Video Stores Struggle to Stack Up

Michelle Crames is a self-described movie addict.

She once got her fix braving the lines at Blockbuster Video stores, whipping out the blue-and-gold plastic rental card and diligently returning the movies before late fees kicked in.

Now, her West Hollywood home is filled with about 175 DVDs purchased from such discount sellers as Target Corp., Best Buy Co. and Internet site Half.com. The children’s programming producer still rents from stores, but it’s becoming just as easy to avoid them by using a mail-order or downloading service.

“The only thing saving them in the short term is that people like immediacy: They want these movies in their hot little hand,” she said. “But that will wear off.”

It’s movie buffs such as Crames, 29, who make video store executives wish they could rewind to better days. Their once-captive customers now have plenty of alternatives to renting if they want to watch a film in the comfort of their living rooms.

Evidence of the industry’s anemic state came Tuesday, when bellwether Blockbuster Inc., by far the biggest video-rental chain, reported a second-quarter loss of $57.2 million because of the elimination of its late fees and costs to fund its fledgling online rental business. The Dallas-based chain, which has posted annual losses every year since 1997, earned a $48.6-million profit in the year-earlier quarter. Sales in the latest quarter slid nearly 2% to $1.4 billion.

Blockbuster said that because of the uncertainty and continued weakness in the video rental business, the company “is unable to forecast 2005 results with reasonable certainty.” Blockbuster also revealed that it crafted a new agreement with lenders to keep from defaulting. Chief Executive John Antioco has promised “aggressive actions” but hasn’t specified what they will be.

Not helping matters is Hollywood’s anemic box-office performance this year, which portends more sluggishness. Recently, Blockbuster’s top rival, Movie Gallery Inc., also warned of difficulties. Even smaller retailers are feeling the pinch.

“We live precariously -- all of us -- Blockbuster and the independents and the various chains,” said Jim Salzer, owner of Salzer Video in Ventura.

Blockbuster shares tumbled 11.5% on Tuesday, falling 92 cents to $7.09. They are down nearly 26% year to date.

It wasn’t long ago when video stores minted money. The proliferation of videocassette players in the 1980s made visiting the video store a weekend ritual for a generation of movie buffs and families. Make it a Blockbuster night, as the slogan goes.

“The video store used to be the place to gather with your family, and you would choose your movies as a family,” said Reed Hastings, chief executive of online video rental company Netflix Inc. “It was a very Norman Rockwell America.”

Enter the low-priced DVD. Introduced in 1997, the DVD became a hot item for mass merchandisers such as Wal-Mart Stores Inc., Best Buy and Target, whose cut-rate prices persuaded customers to buy movies for just a few dollars more than they could rent them.

DVD sales soared from $1.3 billion in 1999 to $15.15 billion last year, according to figures from Adams Media Research. Meanwhile, video renting peaked in 2001 at $8.42 billion, the Video Software Dealers Assn. reported. The number slid to $8.06 billion last year, the lowest since 1997. In a nod to the changing times, trade publication Video Store Magazine became Home Media Retailing.

“There is not the level of excitement that you had in the mid-’80s, but those were boom times,” said Adams Media chief Tom Adams. “There is no magic bullet that will restore that crazed consumption level.”

Another threat came in 1999, when Hastings launched Netflix, which rented DVDs to people over the Internet, delivering them via mail and nixing the late fees that stuck in the craw of video store customers.

Now, other technologies -- video on demand, Internet downloading and pay per view -- that make ordering a movie as easy as clicking a remote threaten to further undermine the video store.

A study released Tuesday by Adams Media and Screen Digest predicted that the industry in the next decade would be driven by film downloads, not rentals, in the same way the music industry is shifting to digital sales.

“The rental of a movie will happen through alternative distribution platforms, not free-standing video rental stores,” said Warren Lieberfarb, former head of home video for Warner Bros. and considered the father of Hollywood’s DVD business.

Video store executives said they had read the industry’s premature obituary before.

“People have been saying that the video store is a dinosaur since the beginning of Blockbuster dating back to the ‘80s,” Blockbuster’s Antioco said in an interview.

Mark Wattles, founder of Hollywood Video, said the video store industry was facing major challenges. But he believes that savvy merchants will take advantage of technological changes.

“I don’t think we are in the twilight of the brick-and-mortar store for any industry,” he said. “Consumers will continue to want to handle things and buy on impulse. There are a lot of changes ahead. I think that the really good operators will capitalize on those changes.”

Some are surviving with a niche strategy, offering a large selection of foreign and art films with knowledgeable staff to help customers.

Case in point is Vidiots in Santa Monica, a 20-year-old video renter that stocks more than 40,000 titles and caters to the serious film fan. The store, founded by childhood friends Patty Polinger and Cathy Tauber, has survived a fire, major earthquake damage and competition from big chains.

“For 20 years, there have been these threats that were going to put the video store out of business,” Tauber said.

Video store executives see their future in evolution, not extinction. Blockbuster has spent millions launching its online business, although it remains far behind Netflix. The company also is expanding its sale and trading of video games and movies and has cut late fees at the cost of millions of dollars.

Antioco predicts that Blockbuster will probably offer downloadable films or leverage its 60 million worldwide family accounts to establish a Blockbuster video-on-demand service.

“We are doing more to evolve now and provide the services people want than ever before in our history,” Antioco said. “But we are not just relying on the store.”

But as the alternatives to getting a movie to watch at home become easier, keeping film buffs such as Crames will be harder.

“It’s about retailers determining what other kinds of services they can provide customers that bring value,” she said. “If they can give me more interesting services and offerings ... they would be able to catch my attention.”