I’m Not Surprised by This Blockbuster News

The news is out, and it is not good for Blockbuster Inc. (NYSE/BBI) — the nation’s biggest movie-rental chain. Facing stiff competition from on-line movie rental businesses and the rapidly growing trend of “Video on Demand,” Blockbuster has been scrambling to halt a decline in its business.

 But you shouldn’t be surprised. I’m not. I was just at my local Blockbuster outlet on Friday night (a typically busy time). To my amazement, the store was empty — no customers in sight. I asked the cashier behind the counter where everyone was, and she said the movie rental business was down dramatically. She even went as far as saying that she believes that the brick and mortar video rental business would be dead within five years. Now she may be exaggerating, but you really have to wonder if Blockbuster can survive simply as a pure play in video rentals.

 I personally see the trend for on-line movie rentals and Video on Demand only rising. I recently tried Video on Demand and can say it is an excellent alternative to renting your favorite movies. You don’t have to drive to the video store, and you can browse the shelves with a click of your remote.

 On Tuesday, Blockbuster confirmed its investors’ worst fears, releasing dismal Q2 results that reflected the company’s difficulties in trying to halt its declining business. The pitfall was the company’s new strategy of eliminating late fees, which, while great for movie renters, has been a drain on revenues. Blockbuster lost $57.2 million, or $0.31 per share, in the Q2, versus the prior year’s profit of $48.6 million, or $0.27 per diluted share. The adjusted loss was $40.2 million, or $0.22 per diluted share, well off from the Street estimate calling for a loss of only $0.10 per diluted share, according to Thomson Financial.

 On the revenue side, Q2 revenues fell 2% year-over-year to $1.4 billion, below the Street estimate of $1.45 billion. And to make matters worse, the key same store sales number for the Q2 fell 4.7%. Impacting the slide in revenues was the elimination of late fees, which fell to $20.9 million, down 87% from $159 million. These numbers are atrocious and can only indicate a worsening situation. The company had recently been in a proxy fight to rid the late fees but it failed. Now that the new strategy of no late fees is clearly detrimental to Blockbuster’s business, something needs to be done.

 The company will no longer provide guidance for the FY05, and this is in my mind is a red flag. If Blockbuster maintains its no late fee strategy, it will have to generate new revenues from elsewhere. The company’s entry into the on-line rental business to compete with the likes of Netflix Inc. (NASDAQ/NFLX) is viewed as a possible strategy, but whether this will save the company is another issue. Netflix had a vision on the video rental business, while Blockbuster was slow to react. And in the world of business, this will kill your potential. Just ask Blockbuster!

 Also take a look at the respective projected growth estimates for earnings. Blockbuster’s projected earnings growth is a dismal 6% annually over the next five years, versus 20% for Netflix.

 The price trends on the charts are moving in opposite directions, with Netflix at a new 52-week high and Blockbuster plummeting nearly 6% on Tuesday to near its 52-week low.

 So, which company had the better vision? The trend is clear, and Blockbuster has failed miserably.