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Blockbuster has recently announced its intent to acquire Circuit City. Many questions came up regarding the true value and potential synergies that both struggling companies could achieve operating together. Blockbuster’s executives believe synergies will come from the optimization of the store footprint and a broader offering of products under one roof – from DVD players and TVs to movie and game rentals.

As a matter of fact, Blockbuster is looking for alternatives to survive given the enormous transformation in the movie rental industry. All started in the early 2000s, when Blockbuster started to see its empire threatened, initially, by the growing consumer preference to buy vs. rent with the reduction in DVD prices. The attempt to jump into that market was unsuccessful as Blockbuster faced fierce competition from other retail giants such as Wal-Mart, Target and Best Buy. Later came the rental subscription, driven by Netflix, that offered more convenience, lower prices and a broader selection of movies. In parallel, cable video on-demand also started to grow on consumer preference and steel share from in-store rentals.

The market share of in-store rental, which represents 60-70% of Blockbuster’s sales, in the total rental industry has declined from 75% to 60% in less than 2 years. The attempts to move to the subscription business, which has experienced a double digit annual growth, has been unsuccessful as Netflix has captured over 70% of market share. Additionally, the overall movie rental business – including in-store, subscription, vending and on-demand – is a mature market in the US ($9.4Bn in 2006 and $9.5Bn in 2008E) which brings additional pressure and challenges to Blockbuster.

Given this environment, Blockbuster’s future does not look that promising. A merge with Circuit City will potentially deliver synergies in closing overlapping stores but will not solve the structural problems that Blockbuster is actually facing.

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