Glenn,
When rumors of Amazon's entry into DVD rentals first surfaced, the New York Times published a story that highlighted that Amazon had too few distribution centers to effectively serve the DVD rental market.
This is where Blockbuster comes in.
If Amazon is serious about entering the DVD rental space (and I think that it is), it has essentially 3 choices:
(1) It can open dozens of new distribution centers, which it has historically avoided doing.
(2) It can acquire a competitor, such as Netflix or Blockbuster. This option seems unlikely; if Amazon were interested in Netflix, then Amazon probably would have acted already. Also, if Netflix thought that Amazon were going to acquire it, then why lower prices? Clearly, Netflix views Amazon as a competitor rather than as a partner.
(3) It can partner with an established company, like Blockbuster or Hollywood Entertainment.
I think that option (3) makes the most sense.
If Amazon were to partner with Blockbuster, then Amazon could focus on creating a great website and let Blockbuster handle distribution, just as Amazon has done with its other partners such as Toys R Us and Borders.
Such a partnership seems extremely win-win: Blockbuster could leverage off of Amazon's IMDB site, and Amazon could gain significant revenue without having to build new distribution centers or stock a DVD rental library.
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Message 20683016
Amazon Rumor Ruffles DVD Rivals
By BOB TEDESCHI
Published: October 25, 2004
To match the services of competitors, though, Amazon would likely have to open distribution centers throughout the United States - a strategy it has largely eschewed since early 2001, when it began shutting huge warehouses filled with goods it owned and started relying more on retailers and distributors to ship products on its behalf. The company maintains six regional shipping warehouses.
Mr. Szkutak said the company did not expect to open any new distribution centers in the coming months. Still, Amazon could rely on a network of vendors for DVD distribution, much as Wal-Mart has done to supplement its 14 DVD warehouses.
The cost of building a movie rental library alone could daunt some investors, said Mark S. Mahaney, an analyst with American Technology Research, a San Francisco investment firm. Mr. Mahaney noted that Netflix spent $80 million in the first nine months of this year simply acquiring DVD's - $10 million more than Amazon's capital expenditures for the past year. Netflix has about 25,000 movie titles.
"If you're talking about doubling Amazon's capital expenditures, that's something I'd have to think about," Mr. Mahaney said when asked if he thought the idea made sense for Amazon. "It'd obviously benefit them from a gross margin perspective, though."
Amazon's gross profit margins have decreased steadily in recent years, to about 24 percent, as the company has cut shipping costs and dropped prices. By contrast, Mr. Mahaney said, gross margins for online DVD rentals are 40 percent to 50 percent.
Even if Amazon enters the market, however, Netflix may have time to add customers. Mr. Hastings said one crucial aspect of the online DVD rental business was widespread distribution of warehouses, which makes overnight delivery possible.
It has taken Netflix six years to build 29 distribution centers - enough to offer overnight delivery to nearly 90 percent of the country's prospective customers.
But Blockbuster has thrived even without such broad capability for overnight delivery. The company has 10 distribution centers, covering about half of the nation for overnight shipment, yet it says it is on track to reach 500,000 rental subscribers by the end of the year. Netflix took more than three years to reach that number of customers.
Shane Evangelist, senior vice president of Blockbuster Online, said that like Netflix, his operation could remain profitable at the lower price, particularly next year when Blockbuster stores begin shipping videos to customers who rent online.
"We've got 'Top Gun' in 6,000 stores," Mr. Evangelist said. "We bought it, we've rented it, it's fully amortized, but it's not sold out every week. We can ship it from the store, but also rent it online."
Mr. Evangelist said the company would be able to route the customer's online order to a store in a given region that has the requested title available. "So you start to see how this becomes pretty big in optimizing our inventory," he said.
nytimes.com |
