Closing Scenes

During the 1990s Tom Hamilton had what he calls a “nice business” running 21 Spokane-area video rental stores.

Times have changed. The once-prosperous group of Premier Video stores has shrunk to just one location.

That store, on Third and Maple near downtown Spokane, will shut down in June when the lease is up, Hamilton said.

“Don’t ask me for advice on how to succeed in this business,” Hamilton said. “It’s not easy at all.”

Hamilton shouldn’t feel like a loser.

Blockbuster Inc., which has more than 5,000 video stores nationwide, closed about 150 of them last year. It expects to close at least than many in 2006, said company spokesman Randy Hargrove at Blockbuster’s Dallas headquarters.

Plenty of darkened video stores, with movie posters still stuck to the walls, will be visible around the country, say industry watchers. As consumers choose from a wider smorgasbord of entertainment choices, the future of brick-and-mortar video stores has become uncertain.

“Brick-and-mortar video stores will be closing by the thousands in the coming several years,” said Steve Swasey, director of communications for Los Gatos-based Netflix Inc., a company launched in 1999 that delivers movie DVDs to customers by mail.

“Video stores are like travel agencies that you used to find in every strip mall,” Swasey said. “You don’t see them anymore because people can do their travel planning online.”

The people watching the movie rental industry agree online companies like Netflix are gaining customers. But they’re not ready to write off the retail store quite yet.

Hargrove, for one, thinks the travel agency analogy doesn’t apply.

“Renting movies is more impulse driven,” he said. “You don’t just walk by a travel agency and book a flight. People do make impulse rentals or purchases of movies.”

Many observers are wondering if the changes that rocked the music business are just around the corner for the video-entertainment industry. The recording industry, after years of fighting the sale of music through the Web, has seen the light and now embrace online sales. Motion picture studios are moving more cautiously in that direction.

Others contend the retail video store will evolve, get smaller, use technology creatively, and survive for another 20 years or so.

Mom and pops have it worst

One thing is clear, said media analyst Arvind Bhatia, who works with Dallas-based Southwest Securities: “The mom-and-pop retail stores are disappearing much faster” than the national companies like market-leader Blockbuster or the No. 2 retailer, Movie Gallery.

Where Spokane County once had dozens of independent, locally owned video stores, today there are fewer than a dozen.

The survivors are faced with the same economics as the big companies. Overall rentals and sales of movies have declined since 2000. Rentals of movies declined an average of 3 percent each year from 2001 to 2004. In 2005, movie rentals fell by 9 percent from the year before, according to industry reports.

The challenges come from several sources. Online rental companies like Netflix now take about $1.7 billion out of a total rental market of $7 billion. Cable companies and satellite services deliver recent releases directly to subscribers through video on demand.

A tiny portion of the moviegoing audience now legally downloads some movies from major studios entirely through a computer. The major experiment in this service, Movielink, has not yet become a widespread success. New competitors to Movielink show up regularly; last year actor Morgan Freeman announced he’s helping launch a similar service for paying to download films, called ClickStar.

Bhatia can’t say which factor is key, but he agrees with the general view that it’s too soon to declare retail video stores on their deathbed.

He’s sure, however, that consumers now divide their time among more choices.

“People now are spending more time online. They’re playing video games. There are just more options,” he said.

The big companies have responded by cutting costs. Besides closing stores, Blockbuster eliminated all rental late fees, which had accounted for 14 percent of its total revenue.

Mom-and-pop operators don’t have that option. Their choices come down to closing or finding a way to survive.

Ice cream and a movie

Spokane Valley resident Bill Miller, owner of two small video stores, does it by putting in a total of nearly 50 hours each week at his Reel World store in the Valley and at his north Spokane store, Box Office Video. That’s on top of the 60 hours a week he works as an office manager for a Spokane trucking firm.

Like Blockbuster, he’s eliminated all late fees at his stores. He gets his movies through RentRak, a national company that provides new titles at no cost if he agrees to share revenue from sales and rentals.

Miller has added an ice cream parlor at Box Office Video and plans to add a coffee shop there to generate more income. He plans to add an ice cream parlor in the Valley, as well.

His Valley story is profitable; the other one isn’t, said the 32-year-old Miller. He’s thinking of moving the north Spokane store to a smaller building to cut his monthly lease costs, he said.

“If I didn’t work those 50 hours a week (at both stores), this business wouldn’t be profitable,” he said.

Miller spends so much time away from home that on weekends he has his 8-month-old daughter, Lauryn, visit him at a video store so he can spend time with her.

Like Hargrove and others with brick-and-mortar stores, Miller wants to believe the doomsayers are miscalculating the appeal of retail service.

“I know the names of all my regular customers. I talk to them. That’s what I’m good at, talking to people,” he said.

Stores still a lure

Bhatia and other analysts agree Americans still have a thing about dropping into a store, looking at titles and making selections. While Netflix offers 55,000 titles, most video stores at best carry only 6,000 to 7,000 movies. But consumers more often than not are hunting for recent popular releases, and video stores have learned to stock those in abundant supply, then sell them off after their rental popularity drops.

Hargrove said Blockbuster continues to see a positive market for its video rental business.

“A big segment of our customers will always want to go to a store, look at what’s on the boxes, get a movie for mom and dad and different movie for the kids,” he said.

The company will not open as many new stores as it did before, however.

To further hedge its bets, Blockbuster launched its own Blockbuster Online service, which resembles Netflix in that subscribers order movies by selecting choices online. Netflix has about 5.9 million subscribers, compared to about a million for Blockbuster, Hargrove said.

Both Netflix and Blockbuster — companies that clearly don’t respect each other — agree on one thing: they don’t see a big switch away from the DVD format.

“For the studios, the largest stream of DVD revenue comes from the sale of DVDs,” Hargrove said. If the studios get $10 for every DVD sold but only about $2 to $3 for a download, it’s clear which format they’ll prefer.

The sale of movie DVDs in 2005 was more than twice the total for rentals. Americans spent $15 billion to buy DVDs; they spent around $7 billion on rentals, according to industry data.

Another reason to expect DVDs to retain their popularity is the launch later this year of High Definition DVD (HD-DVD), which will give consumers with high-definition TVs a superior sounding and better-looking experience.

New services on the horizon

Neither Blockbuster nor Netflix wants to be left behind as technology and other choices proliferate in the market.

Swasey said Netflix this year will spend between $5 million and $10 million to launch a download service for its subscribers. He declined to say more about how that service will work.

A variety of other retail experiments are also testing the waters, looking for ways to make movie renting more efficient.

McDonald’s Corp. has already dived in, launching a subsidiary called Redbox that installs movie kiosks in high-traffic locations. Renters pay $1 to view a movie, then return the DVD to the kiosk the next day. Early tests show encouraging signs.

The Redbox kiosk model isn’t viewed as a major challenge to storefront video stores, but its low cost of operation will force larger companies to take notice, say industry watchers. Hargrove at Blockbuster said the company already has decided not to open large, 5,000-square-foot stores anymore.

Small video store operators like Bill Miller hopes the movie-rental experiments succeed. As long as consumers walk through a door and start browsing a movie aisle, Miller knows he can keep his stores open. “Even if they don’t rent a film, I can get them to buy some ice cream,” he said.