In the past, movie-night entailed a trip to the local video store for a partial evening of browsing a deep, back catalog of VHS, beta-max or laser discs, in an attempt to formulate the perfect evening with the appropriate cinematic touch. Now, with the emergence of new technology, the "big three" brick and mortars, Blockbuster, Movie Gallery and Hollywood Video, have all filed for bankruptcy protection and the Cro-Magnon video rental customer is now walking upright and browsing for movies online and at vending machines.

SEE: Is Online Shopping Killing Brick-And-Mortar?

The Crumbling of Brick and Mortar
Although Blockbuster dominated the rental landscape in the 1990s, the company was late to the party of online streaming content and rental kiosks. The once dominant retailer with revenues in excess of $900 million has been reduced to 1,500 stores with anemic profits of $1 million per quarter. Here's how it happened:

Fade to Black: The Fall Of Blockbuster

  • October, 1985: The first Blockbuster store opens in Dallas, Texas.
  • August 1991: Blockbuster lowers rental prices for hit movies and shortens the rental period in order to boost earnings. The chain's ability to open new locations appears to be slowing.
  • 1998: CEO John Antioco turns down a deal with Warner Brothers Studios to effectuate a DVD rental "window" that would make new releases available exclusively as rentals before being sold. The subsequent "Plan B" turns Wal-Mart into the studio's single largest source of revenue and decimates Blockbuster's rental business.
  • August 2004: Blockbuster Online DVD rental service is launched to compete with the already established Netflix, which started in 1997.
  • December 2004: Blockbuster drops late fees on all rentals. A hostile bid to buy rival Hollywood Video at $1 billion is rejected and the chain is eventually bought by Movie Gallery.
  • December 2009: Blockbuster begins installing DVD kiosks in an effort to catch up to Coinstar's Redbox, which launched in 2002.
  • March 2010: CEO Jim Keyes warns of a bankruptcy filing if the company is unable to repay nearly $1 billion in debt.
  • July 2010: Blockbuster is delisted from the NYSE.
  • September 2010: The company files for Chapter 11 bankruptcy after pushing back a debt payment of $42 million for the second time. Store closings since 2008 reach 1,000.
  • April 2011: Blockbuster is bought by Dish Network for $320 million. As of early 2012, 1,500 stores were still in operation with plans to close at least 500.

SEE: An Overview Of Corporate Bankruptcy

Scene Two: Exterior Shot, McDonald's
According to Russ Crupnick, senior vice president for The NPD Group, "There's no doubt that Redbox has been the largest beneficiary of the collapsing brick-and-mortar store rental business, especially with ongoing Blockbuster store closings and the fact that there are also fewer independent stores than the prior year." Redbox now owns the lion's share of the physical rental market, standing at 37%, an increase of 12% over the previous year. Overall, kiosk rental is now the most popular movie-rental method in the U.S.

For $1.20, $1.50 or $2 a day, consumers can rent DVDs, Blu-Rays and games from the vending machine-style kiosks located in various shopping centers, convenient stores and, yes, McDonald's. Redbox is owned by Coinstar (CSTR), a provider of automated retail machines, which also offers coin-counting services through its Coinstar kiosks. The company operates over 33,000 Redbox kiosks throughout the U.S.

Coinstar's stock has followed the ascent of Redbox. Shares hit their highest level, ever, in April of 2012. According to the company's first quarter earnings report, revenue for the first quarter of 2012 increased 34%, driven primarily by Redbox revenue growth of 38.8% to $502.9 million. For 2011, revenue and earnings were up 28% and 78% respectively over last year.

Dissolve To: The Qwikster Debacle
If the video rental consumer is not perusing a Redbox for the perfect movie, then they are likely renting from a paid, video-on-demand, streaming service. According to the NPD Group, nearly one-in-three paid movie rentals come from these services and Netflix (NFLX) is the dominant provider in this segment with a 55% share.

Netflix delivers streaming digital content to more than 23 million subscribers globally via PCs, Internet-connected TVs and consumer electronic devices.

In September 2011, Netflix endured the "Qwikster Debacle" in which CEO Reed Hastings attempted to sever the mailed portion of the business from the streaming business. Qwikster quickly disappeared and the experiment, coupled with a 60% price hike, created a backlash that resulted in the loss of 800,000 subscribers and a drop in share prices to a low of $64 in November of 2011; share prices dropped again in early June.

Netflix's share of the physical rental market was flat for the year at 30%. 2011 net income for Netflix was up 41% and 2011 Q4 earnings beat Wall Street's forecasts of 54 cents a share and $857 million in revenues, rising to 73 cents per share and $876 million in revenues.


The Bottom Line
Sea change is inevitable and over the past decade the video rental industry has witnessed one giant tsunami of change. Video rental customers have evolved from browsing the aisles of local video stores to browsing the streaming selections available in-home and at physical kiosks that now dot the new rental landscape, bereft of beta-maxes, laser discs and Blockbusters.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  3. Technical Indicators

    Key Financial Ratios to Analyze the Mining Industry

    Discover some the most important financial ratios used by investors and analysts to evaluate companies in the metals and mining industry.
  4. Technical Indicators

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  5. Technical Indicators

    Key Financial Ratios to Analyze Airline Companies

    Examine some of the most important financial ratios and performance metrics investors use to evaluate companies in the airline industry.
  6. Stock Analysis

    The 5 Biggest Canadian Oil Companies

    Obtain information about some of the largest and most successful major integrated oil corporations that are headquartered in Canada.
  7. Technical Indicators

    Key Financial Ratios to Analyze Tech Companies

    Understand the technology industry and the companies that operate in it. Learn about the key financial ratios used to analyze tech companies.
  8. Stock Analysis

    3 Reasons to Continue to Own Monster Beverage

    Learn more about the Monster Beverage Corporation and some of the primary reasons why investors and market analysts like the stock.
  9. Technical Indicators

    Key Financial Ratios to Analyze the Hospitality Industry

    Understand the hospitality industry and the types of companies that operate within it. Learn about key financial ratios used to analyze the industry.
  10. Stock Analysis

    3 Stocks to Invest in the Oil Transportation Industry

    Learn about the oil and gas transportation industry, and discover some of the best oil transportation stocks for investors to consider.
RELATED TERMS
  1. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  3. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  5. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  6. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  3. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  4. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>
  5. How can a company reduce the unsystematic risk of its own security issues?

    Companies can reduce the unsystematic risk of their own security issues simply by doing the most effective job possible of ... Read Full Answer >>
  6. How can I find net margin by looking a company's financial statements?

    In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!