Online service boosts Blockbuster shares

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Blockbuster appears to be hitting its stride, possibly at the expense of competitors. At least that what's Wall Street has been saying.

Case in point: Thursday marked the second day in a row shares of Blockbuster hit a 52-week high, having advanced 6.6% Wednesday and another 2.5% Thursday to $5.78.

Netflix and Movie Gallery shares, meanwhile, were the two worst performers Thursday on The Hollywood Reporter's Showbiz 50 stock index, having lost 4.7% and 9.3%, respectively.

The divergence is even more dramatic when expanded to a longer view. In the past 52 weeks, shares of the formerly beleaguered Blockbuster have soared 55%, while Movie Gallery shares have sunk 45.6% and shares of Netflix were off 2.6%.

The reason for Blockbuster's sudden fortune, say analysts, is their thrust into the space Netflix invented more than seven years ago: subscription DVDs by mail.

Netflix still leads, with 5.7 million subscribers, but Blockbuster, which jumped in less than three years ago, boasted on Thursday that it signed up its 2 millionth paying customer sometime during the just-ended fourth quarter. Movie Gallery, second to Blockbuster in the number of physical movie rental stores it controls, has no online service to compete with those from Netflix and Blockbuster.

Analysts tie Blockbuster's online success to Total Access, the initiative it launched on Nov. 1 that lets online users exchange movies in stores as well as through the mail. In the nine weeks since Total Access was unveiled, Blockbuster shares have risen 47% while Netflix shares have dropped 8%.

Blockbuster, said Pali Research analyst Stacey Widlitz, "is the only service that can offer an integrated in-store and online approach."

Widlitz, who has a "buy" rating on Blockbuster shares, also says that, fortunately for Blockbuster, cannibalization of its in-store customers is not a factor.

"We believe new online customers are coming from Netflix, or Blockbuster is keeping existing customers from leaving for Netflix," she said.

Widlitz, though, is bullish on Blockbuster for more reasons than just Total Access. She also likes Blockbuster's plans for divesting of stores in foreign markets. Spain is already gone, the company closed its last store in Peru this week and last week it received regulatory approval to sell its Taiwan operations.

Blockbuster also will benefit from "the continued demise of Movie Gallery," said Widlitz, as well as from the further closing of Blockbuster's underperforming stores.

The market for the DVD-by-mail concept where Blockbuster plays second fiddle to Netflix will grow from $1.7 billion in the U.S. last year to $2.5 billion in 2010, according to Adams Media Research.

Next up, though, is the digital download market, which Adams expects will rocket from just $32 million last year in the U.S. to $2.8 billion in 2010.

While Adams predicts that both Blockbuster and Netflix will have a stake in that business, some observers expect Netflix to be a bit bolder a bit sooner. Netflix said that it will talk about some of its specific plans for the digital delivery of movies on demand when it next reports quarterly financial results, which the company said Thursday will be on Jan. 24.

Netflix once spoke of a partnership with TiVo for delivering movies on demand, though both companies have been mum on details and many expect that the relationship has soured.

Apple Computer, meanwhile, has been offering up movies and TV shows through its iTunes service, and the company has promised that its iTV box, which might be showed off at next week's Macworld conference, will easily bring the iTunes movie experience to TV screens.
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