Blockbuster's Loss Should Be Coinstar and Netflix's Gain

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There could be a reason why DISH Network (NAS: DISH) was willing to pick up Blockbuster in bankruptcy proceedings last year for barely more than what a dedicated liquidator was willing to pay.

DISH CEO Joe Clayton told Reuters last week that the satellite television provider will be closing more Blockbuster locations than it was originally targeting.

"We will close unprofitable stores," Clayton said in the interview. "We will close additional stores."

It's not a surprise that some -- if not many -- Blockbuster stores aren't turning a profit. Cheaper rental alternatives exist. Coinstar's (NAS: CSTR) Redbox and the NCR-bankrolled (NYS: NCR) Blockbuster Express offer celluloid buffs cheap discs through automated kiosks. It's easy to be cheap when you don't need to spend a lot on labor and strip-mall rental space. Netflix (NAS: NFLX) may have stumbled in the third quarter, but it still had nearly 14 million DVD-based subscribers in this country.

Clayton didn't reveal how many stores will actually be closing, but he did say that the stores that will remain open will become more active in selling DISH subscriptions and may eventually grow into service hubs for its satellite service's subscribers. In other words, even the locations that live may not have the same purpose.

Clearly, this is a dinner bell for the few players left standing, but maybe it's a more ominous bell. After all, the demise of Movie Gallery and Hollywood Video didn't lead to a return of Blockbuster's glory years.

Redbox is still delivering monster growth for Coinstar. It may very well be the last DVD rental joint standing in a couple of years. However, what if Blockbuster's decline isn't any different than when Borders or Virgin Music or Circuit City went down? It wasn't a feast for the survivors. It was a sign of things to come.

A smaller -- and different -- Blockbuster may initially sting NCR's licensed kiosk business. After all, the brand may grow to mean something else. However, if this is symptomatic of DVD rental trends following the gradual decline of DVD purchases, it's not as if Coinstar or Netflix will be rocking in physical rentals.

Netflix obviously has its streaming lifeboat in place. Coinstar is likely to finally introduce its long-promised digital strategy later this year. However, the DVD rental as we know it is dying.

It was nice knowing you, special features, blooper reels, and alternate endings.

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At the time this article was published Motley Fool newsletter services have recommended buying shares of Netflix and Coinstar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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