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Blockbuster's Antioco Credits DVD Rentals for Chain's Strong Financials; Says VOD Is 'Good Ways Off'

19 Apr, 2001 By: Thomas K. Arnold

Blockbuster Inc. chief John Antioco credits soaring DVD rentals with giving the retail chain one of its strongest financial quarters ever, with overall rental revenues in the first quarter of 2001 rising 9.3% and cash earnings 23% from the comparable quarter lastyear.

"This new digital format is rapidly establishing itself as the preferred way for consumers to watch the movies at home," Antioco saidin phone call with analysts this morning. "We’ve been advertising Blockbuster as the place for DVD and have captured over 45% of all domestic DVD rental transactions."

He added that DVD rentals at Blockbuster are outpacing DVD sales more than four to one, and maintains this "gap will continue to widen as massmarket penetration continues."

Antioco said DVD rentals now account for 14.6% of domesticrental revenue and as much as 25% "on some new releases."

He also said internal research shows that "our typical member’s totalrental behavior, including DVD and VHS, increased more than 25% after the purchase of a DVD player."

An 18% rise in Blockbuster’s international business alsocontributed to the chain’s robust first quarter, for which cash earnings — net income before amortization of goodwill left over from theViacom acquisition — clocked in at $46.5 million, or 27 cents a share, up from $38.1 million, or 22 cents per share, in the first quarter of 2000.

Total revenues for the quarter rose 8% from the first quarter of 2000 to $1.31 billion, while rental revenues came in at $1.12 billion, up from $1.02 billion in the first quarter of 2000. Same-store salesrose a healthy 5.3%. Blockbuster opened 329 new stores between first-quarter 2000 and March 31 of this year.

Antioco predicted a flat second quarter due to a weaker slate of product coming to market in that time period, although he expressedconfidence that the company will be able to generate solid cash earnings for the full year 2001, thanks in part to its alliances with DirecTV and Radio Shack.

Antioco all but admitted that Blockbuster’s aborted video-on-demand venture with Enron was a mistake. "We learned a great deal from our trial, mostly that commercial viability is still a good ways off into the future," Antioco said. "As a matter of fact, in a recent front-pagestory in USA Today, VOD was referred to as ‘video on delay.’

"It’s obvious there are significant technological and financial hurdles to rolling out VOD on a widescale basis."Still, he added, "when VOD finally does become a reality, Blockbuster is in a position to become a force in this, and to this end, we willcontinue to secure digital rights from studios."

Defying conventional wisdom, Antioco opined that once VOD does arrive, it will cannibalize the sellthrough end of the video business more than rental. "It is my point of view that the convenience of VOD will create an especially negative impact on the sale of prepackaged retail product,even more so than rental," he said.

"Many customers buy at Wal-Mart simply out of the convenience of one-stop shopping. And these are thevery same convenience-oriented customers who will trade down from a $15 DVD to a $5 VOD transaction."

Antioco also predicted that the days of sellthrough-only pricing for DVD are numbered."My personal long-term view, which I can only say is supported by what I believe is best, economically, for the studios, is that eventually DVD will flow into exactly the same release window pattern as VHS," he told analysts.

"It will come out with VHS rental day-and-date, and then four or five months later it will be released at retail [sellthrough].

"The ratio of transactions from rental to retail is four to one, and I believe that will continue to grow this year and next as DVD becomesmore of a mass market product. People will much prefer to rent productas opposed to spending $20 to buy product, and for that reason it makes sense for it to be rental model, rental window and revenue-sharing."

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