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Tickers in this Article: BBI, NFLX, AAPL, WMT,
Blockbuster's (NYSE: BBI) latest quarterly earnings paint a picture of a company working to stay at the center of the video distribution system. Bricks-and-mortar stocks are passé. Even mailing DVDs is being replaced by video-on-demand over the internet. And, Blockbuster can't simply close its stores and migrate to a new model.

Old Style
Blockbuster was built on giving consumers access to movies back in the VHS days. Customers could drive to an outlet, pick up a movie, watch it then return it. The dawn of the DVD made the package even more portable.

The model was successful, and five years ago the stock traded at nearly $30. No other company had Blockbuster's huge network of stores. It was, in many ways, without competition.

New Distribution
At about the time Blockbuster's stock was moving to $30, Netflix (Nasdaq: NFLX) launched a new service that offered customers DVDs though the mail. No stores. No driving. No late fees. And, Netflix did not have to keep hundreds of physical locations or pay to staff them.

The revolution in the business model showed in the stock price. Over the last five years, Blockbuster's stock has fallen almost 80%. Shares of NetFlix are up almost 200%. (For more insight, read Getting To Know Business Models.)

Bad Quarter Tells a Story
Blockbuster's latest quarter saw the company's loss rise to $46 million from a $2 million loss in the same quarter a year ago. Revenue was up a modest 5% to $1.5 billion. Same-store revenue was essentially flat. Blockbuster's new Total Access program, which allows customers to get movies in the mail and return them to stores, is somewhat successful, but only enough to keep the company treading water.

The Market Keeps Changing
Last quarter, NetFlix launched a new service. Customers can now rent movies and watch them on their PCs. The company is following operators like Movielink into the business. But now, large retailers of DVDs like Wal-Mart (NYSE: WMT) are experimenting with similar systems. Also, movies are becoming portable through download services for devices such as Apple's (Nasdaq: AAPL) iPod.

As the digital revolution hits the movie industry, Blockbuster is spending significantly to keep up. The costs of promoting its Total Access business drove gross margins to 51.7% in the most recently reported quarter. In the same quarter last year, the margin figure was 56.5%. Wall Street hammered the stock on the news, pushing it down 12% to $5.40 just after earnings.

Tough future
Activist Carl Icahn has bought into Blockbuster and put some of his own representatives on the board over a year ago. It has not done the company any good. Disputes between Icahn and Blockbuster's CEO John Antioco driven Antioco to resign, and it is unclear who will take over at the helm. With Blockbuster's problems, it might not matter.

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