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Inder Sidhu

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Profiles in Doing Both: Is There a Sequel in Blockbuster's Future?

Posted: 11/23/10 11:01 AM ET

GM has done it. Pilgrim's Pride and Delta Air Lines, too.

Each of these companies entered bankruptcy wobbling, and emerged stronger afterwards.

Now it's Blockbuster's turn.

Does the struggling video-rental giant have a second act after filing for Chapter 11 in September? A lot depends on whether the company can reinvent its business while trying to optimize its operations. So far, Blockbuster has not succeeded at doing both simultaneously.

Maybe bankruptcy will give it the breathing room it needs. Investors, mall owners and employees are holding their breath, but customers don't seem so inclined. In large numbers, they are moving on.

Who would have thought this possible? Not that long ago, Blockbuster was an icon of American retailing. To millions of entertainment seekers, the company stood for convenience, variety and affordability.

But then things changed. Instead of satisfying customers, Blockbuster began to irritate them. Their chief complaint: late fees, which Blockbuster added to rentals not returned on time. A decade ago, late fees accounted for more than 15 percent of Blockbuster's revenue--and a sizable percent of its profits.

Though the model was not sustainable, Blockbuster clung to it. The same is true of its retail stores. For most of Blockbuster's 25-year history, the company's management team thought having a retail footprint in strip malls all over the country was a competitive advantage. Since more convenient ways to rent movies have flourished, this is no longer the case. As a result, Blockbuster is expected to close hundreds of its 3,000 domestic stores.

To make the most of its performing assets, Blockbuster has tried to optimize what it could. It has expanded its in-store inventory to include video games and entertainment gear. And it has experimented with different pricing plans. It even eliminated late fees--for a while.

Still, Blockbuster's revenue fell. Between 2005 and 2009, the company's sales dropped 27 percent to $4 billion. In the same period, Blockbuster lost $1.5 billion in total.

Try as it might to optimize sales-per-square foot and reduce its SG&A through better cost containment, Blockbuster could not keep up with rivals who were reinventing in-home entertainment. As late as 2008, Blockbuster heaped scorn on the business of renting DVDs via mail. "I've been frankly confused by this fascination that everybody has with Netflix," said Blockbuster CEO Jim Keyes that year.

By early 2010, Keyes had changed his mind. And for good reason. Netflix has attracted 17 million subscribers and signed distribution deals that allow it to stream video to iPods, Nintendo Wiis, PCs and TVs. Today, more Netflix customers watch content streamed over the Internet than on traditional DVDs. With momentum building on almost all fronts, sales this year are expected to top $2 billion for the first time in company history.

In addition to Netflix, Blockbuster is also struggling to keep up with Coinstar's Redbox business unit. Between 2005 and 2010, Coinstar put more than 28,000 Redbox rental kiosks in high-profile places such as McDonald's, CVS and 7-Eleven. In that time, Coinstar's share of the multi-billion dollar DVD rental market grew from almost nothing to nearly 25 percent.

Under siege, Blockbuster has tried to keep up with its rivals, but its debt load has made additional investments difficult.

At the beginning of the year, for example, the company had just one-tenth the number of vending machines as Coinstar. And Blockbuster's On Demand service, which boasts newer films than its rivals, is considered by some to be more difficult to use and more expansive than other services.

With sales shrinking and losses mounting, Blockbuster needs more reinvention to keep pace with not only Netflix and Coinstar, but also Apple, Google and now Amazon, too. Is Blockbuster up for such a dramatic shift? Many wonder. This is why its time in bankruptcy is so important.

Blockbuster must mobilize quickly and optimize its workforce and store count. It also needs to reduce its debt. Most importantly, Blockbuster must also reinvent how Americans consume movies, TV shows, games and more.

If Blockbuster is successful at doing both optimization and reinvention, the words "Make It a Blockbuster Night" could mean something once more. If Blockbuster missteps on either front, however, it won't be "Back to the Future" anytime soon.

For more information, view the WebEx recording at Together@WebEx.

Inder Sidhu is the Senior Vice President of Strategy & Planning for Worldwide Operations at Cisco, and the author of Doing Both: How Cisco Captures Today's Profits and Drives Tomorrow's Growth. Follow Inder on Twitter at @indersidhu.

 
 
 

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