Watch Out, Netflix!
Blockbuster announces big subscriber boost to draw closer with Netflix, even as analysts worry downloadable movies could doom them both.
January 3, 2007
By Alexandra Berzon
The Blockbuster store in a mini-mall near you was looking mighty lonely there for a while. A wrap-around wall of New Releases under buzzing florescent lights. A paucity of older movies. That blue and yellow feeling.
Since its founding in 1999, Netflix has dominated online video rentals, and eroded Blockbuster’s status as video king. Blockbuster’s 8,000-plus worldwide leases began to appear to be a burden as more and more renters jumped to online rental, using a website to select videos that appear days later in their mailbox.
But now those same stores are being celebrated as a possible company savior. In November, the Dallas-based company introduced its “Total Access” plan that allows customers to rent online and return videos in stores for a free exchange. That’s a service Netflix – bound to the Internet and the mailbox—can’t offer, and it looks to be paying off. On Wednesday, Blockbuster announced that it had signed up 500,000 paying subscribers in the fourth quarter, and had met its goal of two million total online paying subscribers by the end of the year.
That’s still far behind Netflix’s 5.7 million subscribers, but it was enough to shoot Blockbuster shares up 6.24 percent to $5.62 in Wednesday trading. Netflix shares were also up Wednesday, rising 1.78 percent to $26.32.
“The fundamental difference between Netflix and Blockbuster is that Blockbuster has a physical presence, and this is the first time they’ve been able to leverage that,” said analyst Chad Bartley of Pacific Crest Securities. “They probably took shares from Netflix, and that could be a negative for Netflix.”
In a research note, analyst Michael Pachter of Wedbush Morgan Securities said he expects that most of Blockbuster’s subscriber gains came from “converting brick and mortar customers to their new program” and pointed out that Blockbuster paid for the gains in heavy advertising. But Mr. Pachter also noted that the program’s success could become a blow for Netflix in the future as the online rental leader finds it harder to pull away Blockbuster customers.
The bigger question for both Netflix and Blockbuster, say analysts, is the potential impact of services like iTunes and CinemaNow that offer video-on-demand – video streaming and downloading on the Internet. That’s been coming on strong as broadband speeds get faster, and analyst Phil Leigh of Inside Digital Media expects video-on-demand to hit mass market within five years.
“The popularity of downloading movies is only going to grow,” said Mr. Leigh. “The Total Access program is an intelligent evolutionary adaptation, but it’s not enough to save them. What both Blockbuster and Netflix need to do is build up their subscriber base as big as possible and then gradually migrate that base to on-demand sales.”
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