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Blockbuster Loss Widens

1 Nov, 2007 By: Erik Gruenwedel

The bill for Total Access has come due, and Blockbuster Inc. is tightening its belt.

The Dallas-based No. 1 video rentail chain has upped restructuring efforts, including refocusing on retail sales and digital delivery, in an aim to reduce $45 million in overhead costs following another disappointing quarter.

Blockbuster posted a third-quarter (ended Sept. 30) loss of $35 million, compared to a loss of $24.7 million during the same period last year.

Total revenue declined 5.7% to $1.24 billion, compared to $1.31 billion last year.

The company has shed about 400 employees since new CEO Jim Keyes took over in July.

Significant to the loss was a $29 million negative impact to rental gross profit related to the cost of free in-store exchanges associated with Total Access.

In a call with investors, Keyes said the popular online rental, in-store return program had come into existence at an unsustainable cost.

“What had been an online model was not really a digital solution,” Keyes said. “It was more of a competitive response to the demand for by-mail delivery of DVDs.”

The CEO credited rival Netflix with development of the online rental market but recognized that Blockbuster's pursuit of by-mail subscribers was “a bit overzealous.”

The company reportedly spent more than $300 million marketing Total Access.

“Clearly our spending on that one channel was exceeding our returns,” he said.

Keyes said Blockbuster Total Access did achieve a significant boost in subscribers but at the same attracted a slew of price-sensitive and heavy-rental customers.

“Our aggressive growth proved the competitive strength of Total Access, but it also demonstrated the cost,” he said.Keyes said Blockbuster's goal of obtaining profitable growth included significantly scaling back advertising and in-store marketing of Total Access.

The CEO said the restructuring of Total Access monthly rental programs included eliminating customers who he said were not willing to pay a higher monthly price for unlimited exchanges.

Total Access lost about 500,000 subscribers in the quarter, many of whom Keyes said he was happy to see move to the competition. He said the tally included about 300,000 non-paying trial subscribers. Total Access had 3.1 million subscribers at the end of the quarter.

“We feel the [subscriber] moves were timely as well as prudent,” he said.

Keyes said the changes did not indicate abandoning online rental but instead allowed the company take “a break in the action” while assessing Total Access.

The CEO said Blockbuster is attempting to shift its mission away from a pure rental play to “convenient access” to media entertainment, which includes Movielink downloads and sellthrough.

He said new objectives include providing greater availability of new releases in stores, simplifying pricing and improving customer service.

In an effort to stimulate retail sales, Keyes said Blockbuster stores will begin to assume a “merchant culture.”

Stores have begun to showcase sellthrough copies of new releases along with rentals. Paramount's Transformers sold 200,000 copies in the first week, possibly a record for the chain's nascent retail channel, Keyes said.

“We could sell movie soundtracks, posters, as well improving impulse snacks and beverage assortments,” he said.

Finally, the CEO said Blockbuster will continue to enhance the digital retail channel underscored by the acquisition of Movielink. He said the site will be integrated into Blockbuster's site with an improved user interface.

He expects integration of Movielink to be completed by the first quarter next year.

“Total Access proved to be a valuable competitive advantage for the by-mail space and will be even more of an advantage as we move into a true digital-delivery concept,” Keyes said.

Blockbuster plans to license assets internationally. This will include selling physical assets and redeploying capital while maintaining a brand presence.

In the United States, Blockbuster envisions new prototype store concepts in which consumers can experiment with formats, get video games, visit a children's area and access interactive options, among other changes.

The prototype stores will begin rolling out next year.

Keyes said Blockbuster will increase efforts aimed at satisfying the needs of its 2 million daily customers who shop at physical locations and online.

“That existing customer base represents one of our most valuable assets,” he said.

The company has shuttered 526 stores worldwide since September 2006. Additional stores closures are on hold until management further assesses the business model, according to CFO Tom Casey.

Same-store (stores open at least 12 months) rentals in the United States increased 2.3% while declining 2.8% globally.

Worldwide same-stores sales increased 3.5% as online rental and global video game sales outpaced declines in domestic in-store movie rentals.

Online rental revenue grew 122.4%, from $64.7 million to $143.9 million, representing 11.6% of the Blockbuster's total revenue.

Global retail comps increased 28.2% due to strong game sales, particularly of Halo 3.

Blockbuster management is slated to outline additional details to analysts Nov. 8 at a presentation in New York.

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