To him, Netflix is a marginal player lurking in a "tiny" $5.6b, while Blockbuster is the giant, going after the $27.2b. From this point of view, narrow as it is, he's not really crazy at all. And obviously some investors agree. There's a lot of money here that Netflix isn't even trying for, and Blockbuster has a foothold in.
Yet Netflix is worth 4x Blockbuster. Why? I'm not sure that the CEO has really followed this question to the end. He seems overly focused on the size of his market, rather than on how profitable it is.
Put another way:
Netflix is worth about 32% of the market it's playing in ($1.8b market cap, playing in $5.6b market).
Blockbuster is worth 1.7% of the market its playing in. ($472m market cap, playing in $27.2b market).
Physical presence seems valuable, so that's what he goes on and on about -- nobody can compete with Blockbuster in the physical realm, that's their advantage. But maybe that's because nobody wants to. Stores cost too much for what they give you.
Just because there's money being spent, doesn't mean there's profit to be made.
(all numbers taken from the CEO's own chart-graph of stagnation, at http://www.flickr.com/photos/13736953@N00/2762004788/)