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Blockbuster CFO Details Online, Sub Plans

21 Jun, 2004 By: Holly J. Wagner

Blockbuster Video is “ahead of schedule” in software development for the planned launch of its online rental service, slated for late this year, CFO Larry Zine said.

“Initially, it will have some interesting ties to the stores,” Zine said. “It's hard to distinguish ourselves from what we are going to do and what Netflix is going to do near term.” Meanwhile, online subscriptions will help Blockbuster extend its brand to markets it does not yet reach, he said.

Although the chain is expanding its distribution capacity beyond the few facilities it has maintained for its brick-and-mortar operations, online rental will launch with “significantly fewer than 20” distribution centers, he said, compared to Netflix's 25-facility distribution network.

“Some time, middle of next year, we will be filling online orders through the stores. We will let them return by mail or in stores,” Zine told analysts at the Sixth Annual Thomas Weisel Growth Forum.

Warehouses are “more of an interim solution than a long-term solution,” he said. “The ultimate solution will be to distribute product through the stores,” he said, adding existing employees can carry out that task.

Meanwhile, in-store subscriptions are a promising front, Zine said. The average Blockbuster customer spends about $15 a month, while subscriptions cost $25 a month. Subscription customers boosted the bottom line in the 1,200 stores that tested in-store subscriptions before the national rollout, he said. “What we've seen are more light users trading up to this model,” he said. Some heavy renters sign up for subscriptions, he said, but the tradeoff has not been “severe.”

On the game front, the chain just announced its “Flip-It” game pass. The $49 pass is good for unlimited game rentals, one game at a time, for three months. The chain already offers a $20 monthly game pass that lets gamers have three games out at a time. The Flip-It campaign started May 26 and runs through Sept. 7, but Blockbuster spokeswoman Jerianne Thomas said those who buy the passes have three months from the date of purchase to flip their games without late fees. “For less than the price of a hot new game, you can play all summer,” Thomas said.

Blockbuster can meet the online rental challenge once its brick-and-click model is ready, an analyst said. “Three out of four reasons why people switch to Netflix, Blockbuster is addressing,” said Michael Pachter, an analyst at Wedbush Morgan Securities. “Blockbuster is going to eat Netflix's lunch when they roll this thing out.”

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