BBI – Blockbuster
With the news recently that Blockbuster had finally surpassed its 2 million subscriber goal after claiming it would happen now, very soon now, and maybe next year, I decided to take a look at the company as one of those potential unloved stepchildren of stocks, the overweight cousin to Netflix, struggling to rid itself of the extra weight of bricks-and-mortar, or at least slim down enough to be competitive. The fact of the matter is, Blockbuster has taken on an awful lot of debt since the last quarter of 2005 and is running a signicant deficit. Sure, it may or may not be eating into Netflix’s sales but the question for me is whether increasing a market that I suspect may not exist in large part in a few years time is a wise move.
Blockbuster sees NFLX as their mortal enemy, but on the horizon is a gang of toughs who are making it easier to download and stream video, and if they can work together without in-fighting, I’m pretty sure that owning a media centre PC to store and watch movies, like the wildly popular Tivo and its PVR ilk, will be a lot more appealing than the DVD player and its jewel boxes and bookshelves packed with twice-watched flicks. If the music industry’s woes has shown anything, it’s that people can treat media as somewhat of a commodity (even more amazing considering how often music is replayed versus film). Blockbuster and Netflix are both aware of the changing tide, which has shrunk their bottom line, but if I were them, I would be putting a lot more emphasis on that side of things. As Zip and other Canadian by-mail DVD delivery services have sprouted up in Netflix’s wake, it’s pretty obvious how little of a “competitive moat” that these distribution companies have — they’re all dependent on various forms of mail, so they all tend to have similar business models — and though getting into digital distribution has its own set of pitfalls, its my belief that it will be the method that people use to acquire their media in the future. Every person who’s seen an Xbox 360 and Xbox Live’s video download service or a modded Xbox running XBMC, or a guy on the bus watching videos on his Korean-made cutting-edge PDA (if only I could have seen the brand! It looked pretty slick) or a video iPod, realizes the sheer potential of this form of distribution.
With BBI having a current P/E of 20.35, and the last sale at $5.70, I’m also leery. Only a few months back it was in the mid $3’s and would have been a little more attractive strictly on a P/E measure; a nice gain for those who purchased then. But with the price rise — likely due to other people hoping that this news bodes well for Blockbuster’s revival — and the ill-fated emphasis on fighting Netflix instead of casting about for new markets, I can’t see myself investing in this. Something significant will have to change before I’d throw my money at it.
I have no position in BBI, NFLX or any video distribution-related stocks at the time of writing.
