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Blockbuster Tweaks Rental

22 Jul, 2004 By: Holly J. Wagner

Blockbuster's new initiatives are on track, online rentals should launch ahead of schedule and the chain is tinkering with a la carte pricing and terms as it strives to transition away from traditional rental models, executives said.

“While the rental category as a whole isn't growing, the DVD rental segment is. Since Blockbuster is the largest renter of DVDs in the country, our plan is to leverage our position and earn an even greater share of the DVD rental business,” chairman and CEO John Antioco said. “We plan to accomplish this through rental subscription programs both in-store and online and by providing a better rental proposition for a large segment of our customers who aren't going to want to subscribe but would rather pay as they go.”

The chain is offering a $10 introductory subscription price break, at $14.99 for a two-out Movie Pass and $19.99 for a three-out pass for the first month, and is testing new pricing and terms on a la carte rentals.

“Just this week we launched a low-priced promotional offer on the Movie Pass that should encourage trial among light to medium renters who aren't sure of the value of the pass because of the price point,” Antioco said. “We believe the low introductory price coupled with our in-store campaign and our advertising should drive awareness that there's a new way to rent at Blockbuster.”

Neither he nor a spokesman would elaborate on the pricing tests, but Antioco said, “the outcome of these tests will determine our direction going forward, but our goal is to remove any barriers to renting at Blockbuster.”

Blockbuster's online rental service will launch ahead of its previously announced fourth quarter debut, Antioco said, but that launch will carry with it “significant expenditures in customer acquisition” as the chain increases advertising to build awareness of the program. The company expects to have 8 percent of its active renters on some type of subscription by the end of the year, and 10 percent by the end of 2005.

As part of that effort, Antioco said, “We will be launching a relationship with MSN, which we think will be a great source of new subscribers for us.”

The company ended the second quarter with a video trading program in 300 U.S. stores and 600 U.K. stores, and will offer trading in all 700-plus U.K. stores by the end of the year, Antioco said.

Big Blue ended the first quarter with 179 Game Rush store-in-stores in the U.S. and was expected to have 250 at the end of the second quarter but a spokesman could not provide the present number. The chain recently acquired 40 Rhino Games stores in the U.S. About 40 stores in the U.K. have game store-in-stores, plus the chain has 175 separate GameStation sites in the U.K.

“We plan to double these numbers next year,” Antioco said. “We are going after games in a big way.”

The transition to a broader range of customer options will include “short-term pain and sacrifice” Antioco said, but added, “We have a very clear vision of where we want to go and what we want to become. We realize that the movie rental business alone won't give us the kind of growth we want for Blockbuster in the future.”

Total Revenue Up, But Lower Profits Expected
The chain reported total revenue up 2.1 percent to $1.42 billion, from $1.39 billion for the second quarter last year, crediting the favorable impact of foreign exchange rates and growth in the store base. But worldwide same-store revenues were down 4.4 percent from the same period last year. Total rental revenues, which represented 75.7 percent of total revenue, decreased 1.7 percent to $1.08 billion for the second quarter of 2004, compared with $1.10 billion for the second quarter of 2003. Worldwide same-store rental revenues decreased 6.4 percent.

Antioco said he expects rental revenues to be down through the end of the year and into 2005 as the company continues investing in its new initiatives including subscriptions, trading and game store-in-stores. The company expects to spend $90 million in incremental expenses associated with those initiatives by the end of the year.

Profits for the third quarter of 2004 are expected to decline “significantly,” he said, citing a weak release slate, expected high viewership for the summer Olympic Games, an estimated mid-single-digit percentage increase in worldwide same-store revenues and increased operating expenses associated with the development and launch of the key growth initiatives.

The chain also expects to have opened 400 new company-owned stores by the end of the year. A spokesman said that number is a worldwide projection and includes Blockbuster, game and Movie Trading Company concepts.

The chain expects earnings per share to be down 30 percent for the year, from $1.48 last year, if the company continues on its present course.

“Given the changing rental market dynamics and the promise we see for our initiatives, we are considering accelerating spending in the back half of the year. If we decide to do so or if our rental business is softer than we expect, the year-over-year decline in earnings could be more than 30 percent,” CFO Larry Zine said.

Spinoff Coming in October
Addressing the spinoff from Viacom, he said Blockbuster expects to pay the previously announced $5 dividend in September and launch its exchange offer with Viacom shareholders shortly thereafter, with the spinoff expected to be completed in October.

“We would expect that if things go according to current plan that we would launch the offer in September and close it 30 days thereafter,' he said. “Prior to launching the exchange offer we expect there would be the declaration and payment of the dividend and that would be the foundation for the exchange offer.”

Shares of Blockbuster closed at $13.30, down nearly 8 percent, or $1.11, and $1 below its most recent 52-week low of $14.30 set July 16.

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