Video stores losing ground as habits change

NPD report says customers prefer mail, kiosks

The future of the traditional home-video store looks bleaker than ever.

Rentals of movies from DVD-by-mail services like Netflix and kiosks run by Redbox and newer startups have surpassed the number of films borrowed from stores operated by the likes of Blockbuster for the first time, according to NPD Group.

“Netflix and other subscription services comprised 41% of video rental turns in the third quarter of 2010, followed by kiosk rentals at 31%, and in-store rentals at 27%,” the research firm said.

The kiosk biz, in particular, grew 10% in the third quarter over the same period in 2009.

The NPD report didn’t tally the number of films rented on the Internet, a growing part of Netflix’s business.

Either way, the change in consumer behavior isn’t good news for Blockbuster, which is trying to turn around its own rental operation and emerge from Chapter 11 bankruptcy protection, which it filed in September in order to wipe out more than $900 million in debt.

The company operates 3,367 stores in the U.S. and roughly 6,500 worldwide, but said in December that it plans to shutter 180 locations by the end of March. The company is now considering shuttering another 1,000 stores globally, after having already closed 1,000 storefronts over the past two years.

That scenario is even more likely now that Blockbuster’s management is requesting as much as $250 million from creditors as part of its reorganization plan being worked out with bondholders, led by billionaire Carl Icahn, sources close to the situation said.

If its bondholders can’t agree on a reorganization plan, Blockbuster’s assets could be auctioned off, which analysts say could earn around $400 million.

Blockbuster missed a deadline on Friday to offer a new reorganization plan and hire another CEO.

The company is still figuring out ways to pay for the expansion of its own DVD-by-mail service and kiosk business, the latter of which is run by ATM-operator NCR under the Blockbuster Express banner.

While more of Blockbuster’s kiosks (which can hold more discs than Redbox’s kiosks) have been installed, the company’s mail service is seeing a decline in subscribers. At last count, Blockbuster had 1.2 million DVD-by-mail subscribers, compared with Netflix’s nearly 17 million.

Blockbuster will certainly need more than just a growing kiosk biz to save the company, however.

Redbox’s bottom line started showing signs of taking a hit last week after it agreed to hold off on offering DVD and Blu-ray rentals of 20th Century Fox, Universal and Warner Bros. films for $1 a day until 28 days after the discs go on sale in stores.

Despite traffic to its kiosks remaining consistent, Redbox owner Coinstar said the company missed its earnings target when it reduced its fourth quarter estimates from $415 million-$440 million to $391 million, still a 31% sales increase. Redbox started delaying new releases during the holiday period.

Coinstar CEO Paul Davis also attributed the decline to more customers dropping off their discs to other kiosks, altering the type of films being offered at various locations.

But “this was Redbox’s first holiday season with 28-day delayed titles, and we underestimated the impact that the delay would have on demand during the fourth quarter,” Davis said.

Nearly 40% of Redbox’s films are on a 28-day delay.

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