Novice Investing - Blockbuster Online Totally Inaccessible

Date: Tuesday 13th 2008f May 2008 07:12:17 AM

Blockbuster Online Totally Inaccessible - 12/22/2007

By: Hari Wibowo

We know it can only last for so long. As Blockbuster Inc. (BBI) launched its online DVD rental 'Total Access', it tries to undercut its online competitors Netflix Inc. (NFLX). However, as we pointed out when Netflix reported its first ever subscribers loss this past summer, the cost advantage is in Netflix's hand. Blockbuster had 33600 employees and costly store presence, Netflix had 1300 employees with no costly store presence. As you recalled, Netflix's subscriber loss was partly caused by price war waged by Blockbuster.

Back to Blockbuster, this past week it raised the price of online DVD rental, ending the year long price war. The main reason behind the move is cost. Also, as Blockbuster lost 500,000 subscribers over this past summer, it shows that it can't compete beautifully in terms of online DVD rental. The main beneficiary of this is of course Netflix, which jumped 9% on the news. Netflix, which is more experienced logistically and has larger scale in online DVD rental, would profit more per subscribers. At this point, Blockbuster boasts 3.1 Million subscribers while Netflix has 7 Million.

What is next? Blockbuster now can't make any on its online service while Netflix can. Its stores are running a huge expense which causes a big drag on its financials. Balance sheet is not that stellar either. Blockbuster spots a negative net cash of $ 680 Million and has reported losses in two of the past three years. Despite that, Blockbuster is still the biggest DVD rental players with the recent bankruptcy of Movie Gallery.

What may be the best way for Blockbuster to profit from its online operation is to team up with established e-commerce players such as Amazon.com or overstock.com. They have the necessary scale to compete with Netflix in terms of logistics cost and they would be interested in expanding their reaches into the stores. Beyond that, I feel that as the world is wired, we have less and less incentive to watch our movie in DVD format, let alone going to a store to select your DVD. Thus, I view Blockbuster's brick and mortar store as a weakness rather than a strength.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Blockbuster Inc. (BBI) or any other securities.

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