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Blockbuster Widens Loss, Sells U.K. Games Unit

2 May, 2007 By: Erik Gruenwedel

The exponential growth of Blockbuster Inc.'s Total Access online movie rental, in-store return program apparently came at a steep price.

Dallas-based Big Blue May 2 posted a first quarter 2007 (ended April 1) net loss of $46.4 million, compared to a loss of $1.9 million during the same period last year, according to a regulatory filing.

The No. 1 video rental chain posted operating losses of $18.4 million, compared to income of $32.1 million last year, due primarily to marketing and product costs associated with Total Access.

Gross margins dropped to 51.7% from 56.5%, resulting from in-store exchanges associated with Total Access.

Revenues for the quarter increased 5.4% to $1.47 billion, from $1.4 billion last year, based in part on a $65.5 million increase in merchandise sales (primarily new video games) and $20 million in revenue generated by the termination of Blockbuster's Brazilian franchise agreements.

Total rental revenue topped $1.05 billion, relatively unchanged from $1.054 billion last year.

Broken down by segments, in-store movie rentals fell almost 10% to $683.6 million from $756.2 million last year.

Blockbuster Online revenue increased 53% to nearly $109 million from $51.2 million, while sales of used movie DVDs increased 15% to $151.1 million, compared to $131.3 million last year.

Extended viewing fees increased 4.5% to $18.2 million from $17.4 million last year.

Sales of new movie DVDs fell almost 8% to $105 million, compared to $113.3 million, while new game sales skyrocketed more than 46% to $201.3 million from $137.5 million last year.

Video game rental revenue dropped 7.5% to $70.8 million from $76.5 million, while sales of used games fell 18% to $17.2 million compared to $20.3 million last year.

The No. 1 movie rental company added 800,000 subscribers to Total Access, bringing total membership to more than 3 million since launching the service five months ago.

Blockbuster said it is on track to reach previously announced subscriber goal of 4 million by the end of the year.

Separately, Blockbuster announced it had agreed to sell its 217-store U.K.-based Game Station Limited franchise to European-based PC and video game retailer The Game Group Plc., for $150 million in cash.

Proceeds from the transaction, which will be included in the second quarter (ended June 29) results, will be used to pay down Blockbuster's reported $900 million debt.

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