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.

Blockbuster Video sign. Click image to expand.
Will Blockbuster survive?

In 2005, Greg Meyer wrote a letter to the management of Blockbuster. He wanted to warn the movie rental company of a looming revolution: DVD vending machines that were showing up at supermarkets and fast-food joints all over the country. At the time, Meyer was the CEO of DVDXpress, which operated DVD kiosks in New York and the United Kingdom. He was offering Blockbuster a chance to get in on what looked to be the next great transformation of the home-video rental business.

If Blockbuster installed a DVD machine outside each of its stores, Meyer argued, it could offer movie rentals even when the store was closed. This would likely increase the revenue at each retail location and let the company reduce its operating hours; with the kiosks, Blockbuster could justify closing each store during the three slowest hours of the business day, saving $140 million a year in operating costs. Meyer gave the Blockbuster board his contact information and proposed a meeting to discuss his kiosks. He never heard back.

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Five years later, Blockbuster looks foolish for ignoring the kiosk revolution. Redbox now operates machines at 22,000 locations, and it's poised to expand to 30,000 by the end of the year. In 2009, Redbox's parent company, Coinstar, doubled its revenue in the DVD business; Redbox now accounts for about 20 percent of the DVD rental market. Meanwhile, Blockbuster looks nearly sunk. In 2005, when Meyer sent his letter to the board, shares of the company—which had already been roughed up by competition from Netflix—stood at $9. Today, two Blockbuster shares wouldn't buy you a $1 rental at your local Redbox. With $1 billion in debt, Blockbuster is flirting with bankruptcy.

Yet here's the crazy thing: Greg Meyer is still trying to save Blockbuster. In 2007, Meyer sold his DVD company to Coinstar. After DVDXpress merged with Redbox, Meyer left the company and used part of his windfall to invest in Blockbuster; he now owns about 650,000 shares of the firm. Despite Blockbuster's current troubles, Meyer believes the video chain can thrive once again.

Meyer acted on that belief earlier this month, launching a proxy effort to win a place on Blockbuster's board of directors. In his pitch to shareholders, he pointed to his 2005 letter as proof that Blockbuster's current management always seems to miss out on the video industry's next great advance. I contacted Meyer shortly afterward with a long list of questions about his odd battle to resurrect Blockbuster. He was happy to talk about what he envisions as Blockbuster's bright future. And I have to say, he doesn't sound totally crazy.

Meyer's mission hinges on the goodwill of the movie industry. At the moment, Blockbuster is being squeezed on two sides. Netflix caters to those of us who like a deep selection of back-catalog movies while Redbox is winning the instant-gratification, latest-release market. If you can get your fix of Truffaut in the mail and pick up the occasional Alvin and the Chipmunks: The Squeakquel at your corner store, who needs Blockbuster? 

But that calculus is changing. Over the last few months, both Netflix and Redbox signed a series of deals with studios that delay their access to many new movies by 28 days after their release date. In return, the companies got better terms on movies after the month-long window. The upshot is that Blockbuster will now be the only large retailer to offer many new movies on the day they're released. As myBig Money colleague Chadwick Matlin explains, the company sees the 28-day delay as its biggest advantage over its rivals. It has launched a clever marketing campaign to show off its exclusive titles—posters highlighting new movies like Avatar with the tagline, "We have it 28 days before Netflix and Redbox."

Meyer believes these ads will do wonders for Blockbuster. "Entertainment is in some respects a perishable good, like fruit," he says. "It's worth more when fresh and less when stale." Blockbuster's wild success in the 1980s and '90s was built on its reputation for having more movies more often than independent video stores. The chain has lost a lot of goodwill with consumers since then. For many years Blockbuster binged on late fees, did little to address persistent complaints of poor customer service, missed obvious opportunities for innovation, and hit technical snags when it did try to deploy new services. But now Blockbuster has a fresh chance to rebrand itself, Meyer says. Over the past few years it has launched a pretty good Netflix-like mail service and a streaming service, and it belatedly began operating rental kiosks in a partnership with NCR (it plans to have 10,000 installed by the end of the year). With all these services, Blockbuster can once again bill itself as it did in the '80s, as a one-stop shop for all your movie needs—the only company that will rent you movies at a store, a kiosk, through the mail, and on your computer screen or Blu-ray player.

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.

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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Farhad Manjoo is a technology columnist for the New York Times and the author of True Enough.

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