Ya know, it's funny… Blockbuster and other video rental places are dead, but you can find those friggin' Redbox and DVDXpress machines everywhere. And even Netflix still runs its DVD rental by mail service. So clearly there is still a market for renting movies on physical media, but it's such that it's no longer sustainable to do it by way of a large, air-conditioned, fully-staffed store.
Not that this has anything to do with the point of your post… sorry. Carry on.
What you say is completely true. There is still demand, but it isn't the same as what it used to be. And Blockbuster failed to adapt to a changing world.