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Blockbuster to Raise Subscription Price

9 Aug, 2005 By: Holly J. Wagner

Blockbuster stock lost nearly 10 percent in early trading Tuesday after the company announced it lost $57.2 million, or 31 cents per share, in the second quarter ended June 30 and will hike its Blockbuster Online subscription price from $14.99 to match Netflix's $17.99-per-month rate for a three-out subscription plan.

The stock price slid from Monday's close at $8.01 per share to $7.22 on the news.

Executives also withdrew their previous guidance for the balance of the year, faulting “uncertainty and continued decline in the rental industry.”

The company previously forecast flat operating income for the full-year 2005, not including the marketing and implementation costs of $50 million associated with the launch of Blockbuster's "No Late Fees" program and $40 million in share-based compensation.

"Our second-quarter results reflect both the success of our new initiatives as well as the impact of the declining store-based video rental industry," chairman and CEO John Antioco said. "Our 'No Late Fees' program is working, and our online business continues to perform extremely well. These two initiatives helped increase our total rental revenue 9 percent quarter over quarter, excluding extended viewing fee revenues. Although we invested heavily to achieve our revenue results, which, combined with industry trends, impacted our bottom line, we believe we are affecting a permanent improvement in our business that will enable us to address the decline in our core rental business, develop new revenue streams and drive future growth."

The company expects overall industry weakness to hurt its third-quarter results, although executives expect conditions to improve in the fourth quarter on a more favorable release schedule, lower operating costs including lower operating income impact year over year from Blockbuster Online, and growth in active members.

The company met the 1 million subscriber mark for the online service in the first half of the year and is on track to have 2 million subscribers by the first quarter of next year, executives said. Two of its other online subscription plans will also get price increases: the five-movies-out plan will be $29.99 (previously $27.49) and eight movies out will be $47.99 (previously $37.49).

During the quarter, the company began fulfilling some online orders from its stores and has more than 200 company-operated and franchise stores fulfilling online orders, with plans to expand the fulfillment process through the rest of the year.

Total revenue for the quarter decreased 1.6 percent to $1.40 billion, from $1.42 billion for the second quarter of 2004. The second-quarter loss compared with net income of $48.6 million, or 27 cents per share, for the second quarter of 2004.

In-store rentals declined in the second quarter, with June trade down “substantially more than anticipated,” executives said.

The elimination of extended viewing fees under the "No Late Fees" program put almost $140 million of drag on rental revenue, but executives said a 9 percent increase in base rentals (online and in-store) rentals and a 10.4 percent increase in rental transactions helped offset that cost.

Extended viewing fees accounted for about 15 percent of the chain's rental revenue during the second quarter of last year.

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