Movie Rental Business: Blockbuster, Netflix, and Redbox

Abstract

Jim Keyes, CEO of Dallas-based Blockbuster Inc., was facing the biggest challenge of his career. In March 2010 Keyes was meeting with Hollywood studios in an effort to negotiate better terms for the $1 billion worth of merchandise Blockbuster had purchased the year before. In recent years, Blockbuster's share of the video rental market had been sharply decreasing in the face of competitors such as the low-cost, convenient Redbox vending machines and mail-order and video-on-demand service Netflix. While Blockbuster's market capitalization had dropped 47 percent to $62 million in 2009, Netflix's had shot up 55 percent to $3.9 billion that year. The only hope for Blockbuster, as Keyes saw it, was to shift its business model from primarily brick-and-mortar physical DVD rentals to increased digital and mail-order video delivery. In Keyes's favor, the studios were more than willing to provide him with that help. Hollywood wanted to see Blockbuster win the video-rental wars. Consumers still made frequent purchases of DVDs at its store—purchases which were much more profitable for studios than the rentals that remained Blockbuster's primary business. Blockbuster had made efforts at making its business model more nimble, but the results had been disappointing, and its debt continued to skyrocket. By the end of 2009, the company's debt had climbed to $856 million, its share of the $6.5 billion video rental business had fallen to 27 percent, and its revenues had tumbled 23 percent to $4.1 billion.

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Resources

Exhibit 1: Blockbuster vs. Netflix

Comparison of Stock Growth

Figure

Comparison of Number of Subscribers and Number of Retail Stores

Figure

Exhibit 2: Studio Windows of Exhibition

Figure

Exhibit 3: Movie Industry Revenue Distribution

Figure

Exhibit 4: Movie Rental Industry Shift, 2005–2014

Begun in the early 2000s, shifts in the film rental industry were continuing and, in some areas, were beginning to accelerate.

Figure

Exhibit 5: Evolving Customer Preferences

Figure

Exhibit 6: DVD Retail Sales Decline

Purchase and rental of DVDs, January–May 2005, January–June 2007, November 2008–June 2009

Spring 2005

Spring 2007

Spring 2009

Number of survey respondents

11,774

12,503

13,030

In the last 12 months, have you:

 Bought or rented a DVD or Blu-ray?

81%

79%

69%

 Bought DVDs?

75%

71%

62%

 Rented DVDs?

76%

71%

65%

Mean a :

 DVDs purchased

3.5

3.1

1.8

 DVDs rented

5.3

5.0

3.4

Base: Adults (18+); see columns.

a. Includes those who did not rent any. Data are for DVDs only; they do not include Blu-ray sales or rentals.

Source: Mintel/Experian Simmons NCS: Spring 2005 Adult 6 Month—POP; Experian Simmons NCS/NHCS: Spring 2007 Adult 6 Month—POP; Experian Simmons NCS/NHCS: Spring 2009 Adult 6 Month—POP.

Exhibit 7A: Blockbuster Income Statement (US$ in millions)

Period Ending:

FY2009

FY2008

FY2007

FY2006

FY2005

Revenue

4,062

5,288

5,542

5,524

5,864

Cost of revenue

1,884

2,565

2,678

2,476

2,647

Gross profit

2,178

2,722

2,865

3,048

3,217

Operating expenses

 Sales, general, and administrative

2,020

2,429

2,719

2,755

3,056

 Other operating expenses

513

587

106

214

588

 Total operating expenses

2,533

3,016

2,826

2,969

3,644

Operating income

(355)

(293)

39

79

(426)

 Interest expense

112

73

89

102

99

 Other income (expense)

(39)

18

5

14

2

 Pretax income

(506)

(348)

(45)

(8)

(524)

 Income taxes

12

26

30

(76)

65

Net income from continuing operations

(518)

(374)

(74)

68

(588)

Net income from discontinuing operations

(41)

(13)

Net income

(558)

(374)

(74)

55

(588)

Source: Morningstar—Blockbuster Annual Financial Reports (edited).

Exhibit 7B: Blockbuster Balance Sheet (US$ in millions, except per share data)

FY2009

FY2008

FY2007

ASSETS

Current assets

 Cash

189

155

185

 Receivables

79

117

113

 Inventories

639

789

344

Total current assets

1,060

1,259

1,319

Non-current assets

 Property, plant, and equipment

  Land

155

184

17

  Buildings and Improvements

1,310

  Fixtures and equipment

1,219

1,345

1,364

  Other properties

1,001

1,052

  Property and equipment at cost

2,374

2,582

2,691

  Accumulated depreciation

(2,125)

(2,176)

(2,228)

  Net property, plant, and equipment

249

406

463

 Goodwill

338

773

Total non-current assets

478

896

1,414

Total assets

1,538

2,155

2,734

LIABILITIES AND STOCKHOLDER'S EQUITY

Liabilities

 Current liabilities

  Short-term debt

102

198

55

  Accounts payable

301

427

473

  Accrued liabilities

408

494

530

  Total current liability

935

1,253

1,289

 Non-current liabilities

  Long-term debt

836

583

666

  Capital leases

20

28

37

  Other long-term liabilities

62

76

86

Total non-current liability

918

687

789

Total liabilities

1,853

1,940

2,078

Total stockholder's equity

(314)

214

656

Total liabilities and stockholder's equity

1,538

2,155

2,734

Source: Morningstar—Blockbuster Annual Financial Reports (edited).

Exhibit 8A: Netflix Income Statement (US$ in millions)

FY2009

FY2008

FY2007

FY2006

FY2005

Revenue

1,670

1,365

1,205

997

682

Cost of revenue

1,079

910

786

627

465

Gross profit

591

454

419

370

218

Operating expenses

 Sales, general, and administrative

289

249

271

262

186

 Other operating expenses

110

84

57

44

29

 Total operating expenses

399

333

328

305

215

Operating income

192

122

91

64

3

 Interest expense

6

2

 Other income (expense)

7

12

20

16

6

 Pretax income

192

132

112

80

8

 Income taxes

76

48

45

31

(34)

Net income from continuing operations

116

83

67

49

42

Net income

116

83

67

49

42

Source: Morningstar—Netflix Annual Financial Reports (edited).

Exhibit 8B: Netflix Balance Sheet (US$ in millions, except per share data)

FY2009

FY2008

FY2007

ASSETS

Current assets

 Cash

320

297

385

 Receivables

 Inventories

37

Total current assets

411

361

417

Non-current assets

 Property, plant, and equipment

  Land

  Buildings and improvements

41

33

18

  Fixtures and equipment

175

124

85

  Other properties

50

67

41

  Property and equipment at cost

266

224

144

  Accumulated depreciation

(134)

(99)

(66)

  Net property, plant, and equipment

132

125

77

 Goodwill

Total non-current assets

269

256

230

Total assets

680

618

647

LIABILITIES AND STOCKHOLDER'S EQUITY

Liabilities

 Current liabilities

  Short-term debt

1

  Accounts payable

91

100

104

  Accrued liabilities

33

31

36

  Total current liability

226

216

213

 Non-current liabilities

  Long-term debt

200

  Capital leases

37

38

  Other long-term liabilities

18

17

4

  Total non-current liability

254

55

4

Total liabilities

481

271

216

Total stockholder's equity

199

347

431

Total liabilities and stockholder's equity

680

618

647

Source: Morningstar—Netflix Annual Financial Reports (edited).

Exhibit 9A: Coinstar Income Statement (US$ in millions)

FY2009

FY2008

FY2007

FY2006

FY2005

Revenue

1,145

912

546

534

460

Cost of revenue

793

634

359

355

309

Gross profit

351

278

188

179

151

Operating expenses

 Research and development

5

5

5

5

6

 Sales, general, and administrative

150

115

67

70

47

 Other operating expenses

112

89

129

59

50

 Total operating expenses

267

208

201

134

103

Operating income

84

69

(13)

45

48

 Interest expense

34

22

17

16

13

 Other income (expense)

(2)

(17)

2

1

2

 Pretax income

48

30

(29)

31

36

 Income taxes

19

16

(6)

12

14

Net income from continuing operations

29

14

(22)

19

22

Net income from discontinuing operations

28

Other

(4)

Net income

54

14

(22)

19

22

Source: Morningstar—Coinstar Annual Financial Reports (edited).

Exhibit 9B: Coinstar Balance Sheet (US$ in millions, except per share data)

FY2009

FY2008

FY2007

ASSETS

Current assets

 Cash

192

192

197

 Receivables

61

52

50

 Inventories

104

92

33

Total current assets

391

368

302

Non-current assets

 Property, plant, and equipment

  Gross property, plant, and equipment

759

683

417

  Accumulated depreciation

(358)

(331)

(271)

  Net property, plant, and equipment

400

353

146

 Goodwill

285

290

221

Total non-current assets

832

699

467

Total assets

1,223

1,067

769

LIABILITIES AND STOCKHOLDER'S EQUITY

Liabilities

 Current liabilities

  Short-term debt

7

7

  Accounts payable

119

136

50

  Accrued liabilities

223

216

141

  Total current liability

375

384

197

 Non-current liabilities

  Long-term debt

409

319

266

  Capital leases

26

  Other long-term liabilities

  Total non-current liability

436

363

266

Total liabilities

810

747

463

Total stockholder's equity

412

320

305

Total liabilities and stockholder's equity

1,223

1,067

769

Source: Morningstar—Coinstar Annual Financial Reports (edited).

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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