Blockbuster CEO Lauds 30-Day Vending Window, New Deals With Studios

13 Aug, 2009 By: Erik Gruenwedel

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Blockbuster CEO Jim Keyes Aug. 13 hailed the decisions by Warner Home Video and 20th Century Fox Home Entertainment to delay new release DVDs 28 days and 30 days, respectively, to $1 dollar-per-day rental kiosks, spearheaded by Redbox.

Speaking to analysts during a second-quarter financial call, Keyes said Blockbuster had drafted new revenue-sharing agreements with studios, including one with an unnamed studio that provides new releases at a $2 to $4 recoupable minimum for the studio that he said more than covered the physical cost of goods.

“It’s intended to establish more of a profit-sharing versus revenue-sharing approach,” Keyes said. “We believe this is a win-win initiative that will result in an increased number of rentals and improved profits for the studios on the backend.”

He said the “profit-share” scenario was even better with video games, in which the $4 shelf cost per title is overshadowed by $40 to $45 in cost otherwise.

“If we can overcome this artificial obstacle to inventory management, we can then fill the shelves with games like The Beatles: Rock Band, coming out Sept. 9,” Keyes said.

The CEO said the whirlwind of controversy surrounding rental kiosks revolved around charging $1 per day for new release DVDs.

“We are concerned that through the cost of production and expense of retail distribution, $1 per viewing is not a sustainable industry model,” Keyes said.

He said kiosks offered limited stock space (about 500 discs) that resulted in a dearth of new releases available to consumers.

“For a movie like The Dark Knight, we stocked 400 units per store and still ran out,” Keyes said. “It will be very difficult to ever stay in stock on hot new releases in a kiosk environment.”

He said proposed 30-day windows by Universal, Fox and Warner created a “unique vending” opportunity that the CEO said was complimentary to Blockbuster’s multichannel business model.

He said studios with the kiosk window account for about 60% of total major studio product. The windows also enhance the relationship between Blockbuster stores and its nascent Express kiosks by allowing stores to carry less expensive stock in kiosks.

“With Universal, Fox and now Warner titles, we can now be far more aggressive in filling the stores shelves with product,” he said. “After 30 to 45 days we can make use of that product in our vending channel at a substantially reduced cost of goods (about $5 vs. $15) since that product will be partially amortized. For Blockbuster that represents a pretty competitive opportunity.”

He said the new agreements would also allow Blockbuster to close more underperforming stores.

“This strategy will actually increase our points of presence while reducing a real estate liability,” he said.

He said Blockbuster would have about 500 Express kiosks through partner NCR Corp. by the end of August, with 2,500 installed by the end of the year and an additional 7,000 kiosks installed through August 2010.

Keyes said the Express kiosks would be “future proofed” for implementation of digital distribution via internal servers when it takes off.

He said the plethora of previously viewed product had become “a drug” within the industry (including at Blockbuster) that had artificially enhanced revenues at the expense of sellthrough.

“The studios didn’t like it, and we were overly dependent on it,” Keyes said. He said the rentailer had weaned itself from used product over the past 12 months.

Citing ongoing “trends and market dynamics” and continued “softness” in top-line performance, Blockbuster Inc. Aug. 13 reported a second-quarter (ended July 5) loss of $36.9 million, compared to a loss of $38.9 million during the previous year period.

The Dallas-based No. 1 DVD rental service said it improved earnings before EBIDTA by 30% to $32.3 million from $18.1 million last year.

As previously reported, refinancing and funding of its amended and extended credit facility resulted in more than 25% fewer units available at retail and an approximately 20% lower advertising spend. Spending on new DVD and Blu-ray releases dropped 28% and on DVD catalog and sellthrough fell 40%.

“Temporarily in the first and second quarter, we put our plans for increased [title] availability on hold,” Keyes said. “We made this change with the recognition that we were also facing new and very aggressive competition [i.e. kiosks] who are better capitalized and would likely take share from us as we pulled back.”

He said the consensus to redeploy time and resources away from stock availability had created a “perfect storm” among critics on Wall Street as well as an opportunity to expedite building of new infrastructure, including rental kiosks.

Keyes said a more “realistic” outlook, conservative expectations and the expected sale of an international asset had resulted in a modified full-year earnings guidance of from $270 million to $290 million for the second half of the year, compared to previous guidance of from $305 million to $325 million. 

Same-store sales declined 17.8% for the quarter, which included a rental comp decline of 13.3% and a retail comp decline of 38% — the latter due to reduced sales of video game hardware and software.

Additionally revenue reflected a $61.3 million negative impact from foreign currency exchange and a decrease in the company-operated store base worldwide.

Quarterly revenue dropped nearly 22% to $1.02 billion, compared to $1.3 billion last year.

“Although market dynamics remain challenging, we expect improvements during the second half of the year will be driven by a favorable title slate and increased unit availability,” Keyes said.
 

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