Thursday, September 17, 2009

Blockbuster's Dilemma

This week Blockbuster announced it will likely be closing almost 1,000 of its stores in the near future. Of course, this is no surprise. It has been clear to everyone who watches this industry that the retail video store is dying a not-so-slow death. And the success of the Redbox kiosk business is speeding that process.

So, Blockbuster is now going to spend up to $60 million in shutting down over 20% of its stores in order to save about $30 million a year in operating costs. That means it will take about 2 years for this move to even begin to save money. In the meantime, they are going to spend a bunch of money installing about 10,000 kiosks in an effort to challenge Redbox.

So, two years from now, Blockbuster's best case scenario is that it is perhaps effectively competing with Redbox in the kiosk business, but probably still not making a profit. And they will have announced another round of store closings by then, which will probably cost them more money.

And the real problem is that, in two years, both Redbox and Blockbuster will be that much closer to total obsolescence, because everyone knows that the actual end game is digital distribution. Even Blu-Ray is recognizing that its disc business has a limited lifespan, and is already pushing connectivity with its BD-Live initiative.

So, it would seem that Blockbuster is looking at a few more years of trying to stop the bleeding, while Netflix, Vudu and others get further ahead in the digital delivery business. If Blockbuster wants to ever be a winner again, it needs to also put some significant resources into that arena now. And that means even bigger short term losses.

But the problem is that Blockbuster has a bunch of contracts to distribute DVD's. It can't just stop that business. Not only would that leave it with no revenue and no business model, but it would kill its relationships with studios and distributors. And the Blu-Ray disc business appears to have a few years of life in it as Blu-Ray players come down in price and Christmas is approaching and the economy is slowly improving. Blockbuster can't afford to miss that opportunity, as limited as it might be.

In other words, Blockbuster is actually doing the only thing that it can do under the circumstances. It needs to take a circuitous route to its new long-term strategy, otherwise it will have no future at all. Very tough situation. The only way this could have been avoided would have been much better planning starting at least 5 or 10 years ago.

In the early days of MP3 and Napster, it was immediately clear that discs of all sorts had a limited lifespan. Blockbuster could have started making a new plan way back then. But they were still making tons of money and they wanted to think that they were somehow immune to the inevitable. Obviously, that was a big mistake, and a big lesson to be learned by all.

Your cheese is going to move, so you might as well be the one to move it. (If you don't get that reference, you really need to read more. Check out the Spencer Johnson book here.)

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