Apple plan is a Blockbuster

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Related story: Apple jumps to rentals, lures studios

Apple CEO Steve Jobs said in his Macworld keynote Tuesday that his company's iTunes will rent movie downloads, and Wall Street reacted as if DVDs are headed for the trash heap.

Shares of Blockbuster, the world's leader in DVD rentals, sunk 16.7% on Tuesday to $2.69 after setting an all-time low of $2.66, making it the biggest decliner on The Hollywood Reporter Showbiz 50 stock index. Netflix, the leader in the DVD-by-mail subscription business, saw its shares sink 3.2% to $22.05.

While Blockbuster and Netflix were particularly hard hit, there was carnage on Wall Street in general after a big Citigroup write-down because of the subprime mortgage crisis. Even Apple shares dropped 5.4% to $169.04, while the S&P 500 fell 2.5%.

But even after Apple's drop, it still sported a market capitalization of $148 billion, making it the second-most-valuable company on the Showbiz 50 by far -- more than doubling the value of the next-closest entertainment giant. Apple was the biggest Showbiz 50 gainer last year and quickly has grown its financials, explaining in part its current clout when striking entertainment deals.

Only Google was more valuable after Wall Street's bloodbath Tuesday, boasting a $199.5 billion market cap. News Corp. remained the biggest media conglomerate.

A Blockbuster spokeswoman responded to the company's loss in market value, saying Tuesday that the rental giant feels "the Apple news is a positive" and validates the strategy of its relatively new CEO James Keyes.

"This should accelerate consumer acceptance of digital usage" of film and TV content whether for sale or rental, the spokeswoman said. "Blockbuster feels well positioned to take advantage of increased awareness and demand via its Movielink service," which offers more than 4,000 TV and film titles in deals with all major studios and about 35 indies, she added.

At the same price points, Blockbuster and Apple's offerings might compete mainly on selection and brand. "We've got a great brand," the Blockbuster spokeswoman said when asked whether Apple will be able to transfer its dominance in digital music into the video space.

Keyes is looking to make the Blockbuster brand ubiquitous by pushing into digital downloads and onto other emerging platforms. "There is no one dominant player beyond Blockbuster that can participate in all of those channels," he said (HR 12/19).

Shares of the other big DVD rental firm, Movie Gallery, which trades for just 3 cents a share, were unchanged. The financially unstable firm recently reported that top officials have been unloading their shares for as little as a penny apiece. Movie Gallery, along with a few other penny stocks, is in the midst of being dumped from the Showbiz 50.

Apple's news that iTunes will rent movies for consumers to view on computers or on TV screens, provided they have an Apple TV set-top box, also pits Apple against TiVo, whose shares were off 1% on Tuesday, and Amazon, which lost 3%.

As Movie Gallery shutters ever more stores, Blockbuster is poised to benefit, analysts said, arguing that the swoon in Blockbuster shares Tuesday make them all the more attractive.

"The Apple audience is largely portable, and I don't see Apple TV replacing the DVD player," said Michael Pachter of Wedbush Morgan Securities. "Apple rentals will supplement DVD rentals by giving people the option to take filmed entertainment with them on a plane or train. It will not substitute for DVD rentals," he said.

Pachter, who has an $8 price target on Blockbuster shares, also noted that studios have little incentive to cannibalize DVD sales, especially if Blu-ray Disc gains traction and a DVD upgrade cycle kicks in.

That's one reason, insiders said, that studios have been slow to make titles available for download or streaming online. Netflix, for example, has a Watch Instantly feature that has just 6,000 titles for streaming, nothing near the 90,000 titles it offers on DVD. Apple plans to have only 1,000 titles available for renting by the end of February, 100 of which will be in high definition.

Georg Szalai in New York contributed to this report.
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