"Netflix expects Dish Network streaming push" (NFLX)

As I said, low barriers to entry...

Top Ten Dying Industries

A company called IBISWorld has put together a report called "Dying Industries", which looks at the universe of close to a thousand industries to identify the 10 that are most hopelessly in decline.

These industries all experienced drastic revenue decreases over the past decade, and are expected to continue to decline, due to factors like damaging external competition, advancements in technology, and industry stagnation.

In descending order of 2010 revenue, the industries are:

1. Wired communications carriers
2. Mills
3. Newspaper publishing
4. Apparel manufacturing
5. DVD, game and video rents
6. Manufactured home dealers
7. Video postproduction services
8. Record stores
9. Photofinishing
10. Formal wear and costume rental

In most of these industries, the companies' valuations are already pricing in an eventual end to the industry. I think there may be shorting opportunities in paper, though, and in old-media companies generally.

Blockbuster (BBI) Had the Chance to Buy Netflix (NFLX) But Dismissed It?

A Variety article about Blockbuster from 2005 quotes,

a former high-ranking Blockbuster exec, who recalls, "We had the option to buy Netflix for $50 million and we didn't do it. They were losing money. They came around a few times."

Instead, in 2000, Blockbuster inked a 20-year exclusive video-on-demand pact with Enron as the energy conglom launched into telecom. Blockbuster canned the pact after nine months.

Netflix is now worth $1.4 billion. Blockbuster's market cap is about $850 million.

And now, Netflix is worth $10 billion and Blockbuster is worth ~$100 million. Ouch!

I understand that Sumner Redstone paid $8.4 billion for Blockbuster back in 2004.

Meanwhile, the television and movie studios are looking for ways to "contain" Netflix.

"Is Netflix Streaming Its Way Towards Disaster?" (NFLX)

Good article today by Edward Epstein about Netflix (NFLX).

Netflix was able to get really good licensing deals on streaming content because they did the deals before the content owners realized the value. Unfortunately, the deals are not permanent and will have to be renewed. As Epstein notes,

The brutal reality is Netflix’s bargain days for streaming movies and television is coming to an end. As everyone else in the licensing game, Netflix will have to pay real world prices for content. Just the output deal it announced with three of the weakest studios,  Paramount, LionsGate and  MGM will cost it $200 million a year, a sum that exceeds its operating income last year. And if it wants the kind of output deals the other pay channels have, it will have to pay a great deal more than that.

Yet Netflix has been on a tear, up 247% year-to-date!

Netflix has an enterprise value of close to $10 billion, which is a very expensive 33x EBITDA. That seems to imply that Netflix will permanently rule the roost and be able to get content at prices that leave room for substantial profit. But why would the content owners let Netflix extract those rents?

Who would have guessed, though, that Blockbuster would have utterly failed to make the transition to new forms of content distribution?

New Yorker: "why didn’t the category killers colonize the Web the way they colonized suburbia?"

The problem—in Blockbuster’s case, at least—was that the very features that people thought were strengths turned out to be weaknesses. Blockbuster’s huge investment, both literally and psychologically, in traditional stores made it slow to recognize the Web’s importance: in 2002, it was still calling the Net a “niche” market. And it wasn’t just the Net. Blockbuster was late on everything—online rentals, Redbox-style kiosks, streaming video. There was a time when customers had few alternatives, so they tolerated the chain’s limited stock, exorbitant late fees (Blockbuster collected about half a billion dollars a year in late fees), and absence of good advice about what to watch. But, once Netflix came along, it became clear that you could have tremendous variety, keep movies as long as you liked, and, thanks to the Netflix recommendation engine, actually get some serviceable advice. (Places like Netflix and Amazon have demonstrated the great irony that computer algorithms can provide a more personalized and engaging customer experience than many physical stores.)

Blockbuster (BBI) Reports First Quarter 2010 Financial Results

Blockbuster rallied hugely during the trading day today, as rubes investors hoped that "Blockbuster posts a surprise" when earnings came out after hours. Sold to them!

And it turns out: Earnings just came in and they are not so good.

Revenue for Q1 2010 was $939.4 million, versus $1.09 billion the year earlier (down 14%). [The decrease was] primarily attributable to a 7.1% decrease in worldwide same-store comparables...

Ouch! Those are big revenue declines! Isn't it interesting that the Credit Bubble Stocks short portfolio companies are reporting first quarter results that are worse than comparable 2009 results? Doesn't it make you wonder about the "recovery"?

Operating loss for Q1 2010 was $29.4 million, compared to $50.2 million the year earlier. Adjusted EBITDA for Q1 2010 (which excludes stock-based compensation expenses, costs associated with lease terminations, severance, and professional fees related to the Company’s recapitalization initiatives) was $31.1 million compared to adjusted EBITDA of $97.2 million the year earlier.

Much lower EBITDA. That really hurts projected enterprise valuations, which is bad for the equity because of the negotiations going on right now between different parts of the capital structure. Speaking of which:

“During the first quarter we continued progress to recapitalize our business.  We have had encouraging discussions with both financial and strategic partners and expect to have additional details to report by our annual stockholders’ meeting in late June,” stated Jim Keyes, Chairman and Chief Executive Officer...

A very vague statement. Almost certainly they are working on some kind of distressed debt exchange.

Blockbuster (BBI) Insanity Typical of Today's Market Action

We are still seeing high levels of call buying despite the bad news on Friday, which suggests that the competition is still greedy and not fearful, which, as a bear, is what I want to see.

Blockbuster (BBI) up huge today (50%!), even though its 2012 notes trade at 25 and haven't budged. The only news is that the company has delayed the shareholder meeting, while they work on recapitalizing the company.

Here's a hint for the equity market cretins: a recapitalization means a massive dilution of the equity in order to get out from under the crippling debt load. The 2012 notes yield over 90% at the current price, which confirms the view that the equity has no value.

Icahn Dumps Blockbuster (BBI) Shares

Before I put on my Blockbuster (BBI) equity short, I paused briefly because of Icahn's huge position in the company, then I decided he was missing something.

Looks like I was right - over the past week he dumped a big chunk of his position.

Blockbuster (BBI) Planning Reverse Stock Split

Blockbuster (BBI) Planning Reverse Stock Split

Blockbuster's annual stockholders' meeting will take place at Renaissance Tower, 1201 Elm Street 42nd floor. Items to be voted upon at the meeting include the following:

Combination of Class A common stock and Class B common stock into a single class, and approval to execute a reverse stock split. 

A reverse stock split would be great - much easier to short higher priced stock!

New Shorts

Added a Blockbuster (BBI) short and a Winnebago (WGO) short. Will have more to come on these...

Looking at the Blockbuster (BBI) Situation

On the one hand, Blockbuster 9% Notes due 2012 trade at around 26 to yield ~85%. On the other hand, Blockbuster (BBI) has an $80 million market capitalization.

Here are some really pointed observations about the prospects for Blockbuster

Sorry, but Blockbuster's brand carries zero equity on the Internet. That's like making the argument that Sam Goody or Tower Records could steamroll Apple's iTunes just because it once had a large offline presence.

Meanwhile, Blockbuster's cable rivals like Comcast already have far stronger distribution -- via the set-top box already in your living room, and the dedicated video pipe running into your house; Apple and Netflix are arguably leading the technology race; and everyone's on-demand pricing and content is pretty similar right now.
How about Blockbuster's opportunity to sell some of its stores for quick cash to pay down its debt? (As CNBC's Dennis Kneale asks at the end of this segment.) That's also not in the cards. Jim Keyes says Blockbuster leases almost all of its stores on "very short-term leases" -- so the company doesn't have much of a real estate portfolio.

Here's another lengthy post.