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Final project paper


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Final project paper

  1. 1. Blockbuster‟s lack of blockbuster Frankie L. Jones February 11, 2013 BUS: 642 Thomas Hennefer 1
  2. 2. AbstractBlockbuster video, the once dominant force behind consumers‟ movie rental needs has suffered asignificant loss in revenue to the rise of RedBox and Netflix. The competitive advantage offeredby the two companies has tapped into Blockbuster‟s market and cause a lack of blockbuster forthe company. Since 2009 the company has continue to reported decreased revenue and profitsagainst its competitors. In 2010 the company filed bankruptcy and has since then implementednew services and products similar to its competitors, however, customer‟s still prefer RedBoxand/or Netflix. 2
  3. 3. Once upon a time on a Friday night after work, you were looking to go home, relax, andwatch a good movie. You come up on a big blue sign with yellow lettering, and think, “I‟LLRUN TO BLOCKBUSTER!” Today, we‟re looking for the nearest RedBox, or browsing Netflixfor a good flick. There was time when families would take a trip to Blockbuster, order a pizza,and make it a movie night. Today, people have the luxury of not even leaving the house to find agood movie; thanks to Netflix. After a routine run to Wal-Mart, Walgreens, or Kroger‟s it hasbecome second nature to browse the RedBox, especially since the cost is only $1. But what hashappened to good ol‟ Blockbuster? Over the past few years Blockbuster video locations havesteadily declined. Blockbuster, the once powerful source for movie and video game rental, hasbecome nonexistent in some areas. Due to the rise of Netflix and RedBox, Blockbuster hasexperienced a decline in sales, continues to close locations, and continues to post quarterlylosses. Blockbuster has implemented new services; however, customers still prefer Netflix andRedBox over Blockbuster. This paper will test Blockbuster‟s reported revenue from 2009-2011against reported revenue from 2009-2011 of Netflix and RedBox, and elaborate on the decliningBlockbuster locations against the expansion of Netflix and RedBox. Reported Revenue In 2009 Blockbuster was still among the top two competitors for consumers‟ movie rentalneeds. RedBox was establishing a foundation and surpassing forecasted expectations every year,while Netflix accumulated revenue between $1.63 billion to $1.67 billion, which was about $30billion more than Blockbuster. 3
  4. 4. 2009 Total Revenue for Blockbuster, RedBox, and Netflix 1,800,000,000 1,600,000,000 1,400,000,000 1,200,000,000 Blockbuster 1,000,000,000 RedBox 800,000,000 Netflix 600,000,000 400,000,000 200,000,000 0 Blockbusters market capitalization had dropped 47 percent to $62 million in 2009;Netflixs had shot up 55 percent to $3.9 billion that year (Chopra & Veeraiyan 2010). According to Blockbuster‟s financial reports for fourth quarter 2009, total revenues were$1.08 billion as compared to total revenue of $1.31 billion for the same period in 2008, and grossprofit was $540.4 million. Blockbuster ended the fourth quarter of 2009 with $188.7 million incash and cash equivalents and $58.5 million in restricted cash related to the Companys letters ofcredit. According to Blockbuster‟s financial reports for first quarter 2010, total revenues for thefirst quarter of 2010 were $939.4 million, compared to total revenues of $1.09 billion for thesame period in 2009, and gross profit was $502.2 million. Blockbuster ended the first quarter of2010 with $109.9 million in cash and cash equivalents. The company filed for bankruptcy onSeptember 23, 2010. Fritz (2001) wrote an article on Blockbuster‟s bankruptcy, and reported thaton April 6, 2011, the company was bought by satellite television provider Dish Network atauction for $233 million with the assumption of $87 million in liabilities and other obligations. 4
  5. 5. In 2011 Dish announced that the Blockbuster division essentially broke even by bringing in $347million for the first full quarter (Smith 2011). In 2009 RedBox„s parent company, Coinstar, reported a revenue of $1.1 billion. $773.5million were from RedBox kiosks (Smith 2010). In first quarter 2010 Coinstar announced profitof $6.4 million on revenue of $350.1 million. In 2011 Coinstar overall posted a first quarterprofit of $26.7 million with revenue at $435.2 million. In 2009 Netflix raised its revenue outlook to a range of $1.63 billion to $1.67 billion(Wilkerson 2009). According to Martinez (2011), Netflix saw $596 million in Q4 revenue of2010, and spent 10% less on marketing in compared with the same period of the prior year. Firstquarter 2011 Netflix reported revenues of $719 million with a net income of $60 million.(Haselton 2011). By 2011, Blockbuster had undergone bankruptcy, while Netflix and RedBox continued topost increasing revenue reports exceeding analysts‟ forecasted anticipations. The competitiveadvantage of the RedBox‟s $1 movie rental, and Netflix‟s internet/tv streamline service tappedinto Blockbuster‟s market, and eventually cause the company to file bankruptcy. Jim Keyes,CEO of Dallas-based Blockbuster Inc., forecasted that the only hope for Blockbuster was to shiftits business model from primarily brick-and-mortar physical DVD rentals to increased digitaland mail-order video delivery (Chopra & Veeraiyan 2010). According to Shane Smith, theBlockbuster division of Dish posted $347 million in revenue for the first quarter of 2011, whichwas a breakeven point. Netflix posted $719 million in first quarter 2011 (Haselton 2011). AndRedbox posted $435.2 million first quarter 2011 (Smith 2010). 5
  6. 6. 2011 Q1 Revenue for Blockbuster, RedBox, and Netflix 800,000,000 700,000,000 600,000,000 500,000,000 Blockbuster 400,000,000 RedBox Netflix 300,000,000 200,000,000 100,000,000 0 RedBox eventually topped Blockbuster in revenue sales over a two year period, whileNetflix still remained the top revenue earner.Diminishing Blockbuster locations vs. Rise of RedBox and Netflix Baker (2012) reported after Dish consumed the company in 2011, Dish CEO Joe Claytonclaimed stated in an interview with Reuters that "We will close unprofitable stores. We will closeadditional stores." Dish planned to keep 1,500 Blockbuster rental stores open and maintain15,000 employees (Reisinger 2012). Although the plan was to maintain 1,500 stores, Claytontold Reuters that more stores than anticipated have slipped into the red, and therefore it wontactually have 1,500 stores operating (Baker 2012). Today, there are around 1000 Blockbusterstores left in the U.S. with locations in 17 countries worldwide. Clayton explained, “Theres verylittle reason to keep the 1,000 remaining Blockbuster stores open at this point. Expect moreclosings as their leases expire.” (Tuttle 2009) There are more than 15,000 RedBox kiosks in the nation and with itsgrowing number of locations; there are already more RedBox kiosks than traditional video stores 6
  7. 7. left in the U.S. Goldman ( 2010) reported the biggest Hollywood studios had become disgruntledwith RedBoxs business model. The $1-per-day price undercut Blockbuster, Netflix and video ondemand services, especially if customers return their movies to Redbox in a timely fashion. Withbig studios already struggling to maintain DVD revenues, Warner Bros., Universal and Foxeventually stopped supplying RedBox with new releases. RedBox, in turn, sued the studios onantitrust grounds. In the meantime, the company pledged to continue supplying its kiosks withday-of-release DVDs, even if it meant buying them at retail. The company hired hundreds ofworkers to go to retailers around the country to buy up new releases in order to fill their kiosks;however, purchasing movies at retail was cutting deep into RedBoxs profits. Meanwhile, studioscould no longer ignore the surging popularity of the red kiosks, which recently topped 20,000nationwide RedBox has rented out over 500 million DVDs to impulse buyers. Some moviestudios, such as Sonys home entertainment unit and Lionsgate. have signed multi-yearagreements to supply RedBox with new releases of DVDs. Pepitone (2011) reported that Netflix had 23.8 million total U.S. subscribers as of Sept.30, down from 24.6 million three months earlier. Around 21.5 million customers had streamingsubscriptions, and just under 14 million had DVD subscriptions, with most customers mixing thetwo. The company will expand its streaming video service into the United Kingdom and Ireland.Netflix is the largest internet subscription service for consumers‟ movie and TV programs needs.In July 2011, the company angered many subscribers by saying it would begin charging separateprices for its DVDs-by-mail and streaming video plans. That amounted to a big price increase forNetflix customers, as the cheapest-possible bill for customers who want both services jumpedfrom $10 to $16 a month. Customers raged against the idea of managing two separate accountsso much so that Netflix pulled a stunning reversal a few short weeks later and canceled the plan. 7
  8. 8. Netflix said it was focusing on the future, promising customers that "we are done with pricingchanges."RedBox vs. Netflix vs. Blockbuster Tuttle (2009) reported, according to Associated Press, of the three businesses, RedBox isthe fastest-growing. RedBox is cheap and fast, therefore, convenient for customers. However,RedBox does not offer a wide variety of movie choices, including older movie choices. Netflixoffers an enormous selection, along with great customer service, which is service that RedBoxlacks. At one point Netflix users became outraged at Netflix‟s attempt to raises prices due toconsumers taking advantage of both movie and TV services, although the attempt fell through, itresulted in a loss of subscribers for Netflix. However, the loss of subscribers has no effect on thehow much revenue Netflix earns against Blockbuster. Blockbuster offers the most options: rentat the store, have movies mailed to you, and swap movies via mail or in-person at a store.Reisinger (2012) Dish announced Blockbuster Movie Pass, a bundle that includes streamingvideo, access to premium movie channels, and movies and games by mail. The service isavailable to existing customers for $10 a month and new subscribers who choose the satelliteproviders Americas Top 200 package for $39.99 a month. However, although Blockbusteroffers more options, do customers still prefer Redbox or Netflix? I polled a small group coworkers and friends through random sampling consisting of 20people. Thematic units measured the content analysis of the question being posed, “Do youprefer RedBox, Netflix, or Blockbuster? Why?” Thematic unit was deemed appropriate basedon the open-endedness of the question. 19 of the 20 polled were responsive. 8
  9. 9. What do consumers prefer? 9 8 7 6 RedBox 5 Netflix 4 Blockbuster Neither 3 2 1 0Most respondents preferred RedBox based on the convenience, costs, and location. RedBoxusers enjoy the luxury of returning a movie at their convenience, to any RedBox kiosk location.RedBox users also like the $1 price for the rental. Most respondents expressed, “You can‟t beat$1!” The respondents that preferred Neflix elaborated on the choices of movies and TVprograms, customer service, and the ability to stream Netflix from game systems. Netflix usersenjoy the convenience of streaming from home, and how movies are mailed to their homes.Netflix users did show concern with the delay in release dates for some movies or series,however, they are comfortable with the overall quality. The respondents that prefer Blockbusterenjoy the variety of the movie selection from old movies to new releases. Respondents that usedBlockbuster and RedBox, preferred Blockbuster because of the delay for new releases toRedBox. In conclusion, Newman (2010) reported that in 2009 Blockbuster had up to 60,000employees. However, according to Blockbuster press release (2010) poor strategic planning and 9
  10. 10. mismanagement as well as competition from other video rental companies such as Netflix andRedBox, Blockbuster has undergone significant revenue losses. Although Blockbuster hasimplemented new services, such as Blockbuster Express and Blockbuster Movie Pass consumersstill prefer RedBox or Netflix over the once dominant chain. Consumers realize the release datesmay be delayed or a monthly charge may be assessed, however, that has not stopped the rapidincrease in RedBox kiosk and Netflix subscribers. 10
  11. 11. SourcesBaker, Liana B. (January12, 2012) “Dish to shut more Blockbuster stores than planned” Rueters, Reports Fourth Quarter and Fiscal-Year 2009 Financial ResultsDALLAS, Feb 24, 2010 /PRNewswire via COMTEX/ -- Blockbuster Inc. (NYSE: BBI, BBI.B),a leading global provider of media entertainment, today announced financial results for thefourth quarter and fiscal year ended January 3, 2010.Blockbuster Reports First Quarter 2010 Financial ResultsDALLAS, May 13, 2010 /PRNewswire via COMTEX/ --Blockbuster Inc. (NYSE: BBI, BBI.B)today announced financial results for the first quarter ending April 4, 2010.Chopra, Sunil & Veeraiyan, Murali (October 21, 2010). “ Movie Rental Business: Blockbuster,Netflix, and Redbox Case, Ben (April 7, 2011). "Dish Network wins bidding for assets of bankrupt Blockbuster". LosAngeles Times., David (April 26, 2010) “Is RedBox worth the wait?”, Todd “ Netflix reports subscriber growth, revenue spike in Q1 2011 earnings”, Juan “ Netflix Q4 2010 revenue jumps 34% despite marketing cut”, Rick (February 6, 2009). "15 Companies That Might Not Survive 2009 sponsersresident evil 6". US News., Julianne (October 24, 2011) “Netflix loses $800,000 subscribers” 11
  12. 12. Peterson, Kim (February 23, 2012) “More Blockbuster stores closing” on 2012-10-31.(Press release). Blockbuster. September 23, 2010. "Blockbuster Reaches Agreement on Plan toRecapitalize Balance Sheet and Substantially Reduce its Indebtedness", Don (January 23, 2012) “Dish closing more Blockbuster stores than expected” Retrieved 2012-10-30Smith, Shane (February 11, 2010) RedBox Parent Coinstar Reports more than $1 billion in 2009Revenue”, Shane (November 07, 2011) “Blockbuster Owner Dish Network Gains Revenue, ShedsSubscribers”, Brad (June 23, 2009) “Netflix vs. Redbox vs Blockbuster: What‟s the Best Movie RentalDeal? “RedBox Second Quarter Operating Profit Rises”, David B. “Netflix profit rises as subscribers increase, cost decline” 12