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Blockbuster ‘Ahead of Schedule' to Offer Online Rentals, CFO Says

14 Jun, 2004 By: Holly J. Wagner

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

Online subscriptions will help Blockbuster extend its brand to markets it does not yet reach, he said.

“There is a significant number of customers that we don't reach today because we are not out there,” he said. “It'll be very good to have two very strong, viable competitors in the online space.”

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, compared to first-mover Netflix's 25-facility distribution network.

“Sometime 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. “The ultimate solution will be to distribute product through the stores.”

Warehouses are “more of an interim solution than a long-term solution,” he said, and existing employees have enough time to do what is needed for mail-order rentals. “It's not a lot of [work on an] incremental basis that it can't be handled through our stores on a daily basis.”

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. But 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 is more light users trading up to this model,” he said. “They go from being a four- or five-movie-a-month customer to an 11- or 12-movie-a-month customer.”

Some heavy renters sign up for subscriptions, he said, but “the tradeoff has not been so severe so that you would not want to go forward with it.”

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.”

The chain learned lessons about how to move forward with its trading strategy, Zine said, acknowledging the future of the trading model.

“All trading really is, is extended rental, and you will be able to decide how long you want to own a movie,” he said. “Essentially, it will allow you to monetize your home movie library.”

Trading offers the opportunity to keep the company on track even as the rental segment declines, he said.

“Probably the No. 1 factor that has affected us is retail, and that factor has provided significant opportunities for us,” he said.

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