Blockbuster Online Revenue Takes a Huge Boost!

[TobiasFunke]

Wait a minute... I have a quick question.

If each store gets $40 from each activation via their store code, where is that money counted?

Is it counted in BBO's revenue, or just flat out BB's revenue? Is this like Enron (thanks to 'The Smartest Guys in the Room') where they are showing profits, only based on companies they created pouring money into them?

[LordPerrin]

Originally Posted by TobiasFunke

Wait a minute... I have a quick question.

If each store gets $40 from each activation via their store code, where is that money counted?

Is it counted in BBO's revenue, or just flat out BB's revenue? Is this like Enron (thanks to 'The Smartest Guys in the Room') where they are showing profits, only based on companies they created pouring money into them?

In my view, that's exactly what it appears like. I've thought about that since day one when they first mentioned the 40 dollar per store.

[TruckerG]

Investor's Business Daily
Picture Darkens For Video Stores
Friday August 11, 7:00 pm ET
Patrick Seitz

Closing soon at a location near you: Your local video rental store.
Weakened by a host of competing entertainment options, traditional video rental stores like Blockbuster (NYSE:BBI - News) and Movie Gallery (NASDAQ:MOVI - News) are closing hundreds of stores in the U.S. and abroad. Movie Gallery said Thursday it will close 175 stores.

Some analysts say these closings will speed the decline of brick-and-mortar movie rental shops. And a nationwide survey conducted for IBD by TechnoMetrica Market Intelligence bears that out.

When a neighborhood video rental store shuts down it gives consumers a reason to try other options, such as video on demand from cable firms or online DVD rentals by mail.

In July, TechnoMetrica polled 904 U.S. adults about their home entertainment habits. Nearly 18% of those surveyed said that a video rental store had closed in their neighborhood in the past two years. (See Data Bus, above.)

People in those areas are more likely to choose home entertainment options other than renting videos. For example, 28% of people who live near a closed video store watched pay-per-view movies in the past month vs. 23% for others.

Of those who reported a video store closing, 46% said they rented a movie from a store in the past month vs. 53% of others.

Target, Wal-Mart Take Sales

People who had a video rental store close near them also were more likely to buy DVD movies, or rent movies from the library or from automated vending machines like Redbox. (See related story, this page.) More of them reported playing video games, using digital video recorders and downloading movies off the Internet.

"The brick-and-mortar, stand-alone rental store is just catching hell from all directions," said Michael Greeson, principal analyst at the Diffusion Group. "You've got Target (NYSE:TGT - News) and Wal-Mart (NYSE:WMT - News) taking away much of their DVD sales business. Their rental business is increasingly challenged by some of the new media models like mail-order DVD and online rentals."

The video rental store business model is fast becoming archaic, Greeson says.

Blockbuster closed about 4% of its stores worldwide in the first six months of the year, or 343 shops. As of June 30, Blockbuster had 8,699 company-owned and franchised stores worldwide.

In the U.S., it shut down 164 company-owned stores in the first half of the year, or nearly 4% of its total. At midyear, it had 4,453 company-owned stores in the U.S.

Blockbuster executives have signaled more store closings ahead.

Movie Gallery, the No. 2 U.S. video rental store chain, said Thursday it plans to close about 175 underperforming stores this year. Earlier, it had indicated more like 100 closings. As of July 2, it operated 4,763 stores, including the Hollywood Video chain it bought last year.

Movie Gallery's stock has lost more than half its value since Thursday, when it reported a steep second-quarter loss and a nearly 6% drop in sales from the year-earlier quarter. The company has hired an investment bank and restructuring firm to help assess its options.

Blockbuster and Movie Gallery are facing declining store rental revenue as more consumers turn to buying DVDs and renting them from online subscription services. Total in-store movie rental revenue fell by 9% in 2005 alone, says Adams Media Research.

Blockbuster is investing heavily in its online DVD rental service to compete with market leader Netflix (NASDAQ:NFLX - News). (See Q&A, this page.) Blockbuster Online has about 1.4 million subscribers vs. Netflix's 5.2 million. Movie Gallery does not have an online subscription service.

Stores Needed For 'Many Years'

Blockbuster Chief Executive John Antioco says he can foresee a day when the online rental business makes up 20% to 30% of the overall video rental business. He hopes to use the chain's stores to attract subscribers to its online service.

The store-based rental industry is overcrowded and some stores need to close, Antioco said in a July 27 call with analysts. But there will still be a need for video rental stores for "many, many years to come," he said. "The fact is that most customers still like to rent exclusively at stores. A smaller group of customers now like to rent only online. And an increasing number -- and we believe this is where our greatest opportunity lies -- want to do both. And Blockbuster is the only company offering both."

But the traditional video rental stores are suffering declining same-store sales as consumers spend their entertainment time and dollars elsewhere.

TechnoMetrica's July survey found that 58% of respondents had rented movies from a video rental store in the past two years. Of those people, 45% said they rent fewer movies these days. About 40% are renting the same amount, and just 14% said they're renting more.

To counter this decline, the rental chains are shutting down their poorest performing stores. They hope those customers turn to the next nearest store for movie rentals.

Blockbuster, however, says it's recapturing just 25% of revenue from closed stores at those still open.

"The fewer of these stores that exist, the less convenient it becomes and the more appealing something like an on-demand video service or even a mail-order DVD service becomes," Greeson said.

Consumers have a plethora of entertainment options. Besides video on demand and online DVD rentals, many people are spending more time surfing the Internet, playing video games or watching TV shows recorded on DVRs.

But traditional video rental shops also are facing a growing threat from automated DVD rental kiosks. These machines, from companies like Redbox, are popping up in grocery stores and fast-food outlets nationwide. The kiosks rent mostly new releases and charge only a dollar a night per movie.

Adams Media Research predicts the number of video rental outlets in the U.S. will fall by 19% over the next five years. Last year the total number of outlets -- including chain stores, mom-and-pop stores and automated kiosks -- fell by just 200 to 32,000, says senior analyst Tom Adams.

Adams expects the number of locations renting videos to fall to 25,900 by 2010.

Two other trends likely to hurt video rental stores are the transition to high-definition discs and the digital distribution of movies.

For the foreseeable future, only online services are likely to rent high-definition video discs. Netflix and Blockbuster Online both carry the two competing HD formats -- HD DVD and Blu-ray Disc -- because their nationwide services can aggregate a large audience.

Building HD Habits

Neighborhood rental stores won't carry the discs until one or both formats catch on with the mass market. But by that time, consumers who want HD DVDs or Blu-ray Discs already will be used to renting them from the online services, analysts say.

Digital distribution of movies over the Internet or via cable could take off as network and technology improvements create a higher quality service. Movie download services haven't caught on yet because downloads are slow, the selection is limited and few people want to watch movies on their PCs.

Still, many consumers are attracted to home entertainment alternatives that don't involve driving to and from a store, prowling the aisles for something to rent and standing in checkout lines.

"The traditional rental store is under fire from all of these new services popping up," said Wade Holden, an analyst with Kagan Research. "They're going to have a tough time trying to keep customers."

[CureForEmo]

I was a bit leary of the $40 'incentive' revenue at first, but it actually is accounted for. Think of the online and in store departments as two separate businesses. When someone clicks a NetFlix ad and signs up, NF pays the advertising company 40 bucks a pop. With blockbuster it's the same concept but instead of BBO paying an advertising company they are paying the store. It's not fake money inflating the SPR's, it's advertising 'costs' being paid to the store side by the online.



cureforemo

[SL_600]

Originally Posted by CureForEmo

I was a bit leary of the $40 'incentive' revenue at first, but it actually is accounted for. Think of the online and in store departments as two separate businesses. When someone clicks a NetFlix ad and signs up, NF pays the advertising company 40 bucks a pop. With blockbuster it's the same concept but instead of BBO paying an advertising company they are paying the store. It's not fake money inflating the SPR's, it's advertising 'costs' being paid to the store side by the online.



cureforemo

This is borderline voodoo econonics. By paying the advertising company or store the $40, they are assuming that the customer will keep the service long enough for it to be profitable for the business. That is a huge assumption, you know, churn and all. Not to mention, for a heavy renter, it is just not profitable for the company and in many cases more is spent to keep them than it is worth. (see: throttling)Although I will say that it is not a total washout for BBV, because they are on the giving and recieving end of the payout. From the right hand to the left hand. Now how'd they do that.

[OzMan]

Originally Posted by TobiasFunke

Wait a minute... I have a quick question.

If each store gets $40 from each activation via their store code, where is that money counted?

Is it counted in BBO's revenue, or just flat out BB's revenue? Is this like Enron (thanks to 'The Smartest Guys in the Room') where they are showing profits, only based on companies they created pouring money into them?

Keep in mind that BBI's bookkeeping is so shoddy that even Enron wouldn't do business with you (Yeah, I know, that is simplistic and reactionary.... but beyond being what I do best, it fits in with another post of mine).

Taking money from the so-far unprofitable BBO and giving it to BBI stores is up there with counting voids as credits and each item as a separate transaction. Remember, even in a paper transaction, the money still has to come from SOMEWHERE, and just shuffling losses around isn't going to make BBI's books look any better in the end.