Did Redbox Kill the Video Store? New Ideas with Old Themes

What did you tell them?
Red Box killed the video store.
Red Box killed the video store. 

For those of you who remember the days of your vcr, a beta or vhs tape and a date, this walk down Memory Lane will also take you into the local video store. Year you remember the old brick and mortar store that sprung up for about a 30 year period  in the United States.


Those who got in early... and got out within the first 20 years of the video rental business then got out were the smart ones. (Does anyone remember paying $100.00 or more to belind to a video club?)  Movie Gallery (formerly known as Video Update) was the last of these stores that died a slow and painful death in our town. Sure expenses like rent at the shopping plaza, and employees took its toll. But the real culprit to the death of this local store was one little Redbox 150 feet away. The brick and mortar store just couldn't compete with a machine. Of course in the world of business, natural selection takes over unless you are part of a government subsidized business lobby. See C, AIG, GM and friends.


In terms of movie rentals, Redbox has a simple model. Place machines in high traffic areas and let the machine do the work of the video store. Let's face it, for those who remember video store experience, this is not much different. For only $1.00 you can stay home and enjoy a video.


However, Netflix has stormed onto the scene. It's first business approach was a simple. Utilize monthly membership fee and mail service to deliver dvd's right to your door. Netflix even offered a free trial to those who are weary of new consumer options. The more recent move into streaming video options and a recession that finds people looking for cheaper entertainment options positions Netflix to be the Amazon.com of ebusiness.  Investors have been handsomely rewarded.


The question is whether Blockbuster can change fast enough to challenge Netflix. Blockbuster has abandoned many of their video stores. And, Blockbuster has a long-established name. Blockbuster has even attempted to rival Netflix with an on-line video experience which also offers a free trial.  The question is only if it is too little, too late?


Growth areas? Great question. The current market suggests that games are another place to attract consumers. Gamestop appears to have successfully transformed itself from a shopping plaza storefront to a viable on-line business model. Gamefly's IPO  (GFLY) could however pose a problem to Gamestop. Could it be a case of Movie Gallery all over again? With free trialmembers and an endless mass of gamers, we can only see new opportunities.


Implications
The meteroic rise of Netflix and the potential of GFLY should not be under-estimated. Let us remember that it is not always the company that has the best name. But it is the company that builds a name with a new and more savvy consumer that usually succeeds.

U.S. Financial Health, Stock Highlights

It was once said, and rightly so that "He who holds gold and silver makes the rules." And for many of those who gold and silver, they carry it in their upper hand for business dealings. Debtors to be sure are at the mercy of lenders more so now, than in almost any time in history. Not because there is debt... more because debtors are over-leveraged to creditors. Likewise, creditors could well be over-leveraged to those who have borrowed too much. (1) It truly is an unhealthy combination in this case. But I bring up this point because the the U.S. government has gone to great lengths to help accommodate the lending... not regulate it... The issue then becomes more touchy as the Federal Reserve Chairman Ben Bernanke dropped a $1.2 trillion dollar bomb last week, that will soak up T-bills without an auction. This could only mean that both Treasury and Fed are concerned about the dis-interest of other governments (namely China, Russia, and Saudi Arabia) in soaking up additional U.S. debt. The Fed move is nothing less than a hail Mary pass into the end zone at this point. Should the trend of shunning U.S. treasuries continue, there will be grave consequences. And the ramifications of no buyers for U.S. debt is ground shattering:

1. The U.S. dollar will be replaced as the world's reserve currency. This will effect the value of everyone and anyone who is holding dollar based assets... From homes to equities...

2. The U.S. will not wield the traditional influence we have become accustomed to in world affairs. And the world will continue to drift into a more isolationist pattern, while governments seek to "test" the new world order. i.e. Iran, Pakistan, North Korea, and China just to name a few.

3. According to one Reuters report, there will be additional resentment toward the United States seen as a long-time exporter of debt, and now inflation. (2)

Anyone who doubts this premise could be part of the Cramer Camp who tauted the positives of inflation. As Cramer stood in his kiddie pool with pants rolled up in a sea of dollars he suggested that stocks will inflate along with dollar based assets. I would like to remind anyone who watches Cramer that he is nothing more than entertainment. Even a six year old girl pointed toward him and laughed saying "That guy is funny." I believe Cramer is short-sighted at the bare minimum, and to the other extreme a buffoon. Inflation is a two-edged sword. And I am suggesting that Cramer is missing a more fundamental paradigm shift that should pull another 20% out of the stock market...maybe more.

Retail and Commercial Real Estate
If you are a Darwinist, then you will see Natural Selection in many aspects of the economy. In the most basic level, most of us would enjoy a flattened playing field where domestic businesses would either compete and win, merge to crate a new synergy, or fail.

With a state like Ohio hitting a 9.4% unemployment rate, there is a resounding message that is sent... It is time to place bets on those who will whether the storm, and those who will not make it in retail. Take a company like DBRN for instance. They are exploring new ways to do business. And even offering members of Weight Watchers "special deals" to visit their store. Currently off their low of 7.94 in November, an 11.35 price tag could well be too much.

REG specializes in commercial real estate property which includes anchor stores like grocery or even large box stores. That being said, we can only imagine the devastating effect the recession (or whatever they are calling it these days) is having on such an operation. The all-time high at 87.10 in July of 2007 has been punished to a current price of 24.93. And the chart looks UGLY!!! (Please see the hyper link)

CSTR has a nice gimmick with the coin-counting mechanisms that are commonly found in grocery stores. I believe the Coinstar charges somewhere in the area of 10% to count coins. Sure, there are a lot of people counting coins these days. But I also believe that human nature will be to leave the middle man out of the equation and deal directly with a bank. Unfortunately, many of the people dealing with change are in long-term financial pinches. I guess if you wanted to add extra minutes to a phone card, buy retail gift certificates, or something of that nature, Coinstar is the thing for you. But, I see this as a company that will be squeezed in this economy. Here is what a couple of people have said about their Coinstar experience. Click here.

Sources Cited
1. http://www.leveragedfinancenews.com/blog/carol_clouse/189922-1.html
2. http://www.reuters.com/article/newsOne/idUSTRE52H2CY20090318