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Blockbuster is trying to turn it around

Maria Halkias. McClatchy - Tribune Business News. Washington: May 9, 2010.

Abstract (Summary)
May 9--Five years ago, during Netflix Inc.'s live phone call with analysts to review year-end results, founder and chief
executive Reed Hastings and chief financial officer Barry McCarthy mentioned much bigger rival Blockbuster 22 times.
Netflix's annual sales had reached $500 million for the first time in 2004, and the pioneer of renting DVDs by mail had posted
its second profitable year since its founding in 1997.

Full Text (1834 words)

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May 9--Five years ago, during Netflix Inc.'s live phone call with analysts to review year-end results, founder and chief executive
Reed Hastings and chief financial officer Barry McCarthy mentioned much bigger rival Blockbuster 22 times.

Hastings and McCarthy were speaking from a conference room in their funky two-story former headquarters in Los Gatos,
Calif. The building had no elevator, and windows overlooked old picnic tables in the parking lot.

Netflix's annual sales had reached $500 million for the first time in 2004, and the pioneer of renting DVDs by mail had posted
its second profitable year since its founding in 1997.

That success turned Blockbuster management, led then by longtime CEO John Antioco, into believers. The DVD-by-mail
business was no longer just a niche online venture for early technology adopters in the San Francisco Bay area.

In August 2004, Blockbuster Online countered with its own by-mail service, enticing customers with coupons for free in-store
rentals. Blockbuster did away with late fees and signed on 2.1 million customers to its new in-store subscription program.

More important, Blockbuster Online added almost as many subscribers in 2004 as Netflix.

In downtown Dallas, Hastings' voice echoed through the hallways of the 32nd floor of Renaissance Tower. Blockbuster
executives had their doors open and were listening to the Netflix call on speaker phones.

"In the last six months, Blockbuster has thrown everything but the kitchen sink at us," Hastings told analysts.

A day later, Hastings received a heavy box from Texas.

Inside was the kitchen sink.

For the next two years, Blockbuster gave Netflix a run. In 2006, when it launched Total Access, which let subscribers return
by-mail movies to a store in exchange for a free rental, it nearly doubled its online subscribers. By the end of that year,
Blockbuster had 2.2 million subscribers -- a rapid accumulation considering it was years behind Netflix.

By the second quarter of 2007, Netflix had lost 55,000 subscribers from the previous quarter.

It was the last time Blockbuster put a lid on Netflix's growth.

Today, Blockbuster is struggling to keep its stock price above $1, a minimum threshold that's threatening to knock it off the
New York Stock Exchange. It finds itself in an all-out fight for survival, warning investors earlier this year that bankruptcy is a
possibility.

Would the kitchen sink era symbolize Blockbuster's last heyday?

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Fast forward three years.

Blockbuster turns 25 in October. It's still the largest renter of movies.

It won the brick-and-mortar battle well before its largest store competitor, Movie Gallery Inc., filed for bankruptcy in February
for the second time. Movie Gallery is closing its remaining 2,414 stores, which include Hollywood Video outlets.

As in the 1990s, when Blockbuster won revenue-sharing agreements from the big movie studios, the chain remains a critical
link to consumers for Hollywood.

Blockbuster struck deals this year with three studios -- Fox, Sony and Warner Bros. -- for exclusive rights to rent new-release
DVDs for the first 28 days. For studios, it preserves the higher price that box office hits traditionally fetch when they initially
move to DVD. That had been threatened by Redbox's $1-a-day rental kiosks.

For Blockbuster, it's a competitive advantage over Netflix and Redbox, becoming the exclusive source of new-release DVD
rentals. New releases account for up to 80 percent of Blockbuster's revenue.

Blockbuster still has 25 million customers who come through its 4,000 U.S. doors at least once a month, preferring to browse
the shelves when they have time for a movie.

But last year's $6.7 billion rental market is way below its 2002 peak of $8.3 billion, and stores now share more than half that
revenue with kiosks and by-mail rentals.

DVD rentals still dwarf the $1.4 billion that consumers spent in 2009 for video on demand, said Tom Adams, president of
Adams Media Research.

"Ironically, by-mail subscriptions and kiosks assumed the Darth Vader role for stores, not video on demand," Adams said.

The overall number of U.S. video stores will fall to fewer than 5,000 by 2014, Adams said. That's down considerably from the
2002 peak of 26,000 and last year's total of 14,000.

"Blockbuster is still a potent brand name. Like Apple, there's a small group of dedicated users getting it through its near-death
experience," Adams said.

Last year, its revenue fell $1 billion to $4.06 billion as it closed stores and lost market share. It posted a $558.2 million loss
and is struggling to persuade lenders to renegotiate $1 billion in debt.

Technology is the new competitor. Netflix boasts that it's reaching the on-demand world faster; more than half of its nearly 14
million subscribers stream video.

Consumers are more quickly adapting to watching movies in a variety of ways -- through cable and satellite TV, over the
Internet or on-demand through video game consoles, smart phones and web-enabled televisions. The latest example is
Apple allowing Netflix to stream movies to its subscribers who buy the hot-selling iPad.

Netflix says more than 50 million households are equipped to watch its video-on-demand offerings through Xbox 360 and Wii
consoles.

Blockbuster and Netflix are seeing nontraditional competitors enter the fray, ranging from Apple and Amazon.com to Wal-Mart,
which earlier this year acquired Vudu, a streaming movie rental service.

Redbox, with 22,000 kiosks, said revenue grew 70 percent in the first three months of this year as consumers took to its
$1-a-night rentals.

NCR Corp. says it will have 10,000 kiosks, most under the Blockbuster Express brand, operating by the end of this year. As
Blockbuster closes 1,000 unprofitable stores and replaces them with kiosks, it collects royalties from NCR.

Wall Street is rewarding Netflix's performance and strategy. Last month, it reported a 44 percent increase in quarterly profit
and talked about its transition from the DVD rental business.

Netflix CEO Hastings has said by-mail DVD rentals will begin to decline by 2014 as consumers make the leap to digital
transmission.

That's why he's making deals with studios and television networks to increase his digital library, giving up new-release DVD
rentals to Blockbuster. Netflix is allowing subscribers to view unlimited steaming videos.

Asked about Netflix's strategy, Blockbuster CEO Jim Keyes is unimpressed.

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"The Blockbuster customer is looking for fresh content," he said. "You don't find fresh on an all-you-can-eat buffet."

Keyes is frustrated that Blockbuster can't afford to heavily promote itself as the only place consumers can rent box office hits,
such as this month's new DVD releases of Avatar and It's Complicated . Blockbuster reports first-quarter results Thursday,
giving investors a first look at how the new-release advantage is playing out.

When Keyes arrived at Blockbuster, he was a self-proclaimed "store guy," following a long career at 7-Eleven.

He wanted Blockbuster to start "thinking like a retailer" and make its stores work harder to speed the chain's transformation
into a multi-channel source for home entertainment. He began experimenting with concepts that he called "Rock the Block,"
with locations featuring electronics, video games, cold beverage bars or play areas for children.

He even went after Circuit City in 2008 but backed off when Wall Street had a fit over the prospect of a merger with the ailing
electronics chain, which later liquidated.

And Keyes bet that Blockbuster customers will move directly to video-on-demand without first becoming DVD-by-mail
consumers. He doesn't like the subscription business. "It's not our core competency."

In 2007, Antioco left Blockbuster after 10 years as CEO, following a nasty clash two years earlier with mega-investor Carl
Icahn over the company's direction. By the time Antioco departed, Icahn was congratulating him on warding off Netflix.

In a recent interview, Antioco said Blockbuster's online business, which at that point had grown to 3.3 million subscribers,
would have continued growing and become profitable in 2008.

"It was a well-thought-out strategy. It was helping the in-store business at a time when Hollywood Video was in bankruptcy [the
first time]," Antioco said. The number of stores "needed to shrink, and we wanted that to come from Hollywood Video. We had
them on the ropes, and we were gaining market share."

Blockbuster president Nick Shepherd was the top internal candidate to succeed Antioco. Teams had developed a strategy for
expanding both the store and online businesses, while video-on-demand revenue was still minuscule. But Shepherd wasn't
promoted, and that strategy wasn't carried out.

The board was already talking to Keyes, who had left 7-Eleven in 2005 after the Dallas-based convenience store's largest
Japanese shareholders took the company private. Armed with a $64 million golden parachute from years of accumulated
stock and options, he was looking for a retail company to take private and had partnered with a group of investors and a bank
to support the initiative.

He told the board he had spent $3 million of his own money to buy Blockbuster stock.

"I approached the board with the intention of acquiring the company, but they encouraged me to join the company as
chairman/CEO instead and keep it a public company," Keyes said.

He arrived July 2 and soon invited top executives to an off-site meeting at Rough Creek Lodge & Resort in Glen Rose, about
two hours from Dallas.

His intentions "were to transform Blockbuster into a world-class, global provider of convenient access to media
entertainment," he said. "Technology had changed the way customers were accessing their favorite content, and we needed
to change to be able to keep pace with those changing needs."

Blockbuster was about to shift gears away from the online DVD-by-mail business and put more emphasis on its stores, but
management wasn't sure what their new leader was proposing. Keyes made his intentions clear in August at a long, tense
meeting with the same top executives in a conference room outside his office.

"The industry was so dynamic and moving so quickly that if the company overinvested in DVD-by-mail, Blockbuster could have
slowed down Netflix, but not that much," Keyes said.

Most of those executives no longer work at Blockbuster.

Today, Keyes uses a sports analogy to describe that key transition in Blockbuster's life cycle.

"We were only in the second quarter," Keyes said. "We could have outscored Netflix and still lost the game."

He said Blockbuster has a better offense now as the game moves into the third quarter.

"Our customers want new releases and the ease of on-demand access through simple technology that doesn't require
another box or game console," he said.

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So far, about 10 million households have bought Samsung TVs and disc players with Blockbuster on-demand movies
available at the push of a button on the remote, he said.

Keyes' biggest sales pitch might be persuading Wall Street not to abandon the company. Over the last several years,
investors clearly picked sides.

Blockbuster's stock was trading below 40 cents Friday. In April, Netflix surged to more than $100 a share and was trading
around $95 Friday.

No longer an upstart trying to attract attention, Netflix isn't worrying much these days about Blockbuster. In Netflix's most
recent earnings call, Hastings and McCarthy never mentioned Blockbuster.

Credit: The Dallas Morning News

Indexing (document details)

Subjects: Motion pictures, Bankruptcy, Executives, Revenue sharing, Video stores
Classification Codes 8390, 9190, 3100
Locations: Los Gatos California
Companies: Blockbuster Inc (NAICS: 451220, 532230 )
Author(s): Maria Halkias
Document types: News
Publication title: McClatchy - Tribune Business News. Washington: May 9, 2010.
Source type: Wire Feed
ProQuest document ID: 2028434581
Text Word Count 1834
Document URL: http://proquest.umi.com/pqdweb?did=2028434581&sid=6&Fmt=3&cl ientId=63894&RQT=309&
VName=PQD

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