Wedbush: Blockbuster's Q4 and beyond

[IVR]

Originally Posted by netflix_got_blockbusted

I respect your opinion, but Blockbuster is no Movie Gallery..

I didn't mean to imply that BlockBuster is another Movie Gallery...but I do think that sooner or later BlockBuster will get caught up in the collapse of the video rental market

It wasn't that long ago that the video rental biz was 10B per year and Netflix was an insignificant part of that 10B...last year the video rental biz was about 8B and about 2B was done online...I will grant you that BB has a nice share of that 2B being done online...but the fact remains that the bricks & mortar rental biz is off by about 40% and that is a major reason for the demise of Movie Gallery/Hollywood Video

I expect the Kiosk to continue to eat into what remains of the video rental biz but I think the BIG collapse of BlockBuster will happen after the studios close the DVD window

[HelloItsMeMOM]

Originally Posted by IVR

I didn't mean to imply that BlockBuster is another Movie Gallery...but I do think that sooner or later BlockBuster will get caught up in the collapse of the video rental market

It wasn't that long ago that the video rental biz was 10B per year and Netflix was an insignificant part of that 10B...last year the video rental biz was about 8B and about 2B was done online...I will grant you that BB has a nice share of that 2B being done online...but the fact remains that the bricks & mortar rental biz is off by about 40% and that is a major reason for the demise of Movie Gallery/Hollywood Video

I expect the Kiosk to continue to eat into what remains of the video rental biz but I think the BIG collapse of BlockBuster will happen after the studios close the DVD window

Very well put. There are so many ways to obtain video now that rental will go the way of many other industries, sadly to say. At least then Keyes will be ready to turn BB into another convenience store chain...

[netflix_got_blockbusted]

Originally Posted by IVR

I expect the Kiosk to continue to eat into what remains of the video rental biz but I think the BIG collapse of BlockBuster will happen after the studios close the DVD window

Regarding kiosks, I have two questions:

First, how do kiosk economics change with Blu-Ray? Will kiosks be able to sustain $1/day pricing with Blu-Ray? If not, then kiosks will either have to alter its $1/day pricing or ignore Blu-Ray.

Second, does Blockbuster have room to move on pricing? Could Blockbuster shift to $1/day pricing, or would that kill its model? We know that Blockbuster is testing various pricing models, including the ongoing per-day test in Rochester NY.

At its Nov-07 Analyst Day presentation, Blockbuster claimed that it earns just $0.56/day from its rentals ($2.79 avg rental price, with an average rental length of 5.0 days).

Based on the Analyst Day presentation, it seems that Blockbuster has room to move and that charging $1/day would improve Blockbuster's economics as well as allow it to effectively compete with Redbox.

I hear that the Rochester NY region will shift to a pure $1/day model on March 11. Previously, Rochester charged as much as $4 on Day 1, followed by $1/day.

[IVR]

I don't think BluRay will be a factor unless it goes mainstream and that will be a few years away if ever ...IMO the BIG problem BB has is that they try to "copy" what others are doing ...the only original idea that they had was EOLF and that was a bad idea

[netflix_got_blockbusted]

Originally Posted by IVR

IMO it will be very difficult for BB to rise much in a sinking stock market

Bull market or bear, I think that the turnaround in BBI will follow the turnaround in Blockbuster. Analysts are coming on board, as are momentum bellwethers such as Cramer.

The analyst notes are more aggressive than I've ever seen. These guys are as bullish on BBI as I am, and that's a first.

The research note from Citi is my favorite.



Citigroup, 3/7/08 research note

• BBI is now designated as our top pick in our coverage universe. In our view, the prevailing valuation (trading at 3.2x our new 2009 EBITDA), accelerating EBITDA in a sluggish economy, near term catalysts, and future opportunities from the five point distribution strategy provide investors a very compelling risk/reward investment story.
  
  
• Reiterate Buy rating and $8 target on:1)BBI gaining share from in-store competitors, 2)improvements in Total Access terms/pricing, 3) benefits from an improving title line up, 4)the revamping of the store base, and 5)the push for a five point distribution strategy.
  
  
• Pricing Changes in the Works — BBI is evaluating several changes to its in-store pricing.These include 1)higher prices with longer rental terms,2) lower prices with shorter terms,and 3)a hybrid offering (different pricing for new release and catalog content).In our view,the second option integrates best with the kiosk model and is most likely to lead to improved inventory and profitability.Management is in no hurry to decide given the other key drivers that BBI has it its disposal.
  
  
• Today's sell off suggests a significant disconnect between the equity market's view and 1)the improving fundamentals implied by today's results and 2)debt market which saw BBI's bonds close up 3%.
  
  
• On a per store basis,revenues of $117.1 mil were up an impressive 12.5%vs.our $107.0 mil (+4.1%)estimate and exceeded the net addition growth for the online rental industry — a positive sign on competition.
  
  
• In prior notes, we stated our belief that online rental is beginning to show sings of maturity. With Netflix reporting 4Q ending subscribers of roughly 7.5 mil, we are seeing more evidence that net additions are indeed starting to plateau.
  
  
• We believe BBI is well positioned to manage its debt and manage any downturn as the company provides one of the cheapest forms of entertainment and we see BBI being an ideal purchase for consumers looking to cut back on trips or their entertainment expenditures (i.e.,a $4 movie rental is much cheaper than a $40 night at the theater).
  
  
• Having been the first to solely adopt Blu-Ray in 2007 and with over 2,000 stores now stocking HD movies, BBI has a solid lead in catering to the Blu Ray customer base, which would be heavily loaded with PS3 owners (the PS3 has a Blu-Ray drive).As the casual gaming demographic continues to expand, we believe this plays into BBI's plans to make a more concerted push into gaming and Wii content given the overlap in the customer base. We would note that there are 20.6 million current seventh generation systems in the market, which is only 30%penetration of the 68.4 million sixth generation systems that were sold —implying there is significant room for growth in this channel and console generation.
  

[orbitdvd]

Originally Posted by netflix_got_blockbusted

Regarding kiosks, I have two questions:

First, how do kiosk economics change with Blu-Ray? Will kiosks be able to sustain $1/day pricing with Blu-Ray? If not, then kiosks will either have to alter its $1/day pricing or ignore Blu-Ray.

Second, does Blockbuster have room to move on pricing? Could Blockbuster shift to $1/day pricing, or would that kill its model? We know that Blockbuster is testing various pricing models, including the ongoing per-day test in Rochester NY.

Most of us know that Blu-Ray will just be a niche market, it will probably get bigger, but not enough to fuel the industry. Redbox also doesn't carry tv shows, which is a huge part of the rental business, and they are doing just fine.

As far as test marketing goes, I hope that Keyes is smarter than Antioco. Wasn't EOLF and Total Access test marketed as well? Why did those get rolled out nationwide knowing the problems with both?


marc

[zooworker]

Originally Posted by orbitdvd

As far as test marketing goes, I hope that Keyes is smarter than Antioco. Wasn't EOLF and Total Access test marketed as well? Why did those get rolled out nationwide knowing the problems with both?


marc

They probably didn't test it long enough or the right market. My area would have shown them how bad it was. So far Keys seems to spending a lot of money to produce sales. We shall see...........

[HelloItsMeMOM]

NetflixgotBlockbusted,

Are you being fair to your bosses by spending their time looking up information on Blockbuster?

Just a thought ....

[IVR]

Originally Posted by netflix_got_blockbusted

Bull market or bear, I think that the turnaround in BBI will follow the turnaround in Blockbuster. Analysts are coming on board, as are momentum bellwethers such as Cramer.

The analyst notes are more aggressive than I've ever seen. These guys are as bullish on BBI as I am, and that's a first.
[/list]

Well BlockBuster was UP 15 cents today ...better than the market as a whole but I continue to think things will be tough
BB is in a dying business and the market will probably be down during the next year

[netflix_got_blockbusted]

Originally Posted by orbitdvd

As far as test marketing goes, I hope that Keyes is smarter than Antioco. Wasn't EOLF and Total Access test marketed as well? Why did those get rolled out nationwide knowing the problems with both?marc

Excellent point. First, I apologize to SL_600, who had it exactly right last year. I gave the guy a hard time, and it ultimately turned out that I was wrong and he was right.

Originally Posted by SL_600

I absolutely refuse to believe that Total Access was extensively researched. It was an act of desperation by a company in a desperate situation. End of Late Fees.... extensively researched? I laugh at the naivete of anyone who believes this. Of course Antioco will not and cannot admit mistakes made. Remind you of any other Commander in Chief?

These two initiatives were good gimmicks for the short term at best. EOLF has not sustained the hoped for number of customers who were supposed to come back to offset the late fee revenue. It has not happened. Total access, while it has helped to accrue more subscribers, is eating a hole in Blockbuster's already thin pockets. What good is it to have all these subs if they are not bringing in revenue?

In hindsight, I agree with SL_600 that many of Antioco's iniatives were not tested thoroughly enough. Antioco asked investors to make a leap of faith, promising profit that never came.

In contrast, Keyes seems to be taking a patient, data-driven approach. He's been testing since at least Oct 2007. In addition, he's not just testing one model. Rather, he's simultaneously testing different price models in different regions and for extended periods. And Keyes has made it clear that he's in no rush to make a decision, despite that the analyst community consistently asks about pricing.

I can't find anything wrong with Keyes' approach. Can you?

Also, do you believe the Nov-07 Analyst Day statistic that claimed Blockbuster earns just $0.56/day from its rentals? And given this statistic, do you believe that $1/day pricing is viable?

Thanks in advance.