Dec. 5 (Bloomberg) -- McDonald's Corp.'s $1 menu offers
more than burgers, chicken nuggets and fries. Diners
can now rent hot DVDs such as ``Shrek 3'' from automated
kiosks for a buck, $3 cheaper than at Blockbuster Inc.
stores.
Blockbuster, the largest video chain, and Netflix Inc.,
the biggest U.S. mail-order movie service, are losing
sales to discount kiosks in an overall market that hasn't
grown since 2001, said Adams Media Research. Adams estimates
Blockbuster has 39.2 percent of the U.S. rental market,
including franchised outlets.
According to a Bloomberg calculation, revenue at Blockbuster
will fall to about $4.9 billion in 2011 from $5.5 billion
in 2006, assuming its share of store and subscription
sales stays the same. ``We're not going to speculate
on our business looking several years out,'' said Blockbuster
spokesman Randy Hargrove.
``The store business is about to face some further
competition from the kiosks,'' said Tom Adams, who has
tracked the movie-rental business since 1984 and is
president of Adams in Carmel, California. ``What $1-a-night
kiosks appeal to is the lower income group or just the
extremely thrifty crowd.''
Blockbuster is already heading toward three straight
years of declining sales. The Dallas-based company's
third-quarter gross margin, or the profit left after
subtracting the cost of goods sold, narrowed to 53.9
percent from 56.6 percent a year earlier.
`A lot of threats'
``They have a lot of convincing to do with investors
to let them know that in the next five years'' the company
will still be viable, said Stacey Widlitz, an analyst
with Pali Capital in New York. She has a ``hold'' rating
on Blockbuster shares and doesn't own them. ``There
are a lot of threats out there that Blockbuster has
to address.''
Blockbuster's stock, down 40 percent in 2007, has plunged
89 percent from its record in 2002. Movie Gallery Inc.,
the second-largest U.S. video-rental chain, filed for
Chapter 11 bankruptcy in October.
Blockbuster fell 14 cents, or 4.2 percent, to $3.18
at 4:02 p.m. in New York Stock Exchange composite trading.
Netflix rose 18 cents to $23.93 in Nasdaq Stock Market
composite trading and has dropped 7.5 percent.
Sales growth at Los Gatos, California-based Netflix
may slow to 8 percent in 2008 from 46 percent last year,
according to the average analyst estimate in a Bloomberg
survey. The company has cut prices to try to win customers
who rent movies on the Internet.
Albertson's, Safeway
About 9,000 DVD kiosks, which are the size of soda-vending
machines, rent new releases at Albertson's, Safeway
Inc., Walgreen Co. and the Golden Arches. By year-end,
about 10,000 will be operating in North America, according
to company estimates.
``It's convenient, and it's cheap,'' said Christian
Yansens, 28, after renting three movies, including ``Transformers,''
at an Albertson's store in Irvine, California. ``Albertson's
is open 24 hours a day so you can get a movie at any
time.''
Yansens said he stopped renting from Blockbuster when
he found the same films for less than a third the price
at the supermarket.
Redbox Automated Retail LLC, co-owned by McDonald's
and Coinstar Inc., and closely held DVDPlay Inc., based
in Campbell, California, install the kiosks, sharing
the revenue they generate. They don't disclose terms
of the agreements. The companies also avoid the costs
of opening and managing stores, which account for about
three-quarters of Blockbuster's operating expenses,
according to Arvind Bhatia, an analyst at Sterne Agee
& Leach Inc. in Dallas. Blockbuster doesn't break
out store expenses.
Sales Growth
DVDPlay Chief Executive Officer Chuck Berger predicts
the kiosks will garner up to 25 percent of the DVD rental
market by 2011. With each machine generating annual
sales of $30,000 to $40,000, the kiosks should top $270
million in revenue next year, or 3.4 percent of the
DVD rental market, Adams said. There may be 50,000 in
North America in five years, based on growth estimates
from Redbox, DVDPlay and TNR Entertainment Corp., the
three biggest companies in the industry, lifting total
sales to between $1.5 billion and $2 billion.
Amid the expansion, Netflix's third-quarter gross margin
fell to 33.9 percent from 38 percent a year earlier.
The kiosk business is ``not terribly competitive with
ours,'' Netflix CEO Reed Hastings said in July. ``Mostly
it negatively impacts stores'' because Netflix is less
reliant on new releases.
Still, DVDPlay's Berger said he sometimes meets people
who say they've dropped a Netflix account since discovering
the vending machines.
Blockbuster kiosks
Blockbuster last month started testing 10 kiosks in
Papa John's International Inc. and Family Dollar Stores
Inc. in Lexington, Kentucky.
``There is nothing to stop us from going into the supermarket
next door'' with our own box, Blockbuster CEO James
Keyes said.
Kiosk operators have a head start. DVDPlay started
developing hardware and software in 1999 to run unmanned
kiosks and Redbox began testing its first prototype
in 2002. Maintenance and signage changes are mostly
outsourced to local companies. Redbox is the biggest
vendor with 6,000 machines, followed by Houston-based
TNR, owner of The New Release kiosks, with 2,100, and
DVDPlay, which has 1,100.
``We don't think any company can easily replicate''
the model overnight, said Gregg Kaplan, CEO of Oakbrook
Terrace, Illinois-based Redbox.
DVDPlay, which charges $1.49 for the first night's
rental and $1 each subsequent night, will be profitable
next year and may sell shares to the public in late
2009, Berger said. TNR CEO Tim Belton said he's talking
with several potential partners and may eventually be
able to almost triple his company's kiosks.
``A buck a day is just a really great value proposition,''
he said.
To contact the reporters on this story: Ari Levy in
San Francisco at alevy5@bloomberg.net ; Josh Fineman
in New York at jfineman@bloomberg.net .
Last Updated: December 5, 2007 16:31 EST
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