Blockbuster's Death Scene Won't End the Video Rental Store

By Justin Bachman, Businessweek

The long-foretold death of the video rental shop - all but sealed Wednesday with news that Blockbuster will shut its last 300 stores in the U.S. - can be read as a wistful moment for retail nostalgics or a proud triumph of digital simplicity.

Blockbuster, bought by DISH Network (DISH) out of bankruptcy two years ago, will turn out the lights on its final American storefront early next year and end its DVD-by-mail business next month. "This is not an easy decision, yet consumer demand is clearly moving to digital distribution of video entertainment," Joseph P. Clayton, DISH's president and chief executive officer, said in a statement.

The Blockbuster brand for digital offerings includes DISH's Blockbuster on Demand streaming service and the Blockbuster @Home movie channels available to subscribers. Blockbuster also has about 450 stores operated under franchise and license agreements, all but 50 of which are located outside the U.S., and those will continue operating. 

The video rental chain was spun off by Viacom (VIA) in 2004 and had about 9,000 locations at the time—a position of market dominance that once made it a target of legal challenges by smaller video rental businesses. Now some of those little brick-and-mortar movie stores will manage to outlive the behemoth. "The fact is that one retailer just doesn't an industry make," says Mark Fisher, president and chief executive of the Entertainment Merchants Association, a home-video and gaming trade group. "When Tower closed its doors, it certainly didn't signal the end of the music business."

Indeed, in the $18 billion home-video market, rental is hot. Spending for movie rentals is expected to top movie sales this year for the first time since 2001, according to research firm BTIG. Movie sales and rentals account for 72 percent of the market for home video, the EMA said in its 2013 annual report. Kiosks from such players as Redbox (OUTR) and DVDNow accounted for 44 percent of all movie rentals, or $2 billion—up nearly 16 percent last year. At the same time, though, 17 percent of brick-and-mortar rental shops closed in 2012.

Video chains that want to keep people browsing the physical discs have been rushing to expand their offerings. The largest U.S. chain, Family Video, has started installing pizza shops adjacent to its locations "to offer one-stop shopping for dinner and entertainment," as the company explains, while also expanding into fitness centers and a cable-TV service in several central Illinois burgs. Another entrepreneur has likewise added frozen yogurt to his store, MR Video, in Keizer, Ore.

In Brooklyn, meanwhile, Wendy Chamberlain moved her 16,000 movies to the basement so she'd have space for a bar and screening room. Some of the staff learned to mix cocktails. "We couldn't just give up," Chamberlain told DNAInfo, a local news website. "We hated the idea of not being able to be here and rent movies to people anymore."

Other small shops in the business have turned to art house fare for cinephiles or foreign-language titles, the kind of movies that can be tricky to find in a Redbox or via Netflix's (NFLX) streaming service. Fisher predicts that DVD rental shops will survive for several more years. "It's about convenience and about value," he says. "Kiosks are of course everywhere, but they don't have a lot of assortment."