The Evolution Of Video Rental Stocks
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.




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