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Analysts: Blockbuster CEO on Track Despite Stock Decline

29 Nov, 2007 By: Erik Gruenwedel

Blockbuster Inc. CEO Jim Keyes' whirlwind strategies to re-assess Total Access, secure distribution with mobile phone manufacturers, establish rental kiosks, simplify pricing schemes, boost inventory and even add stores resulted in a 25% drop in share prices since Nov. 8.

Investors have steadily increased their concerns about a lack of specifics in Keyes' plans since he assumed leadership last summer.

Last week at the Reuters Media Summit, Keyes attempted to outline a new business plan for 2008 that he believes will restore profitability to the Dallas-based movie rental chain of more than 7,800 stores.

Included in that plan, apparently, are movie downloads to mobile phones. The CEO reportedly told investors he had begun watching movies downloaded from Blockbuster's recently acquired Movielink service on his Blackberry PDA with much success.

“The challenge is how do I make this convenient for everybody,” Keyes told Reuters.

To Michael Pachter, media analyst with Wedbush Morgan Securities in Los Angeles, Keyes' approach may be akin to throwing caution to the wind but he said the CEO doesn't have many options.

“Rather than view this as aimless, I think [Keyes] is willing to consider any opportunities that come along,” Pachter said.

The analyst believes Blockbuster will continue to stake its future on its stores — not digital downloads — including upping its retail profile.

“They're never going to make any type of money in [movie downloads] and I'm not sure anybody will,” he said.

Pachter said Blockbuster would have to assume the attitude of “last retailer standing” by offering increased movie rentals and sellthrough in smaller stores. He said initial reports from stores indicated that sellthrough had improved dramatically.Pachter said clerks at Blockbusters have told him they are selling “a phenomenal amount” of movie titles, including “Shrek,” “Spider-Man” and Transformers.

“I don't think [sellthrough] is a bad strategy,” he said. “I also don't think Keyes has anything [concrete] to tell you right now and I'm okay with that.”

Arvind Bhatia, media analyst with Sterne Agee in Dallas, said Keyes is an improvement from previous management.

“I believe in the guy,” he said. “For the first time they have a guy who looks at movie rentals from a retail perspective.”

The analyst said Blockbuster has become proactive versus reactive in order to appease Wall Street. He cited the company's introspection about Total Access, the online rental, in-store return program that jumpstarted Blockbuster's revival to consumers while hemorrhaging profitability.

Bhatia said the program definitely proved that giving away the store could gain subscribers. He said Keyes wants to take that momentum and cater it to retail while streamlining rental costs through kiosks, smaller stores and tiered pricing.

“He's not giving up on DVDs by mail,” Bhatia said.

He said the main improvements he's looking for at the store level are improved inventory and pricing. He said he believes Keyes is looking at the numbers compared to current trends.

“Unless he tests kiosks and phones, he won't know,” Bhatia said.

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