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Blockbuster to Test Digital Kiosk, Simpler Pricing

15 May, 2008 By: Erik Gruenwedel

Blockbuster Inc. May 15 said it is beginning pilot tests of digital kiosks that will let consumers download movie rentals to portable devices and memory sticks — the latter playable on a PC and television.

During an investor call, CEO Jim Keyes said Blockbuster had signed a deal with NCR Corp., which will manufacture the kiosks. He said the tests would be conducted over a six- to 12-month period.

Keyes, who has made digital distribution a cornerstone of his retail strategy and possible acquisition of Circuit City Stores Inc., admitted the kiosks were in the early phase of development but believed Blockbuster could be a first mover in the space.

“We are ahead of the technology and consumer on that initiative,” Keyes said. “It is probably two to three years before there is widespread deployment and consumer acceptance.”

Keyes said the recently enacted due diligence process with Circuit City would hopefully reinforce the benefits of a possible acquisition. He reiterated that he would not proceed with the transaction unless it made sense both strategically and financially.

“The transaction is not critical for our continued transformation,” he said.

A decision is expected in the a few weeks.

Keyes said Blockbuster will roll out simplified pricing and terms this summer that he believes are superior to price reductions. In a previous investor call, Keyes said a visit to a Blockbuster store shortly after joining the company left him so confused about rental prices he vowed a change.

Edward Woo, research analyst with Wedbush Morgan Securities in Los AngeIes, said the simplified pricing will include longer rental periods.

“I assume a ‘simpler' pricing plan will be good for customers, so it should be good for its sales and comps,” he said.

Keyes cited ongoing improvements in DVD stocking, which included a 60% in-stock availability for new releases in the first week, compared to 20% year.

“We believe there are other better ways to compete for the customer than through price,” Keyes said.

He said Blockbuster would not charge a premium for Blu-ray rentals, characterizing the HD format “important” for sustaining profitable growth.

By comparison, rival Netflix Inc. has stated it will charge a premium for Blu-ray rentals.

The Dallas-based DVD rental service in June will unveil a revamped edition of Movielink.com with a link to the company's site. The download service features a catalog of more than 9,000 digital titles.

In the interim, consumer acceptance for traditional DVD rental remained robust.

The company reported first-quarter (ended April 6) profit of $45.4 million, compared to a loss of $49 million during the prior-year period.

Buoyed by a 2.9% increase in same-store (open at least 12 months) sales — the first in five years — U.S. rental revenue topped $825 million, compared to $821 million during the prior-year period.

The company said 160 fewer company-operated stores generated the revenue. Blockbuster has shuttered 412 company stores globally, including the sale of its British Game Station chain, since the prior-year period.

Keyes said Blockbuster reduced sales, general and administrative (SG&A) expenses and ad spending by $100 million in the quarter.

Domestic DVD rentals totaled $468 million, compared to $471.5 million the prior year. Video game rentals generated $54.6 million, compared to $58 million. Previously viewed sales topped $139 million, compared to nearly $138 million during the prior-year period.

Online rental revenue reached nearly $164 million, a 6.1% increase from $154.2 million the previous year.

Keyes said Blockbuster Online maintained a base of 3.1 million subscribers.

“The business is profitable, and we are getting back to the business of growth,” he said.

Sales in the United States included DVD movies at $57.6 million, compared to $54.2 million last year. Game sales hit $20 million, from $11.7 million the year before, and related merchandise topped $47 million, compared to $43 million the previous year.

Keyes said last week's release of the Grand Theft Auto IV video game was on track to become Blockbuster's top rental/seller of all time. He said the title helped generate 4.5% retail market share for Blockbuster during the first week, up from a 1% to 1.5% for a typical new release.

He said the company will greatly expand its gaming selections, including bowing titles on the new release walls in stores for the first time.

As previously mentioned (see HM, April 27-May 3), Blockbuster will begin rolling out 500 “Rock the Block” concept stores in the United States. Initial tests in the Dallas area produced 8% to 12% lifts in incremental revenue and a 3% to 5% growth in active members without advertising, according to Keyes.

“We believe this new emphasis will ignite our retail momentum,” he said. “Casual gamers are already coming into our stores.”

Overall revenue, which included nearly $251 million in international movie and game rental and previously viewed sales and $185 million in sales, decreased 5.4% to $1.39 billion, compared to $1.47 billion the previous year.

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