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Stock Ideas Investors Daily Edge A Blockbuster Mistake
Stock Ideas Investors Daily Edge A Blockbuster Mistake 
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| A Blockbuster Mistake |
| Friday, 04 January 2008 | ||||||||
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Dear Reader, As a kid, I used to love walking into Blockbuster Video. Every single time I walked into that place I ended up leaving with a Nintendo cartridge in my hand. Truth be told, Blockbuster was the only reason I was able to play as many video games as I did. After all, you could rent a game at a tenth of the cost of buying. Sure, other rental places popped up - Hollywood Video and even Albertsons did some rentals. But Hollywood is closing down stores. And Albertsons gave up renting a long time ago. It seemed like the king of rentals was Blockbuster …. that is until Netflix came along. What Netflix did was revolutionary at the time. They took advantage of the booming popularity of the Internet to offer a DVD rental service that had never really been seen before. Instead of driving to Blockbuster to rent a video, all you had to do was log into your Netflix account, make a list of movies you wanted to rent, and you’d receive the DVDs directly in your mail one or two days later. It was a pretty sweet deal. But what made it even sweeter was the price. I rent two DVDs at a time for around $15 a month. If I get two DVDs per week, then I’ve just rented eight DVDs for around two bucks each - way cheaper than Blockbuster’s $4-$5. It didn’t take long for Blockbuster to wise up. Not long after Netflix killed Blockbuster’s customer base, Blockbuster adopted the Internet rental model too. It seemed like every year, the two would drop the price of their monthly service by a dollar. Blockbuster ran a huge ad campaign that helped its traffic increase substantially. They had the right price, the right model, and a unique advantage over Netflix – in-store rentals. It appeared Blockbuster was back.
But just a few days ago, I read something that made me doubt Blockbuster’s future prospects. In fact, it’s probably only a matter of time before they go belly up. You see, the price Blockbuster charged its customers didn’t give them enough money. The price war was threatening their profitability, even as they took on thousands of new customers a month. So they had to do something. What did they do? They raised their prices … in some cases by as much as $10 a month. Now, do me a favor and imagine you’re a Blockbuster customer. You love the service, but are surprised that one day it’s $10 more. What do you do? Take the higher price and stick with them? Or do you defect? I know what I would do. And it’s the same thing a lot of my friends are doing, too – they are leaving Blockbuster in droves. Sure, Blockbuster makes more money. But they are starting to lose customers at the same time. And where are these defecting customers going? You guessed it – Netflix. Netflix was always the stronger company anyway. They simply don’t have the expensive overhead Blockbuster has to deal with. That helps them keep higher margins. It also provides money to spend on new initiatives, such as online video rentals and improving their home page. That’s why I feel good about Netflix. Some may be tempted to jump into Blockbuster, especially since the share price is cheap. But don’t let that fool you. This company could hit 0 by the end of the year. Good investing, Charles [Ed. Note: Three weeks ago, Charles told subscribers of IDEs Global Profits Hotline to capture a gain of 202 percent. To find out how to get these recommendations, click here ]
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