As both Blockbuster (BBI) and Netflix (NFLX) gradually shift their distribution models away from brick & mortar and postal operations and towards digital, Citi says that both companies are taking steps in the right direction.
Citi is optimistic that BBI’s new “Blockbuster on the Go” product, which lets customers download digital content from kiosks on to Archos portable mp4 devices (soon to be available in BBI stores), will support a “wider range of devices, with flash-based media likely a key area for development.” Citi notes that:
SNDK is working with studios to implement flash DRM. From the studio perspective, meetings with several major execs suggest they agree with our belief in the potential benefits of flash media (i.e.,
increased distribution and consumption opps).
Citi is maintaining its Buy rating and $8.50 price target, citing a strong distribution plan and the strength of rentals during macro downturns:
…we believe the core business is in good shape and we believe BBI will benefit from: 1) in-store share gains, 2) TA improvements, 3) new pricing; 4) the push towards a five point distribution plan, and 5) consumer’s willingness to rent more in a tough macro environment as it is one of the cheapest forms of entertainment.
Netflix is also transitioning to digital distribution, and Citi thinks that there are several key advantages to this model:
Download investments will throttle near-term growth but should: 1) help offset rising postage costs; 2) potentially allow for international expansion; 3) improve market share and opportunity; and 4) slowly transition NFLX into more of a fixed cost business model. It should also improve churn, SAC, and protect pricing.
Citi expects studios to react favourably, albeit hesitantly, to the new model:
Discussions with major studio executives supports our bullish stance on packaged media. The studios generally expect any new technology to add to entertainment spending and will be slow to adopt technology that cannibalizes their revenue stream.
Citi maintains its Hold rating and $35 price target on “maturity concerns, competitive threats, and valuation.”