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Blockbuster Leading Blu-ray Charge

7 Aug, 2008 By: Erik Gruenwedel

Blockbuster Inc. is quietly assuming a leadership position in the rollout of next-generation packaged-media format Blu-ray Disc.

The Dallas-based DVD rental chain, which is aggressively showcasing Blu-ray software and hardware via in-store displays and kiosks co-opted with Sony Electronics, is selling from 2,000 to 3,000 Blu-ray players per week, according to CEO Jim Keyes.

He said initial data suggests Blockbuster is becoming an ideal location for consumers to rent or buy Blu-ray product. The company's by-mail DVD rental service added a Blu-ray user profile so customers can elect to receive recommendations and information related to the new format.

“We think we are seeding the Blu-ray population,” Keyes said in a call with investors. “We are seeing consistent growth, new customer growth, which is probably contributing to our increased [in-store] foot traffic.”

Blockbuster also unveiled a revamped Movielink movie download service at Blockbuster.com. The service features access to 10,000 new-release movies and catalog fare. The PC-based service has rentals from $3.99 and movie purchases from $9.99.

The company said it will add additional technological improvements to the service, including a new video player for faster downloading.

“We will also be adding a ‘hot-sync' button to the site to make the movement of our content to portable players easier and more convenient,” Keyes said.

The executive said Movielink will not be incorporated into subscription plans similar to what rival Netflix Inc. has done with its streaming service. He said offering new releases on Movielink, versus the longer-tail product available on Netflix's streaming service, grants Blockbuster's by-mail subscribers access to new releases before they reached the mailbox.

“We think it is a much more robust product offering that is more consistent with our customer base,” Keyes said.

Blockbuster added 100,000 subscribers to its Total Access online rental, in-store return service, bringing total subs to 3.2 million.

Blockbuster's unexpected 14.2% increase in second-quarter (ended July 6) domestic same-store revenue, including a 6.5% increase in rental revenue, was overshadowed a bit by the loss of $41.9 million, up 33% from a loss of $31.4 million during the same period last year.

The increased loss is due in part to higher merchandise costs associated with sales of Blu-ray players and video game consoles. Consumer electronics sales contributed more than $43 million in incremental revenue in the quarter.

Regardless, Keyes said the rental comps indicate customers are willing to pay higher prices for increased availability of new releases. He said selected stores proactively changed pricing and terms, increasing the gross rental price from $4.17 to $4.37.

“While raising prices and tweaking terms, we actually increased traffic, with paid transactions per store up 4.2%,” Keyes said. “We don't believe media entertainment is driven as much by price as by value.”

He said Blockbuster's Rock the Block prototype stores contributed a 12% rise in retail comps with no advertising. He said the concept stores, which feature expanded interactive kiosks and CE products, will be rolled out to select locations with advertising support.

Keyes said Blockbuster's previously announced rollout of 50 vending machines and kiosks with NCR excluded an additional 10 digital-download kiosks at undisclosed locations.

The CEO envisions the kiosks morphing into a licensing or franchise agreement with third parties in order to minimize the impact on Blockbuster capital expenses.

He said the kiosks could potentially be factored into its current subscription programs.

Michael Pachter, media analyst with Wedbush Morgan Securities in Los Angeles, welcomes the NCR deal and believes it could ultimately enable Blockbuster to take market share from Redbox.

“We can envision a scenario [in which] Blockbuster can implement a self-service kiosk within stores, thereby ultimately reducing head count,” Pachter wrote in a research note.

The analyst commended Blockbuster for engaging limited resources with kiosks should the download strategy pay out.

He said the company continues to explore direct-to-TV distribution models, which includes set-top boxes, game consoles, Internet-enabled games, Blu-ray players and Internet-enabled TVs.

“Getting content directly to the TV remains the ultimate challenge,” Keyes said. “In spite of the media attention the new devices seem to receive, consumer adoption, we believe, will continue at a very slow pace, which gives us time to work with the right partners toward the best solution.”

In addition, Blockbuster sold 71 stores in Chile.

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