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Blockbuster CEO Says In-Store Rental Still 'Very Viable'

8 Nov, 2007 By: Erik Gruenwedel

Blockbuster Inc. needs to get back to brick-and-mortar basics and reinvigorate stores, new CEO Jim Keyes told analysts in New York.

The No. 1 rental chain is working with Sony to erect point-of-purchase kiosks in select stores that allow consumers to test and purchase the PlayStation 3 system in addition to purchasing Blu-ray Disc movies.

The chain also is testing kiosks that allow users to download movies to portable flash drives and view them in the home or on portable devices.

The company is unveiling “Rock the Block,” an in-store proposal aimed at revamping retail locations to include beverage bars, tech centers and kids areas.

Blockbuster plans to leverage its brand across multiple distribution channels, Keyes said.

To accomplish this, he said the chain would redouble efforts at the retail level, while weaning itself from a strategy that primarily focused on Blockbuster Total Access.

The CEO said the online rental, in-store return program cost the chain $114 million in gross profit during the first three quarters of fiscal 2007.

“The video store still represents the majority of our business,” Keyes said. “The video rental industry is really not as much in a decline as I had perceived.”

Citing 2007 estimates, Blockbuster claims 33.1% market share in movie rentals, followed by independent video stores (23.5%), online rental pioneer Netflix (13.1%), video-on-demand (11.9%), Hollywood Video (8.7%), Movie Gallery (6.3%), and rental kiosks at 3.4%.

He said data suggests prolonged stability in the DVD rental business. Blockbuster projects overall industry rental revenue will top $8.1 billion in 2007 (compared to $8 billion in 2006), which includes $6.2 billion in-store and $1.3 billion generated online, he said. Blockbuster projects an estimated $4.5 billion in industry gross profit.

He said Blockbuster's revenue is projected to decline slightly from $5.9 billion in 2004 to $5.5 billion this year. Earnings before interest, taxes, depreciation and amortization (EBITDA) dropped significantly from more than $508 million in 2004 to a projected $205 million in 2007.

Keyes said his first question after becoming CEO was, “Where did all the EBITDA go?”

He said the company's shift away from late fees and revenue-sharing deals — what previous management dubbed “managed dissatisfaction” — resulted in Blockbuster acquiring fewer new release titles.

“I'm not sure it was the right strategy to begin with,” he said.

Keyes said the approach resulted in a dearth of available new releases and a bevy of unhappy customers.

“We found that 5% to 7% of customers walked out of the store unhappy,” he said, which he added resulted in an erosion of same-store sales. “Our shelves on Friday, Saturday night too often looked [empty].”

Keyes said Total Access was a great initiative, but it exposed and exacerbated Blockbuster's supply-chain problem. He said the company had been “playing in the wrong game,” investing and growing an online business.

The CEO said distribution of movie rentals has shifted from 84.8% in-store in 2004 to 65.6% in-store in 2007. Online rental and mail-delivered movie rentals have increased from 5.3% to 19.1%. VOD has increased from 9.9% to 11.9% and kiosk vendors such as Redbox, The New Release and DVDPlay have collectively carved out 3.4% of the rental market.

He said he was surprised VOD had not grown more in light of the aggressive approach taken by the cable industry to promote on-demand movie rentals.

“That channel has grown but is not in anyway a dominant channel for us,” he said.

Keyes said Blockbuster is making efforts to better explain to customers its expectations regarding rental deadlines. Some stores even retain late fee signage, he said, showing a slide.

“We eliminated late fees three years ago, and this picture was taken two weeks ago,” he said.

Blockbuster stores rely too heavily on bundling and discounts that have eroded the average rental price from $3.60 to $2.79, Keyes said. At the same time, average rental times (movies checked out) increased from 3.6 days in 2004 to 5 days this year for new releases.

“You can see where some of that EBITDA erosion came from,” Keyes said. “We believe these problems can be changed without using coupons and by going back into the supply chain and working with the studios.”

He said Blockbuster is working with studios to help accomplish their retail goals while underscoring to studios the need to support rental.

“There is still a very viable business model in-store if managed properly,” Keyes said.

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