Blockbuster: Closing Shop?

In an investor phone call last week, Blockbuster CEO James Keyes pointed to unmanned kiosks as the possible future for the company’s movie rental business. He stated that plans call for 500 kiosks to be in place by the end of August, and more than 2,500 up and running by the end of this year. Ultimately, there could be 10,000 kiosks in operation by the middle of 2010. At the same time, the company may accelerate the closing of its storefront operations. Of the 7,100 stores now operating in the U.S. and other countries, about 300 are targeted to close this year.

Part of what is driving this shift is the success of the RedBox kiosk operations. With DVD rentals of just $1 each, the company is rapidly grabbing market share in the movie rental business, and almost entirely at the expense of Blockbuster’s share. Last quarter, Blockbuster earnings fell 22% while Netflix rose 20%. Redbox revenues soared 110% for the same period. Blockbuster is also saddled with $350 million in debt that comes due by the end of 2010.

Blockbuster is exploring the use of recordable media — such as SD memory cards — for use with their kiosks. This would eliminate the need for physical DVD discs and would simply inventory problems, but I don’t expect this to be a significant factor any time soon. Even if Blockbuster can get Hollywood to sign on for such a service (and that’s a big “if” given the studio caution about streaming movies online), most consumers don’t yet have devices that can play back movies stored on an SD card.

Blockbuster is clearly not going to go gentle into that good night, but it’s very likely that we’re witnessing a major shift in the movie rental business, and I don’t think that it’s going to turn out well for Blockbuster.