A Return on DVD Rentals

The outlook is looking better for video rental company Blockbuster, Inc. (NASDAQ/BBI) as it battles a rising trend in online rentals, specifically from market leader Netflix, Inc. (NASDAQ/NFLX). Blockbuster, the country’s number-one renter of movies, has focused more on the online DVD business. At this time, Blockbuster has over three million customers, versus 6.8 million for Netflix.

In a move last week to shift capital to its online rental business, Blockbuster announced it would shut down 282 underperforming and marginal stores in the U.S. in an effort to improve operating margins and expand its domestic share. This follows the closing of 290 U.S. stores in 2006.

The reality is that the trend of online video rentals and video-on- demand is on the rise, while rentals at brick-and-mortar outlets are on the decline. According to research by “Screen Digest,” estimates call for the online DVD rental market in the U.S. to rise to 25% of all video rentals by 2009.

We like Blockbuster’s decision to target its online business. Its ability to grow its subscriber base in what has essentially been a game of pick-up has been encouraging. The company has the benefit of a physical presence, which helps to attract customers and allows for more flexibility for online renters. In addition, the company has an innovative strategy called “Total Access,” which allows online renters to drop off DVDs at a store versus Netflix, where it needs to be mailed back. This would allow renters a quicker turnaround to rent DVDs.

So now, after a poor initial decision not to focus on the online DVD renter business, Blockbuster has finally realized its significance and is doing well to battle Netflix for market share.