DECK: Netflix, Redbox provide tough competition

Blockbuster has made its business in renting out hit movies. Now the company is taking a major hit in its number of video stores because its business has suffered.

On Tuesday, Blockbuster announced it has doubled the number of stores it plans to close. Originally targeted for 410 to 450, the company revealed a plan of “accelerated closures” that increases the number to anywhere between 810 and 960 by the end of 2010.

Blockbuster used to have a store on Marquette’s campus, but closed it in 2006. Open Pantry moved into the location Blockbuster formerly occupied underneath the Campus Town West Apartments in August 2007.

A combination of factors played into the decision to close more stores. In August, Blockbuster reported 18 percent of its 4,356 locations nationwide are unprofitable.

Blockbuster has also accrued $572 million in debt. However, shareholders were more generous than Blockbuster anticipated after the company asked for additional investment capital in May. While the company originally sought $340 million, investors contributed $675 million to relieve Blockbuster’s debt.

Kim Noland, director of high yield research for Gimme Credit, which researches corporate bonds and other forms of financing, said despite that offering, Blockbuster still has a long way to go to change its direction.

“It is difficult to predict a possible turnaround for the slumping in-store rental business,” Noland said via e-mail. “We are concerned that the company’s recent quarter (fourth fiscal quarter) was much worse than we expected.”

In the last several years, Blockbuster has faced increased competition from Netflix and Redbox, who have drastically altered the landscape of movie rentals.

Netflix is an online service that sends a new DVD out when one is returned in the mail. Redbox lets its users choose and reserve movies online for $1 a day, pick them up and return them to any Redbox kiosk.

Michael Pachter, a research analyst for financial services and investment firm Wedbush Securities, said Redbox poses more of a threat to Blockbuster than Netflix does. Netflixs model hurts smaller video rental stores, whereas RedBox’s low price is enough for many customers to cope with the inconvenience of traveling to a kiosk.

“While Netflix is pretty much neutralized and capturing the ‘mom and pop’ folk, Redbox is becoming so ubiquitous,” Pachter said. “People look at it differently because it’s only $1 a day. The value of the movie is perceived to be a tradeoff.”

Redbox has enjoyed a meteoric rise over the last five years. Redbox started with 12 kiosks in 2004 but plans to have 22,000 nationwide by the end of this year.

Chris Goodrich, a Redbox spokesman, said the company installs new kiosks on an hourly basis.

“They’re located where people are already shopping, at leading convenience and grocery stores, like Wal-Mart,” he said.

Redbox, a subsidiary of coin exchange company Coinstar, has seen its share of the video rental marketplace advance to 19 percent, versus 36 percent for rent-by-mail services and 45 percent for traditional stores such as Blockbuster.

Goodrich said this is a groundbreaking new business model, and other companies are noticing.

“It’s efficient and passes the savings on to the consumer,” he said. “Physical stores have labor costs, renting out a facility and a lease, which kiosks don’t have to deal with.”

Pachter said Redbox might upset film studios because movies can be rented at lower costs. He said studios are likely to ask Redbox to raise their prices.

“They feel they’re cheapening the value of the film,” Pachter said. “If it’s a dollar, a block away, at a Redbox, you might feel more inclined to do it than if you used Video on Demand. That’s what the studios hate.”

Video on Demand allows users to choose movies whenever they want from cable and movie rental companies.

Although Blockbuster still holds the largest market share of the video rental landscape, it plans on introducing its own set of rental kiosks.

The company has 497 right now, but is aiming for 2,500 by the end of 2009 and 10,000 by the end of 2010.