Can Blockbuster be saved?

Commentary about business and finance.
April 29 2010 4:38 PM

Can Blockbuster Be Saved?

One man's clever plan to save the video-rental giant.

(Continued from Page 1)

Meyer argues that this plan can work, but the company still needs some major changes. Both Netflix and Redbox use ingenious pricing gimmicks to convince us we're paying a little for a movie even if we're really paying a lot. Because one additional day at either service doesn't cost very much (just $1 at Redbox, and about a quarter per day at Netflix, depending on your plan), you keep your DVDs at home for days or months on end, racking up profit for both companies.

Meyer proposes a similar pricing structure for Blockbuster. The company now charges $5 for five nights on all titles, plus $1 for each additional night. That steep price works for new titles that you can't get elsewhere, but it doesn't make any sense for old movies. Meyer proposes that Blockbuster offer older titles for $2 for the first two nights, then $1 for each additional night. This would encourage a lot of second-movie rentals, he says—a customer walks in to the store because it's the only place to get It's Complicated, but she walks out with Something's Gotta Give, too, because it's just $2 more. Most customers will keep both movies for five nights, Meyer says, in which case Blockbuster earns $5 for Something's Gotta Give—a very healthy margin for an old title. Some "price-sensitive customers," though, will try to watch both movies in two days in order to avoid late fees. Blockbuster wins this way, too: Now it gets the $5 It's Complicated back after two days instead of five, making it available for someone else.

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But in an age of kiosks and streaming, is anyone going to walk into all of those Blockbuster stores? The company's retail locations seem like its biggest problem—they're a constant reminder of a bygone era, of the fact that Blockbuster's rooted in the past. Even if the stores do carry movies that aren't available elsewhere, wouldn't many customers just wait for titles to come to Redbox and Netflix? And if people really, truly can't wait for new movies, they can always get them from iTunes or their cable company's on-demand service, as The Big Money's Matlin points out. We're still left with the same question that has plagued Blockbuster for years: Why maintain a huge, expensive physical space to deliver digitized bits?

To Meyer, the answer is obvious: Because some customers prefer stores, and they probably will for years to come. He points out that Americans still spend more money at video stores than they do on mail- or kiosk-based rentals. It's true that a whole lot of Blockbuster's stores are losing money; as a consequence, the company plans to close down 1,000 locations this year. But as it closes down retail outlets, each remaining store becomes more valuable, and the few that Blockbuster hangs on to will have "a chance to remain solidly profitable for some time into the future," Meyer says.

On April 8, Jim Keyes, Blockbuster's chairman and CEO, put out a press release opposing Meyer's bid for a seat on the board. "We are disappointed Mr. Meyer is pursuing a costly and disruptive proxy contest," Keyes said. Blaming Meyer for wasting company resources was a little rich— Keyes and other executives took home $1.5 million in "discretionary" bonuses in 2009 even though the company reported a loss of $500 million. Meyer is pressing forward with his bid, and he says he's received a lot of support from shareholders.

The company's fate will be decided at its next board meeting, on June 24. When I asked Meyer if he really believes that Blockbuster has a chance, he answered in the affirmative. "Is it possible? Yes. Is it easy? No. First, the patient needs to be stabilized."

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