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<I>VSM</I> One on One

8 Nov, 2002 By: Kurt Indvik

It was in 1997 that Antioco joined Blockbuster as chairman and CEO, after a 30-year career that included 20 years at 7-Eleven, rising to be the chain's SVP of store operations, and COO/CEO positions at Pearle Vision, Circle K Corp. and Taco Bell. He led Blockbuster out of the rentail doldrums through a series of strategic and operational moves, including initiating historic revenue-sharing programs with major studios before taking the chain public in August 1999. Since taking control of Blockbuster, the chain has seen its revenue increase from $3.3 billion to $5 billion in 2001 and appears on track to crest more than $5 billion in 2002.

Antioco recently talked with VSM's editor-in-chief Kurt Indvik about the chain's plans for DVD and games, and its expansion into sellthrough among other major issues facing the chain and the industry.

VSM: You have set out publicly as a goal that Blockbuster will triple the chain's share of the sellthrough business by 2006. How are you going to do this?

Antioco: Blockbuster customers buy in excess of 60 percent of the retail video in America, and if we can only capture a fraction of that business, we can more than triple our market share. Our strategy is twofold. First, we plan to continue to grow the market share in both movie and game rental by giving customers more value, more selection and more control over their rental experience. Second, we plan to leverage the uniqueness of our rental offerings to create compelling “hybrid” rental/retail bundles that will convince people they should be renting and buying at Blockbuster. Right now, they think of us for retail, but not as much as we would like, and our job is to increase that top of mind. If people walk into a mass merchant retailer, I can't stop them from grabbing a movie. But to the extent someone leaves their house for a movie, I want them to have no reason to go anywhere else than Blockbuster. We can offer the flexibility of renting and buying.

VSM: Blockbuster has rolled out a number of rental and sales programs this past summer, including the “Rent It, Like It, Buy It” campaign that continues nationally. How are you analyzing these various programs, and what's the reaction been so far?

Antioco: We think “Rent It, Like It, Buy It” makes sense. We don't see a large percentage of our customers that are going to purchase DVD in that manner. We still think that on previously viewed DVD, the majority of that will be sold on impulse. But we do believe this is a good way to say to people, “this is your guarantee of satisfaction.” They're not sure about a movie, they might want to buy it, but they can start by renting, and if they like it, they can buy it from us or they can buy it from some other store. But I don't expect that to be the majority of our sales. I still think that “Rent It, Like It, Buy It” is a rental message. Why take a risk? Rent it first, and if you like it, then buy it.

VSM: Do you have a vision for what you think the balance of sales to rental will be at Blockbuster? What's the goal you're shooting at?

Antioco: I think probably that over a five-year period we can get to a point where it can be 60/40 rental to retail. There may be higher averages at some stores. Even with the phenomenal growth of sellthrough DVD, if you combine DVD and VHS rental transactions, it's still three to four times the number of retail transactions. The number of retail transactions continues to be based on the nature of the product. We still see that rental, on a transactional basis, will be the preferred way of accessing movies at home.

VSM: It appears Blockbuster has been able to buck the general downward trend in rental revenue, maintaining about a 2 percent increase through the first half of 2002. To what do you attribute your success here?

Antioco: Brilliant management -- now put that in bold! [Laughs] First of all, I think Blockbuster should be outperforming the industry average. We're the most recognized brand. We have more resources by a wide margin than most in the industry; we spend more in marketing and market research than anyone, so I would be surprised if we weren't outperforming the industry over the long haul. In addition, I believe some of the problems the industry is having in terms of retail cannibalization [of rental] is something that needs addressing, which is why we have chosen to participate in the DVD retail side of the business.

VSM: Is your rental pricing a part of this?

Antioco: I think our pricing on rentals is on par. We try to add value to the rental equation, so that whatever they pay for a rental at Blockbuster is a fair value for the price. Those factors can include availability and selection, and the rental terms. As a result, the average price of a rental was $3.50 a few years ago, is probably closer to $4 now, and may be $4.50 or $5 in the next year or so.

VSM: How about the subscription models you are testing?

Antioco: We know we have an opportunity because the pricing model is a sellthrough model in DVD. The whole key to it is, will the average revenue per customer go up? Because if all I do is sell the DVD Freedom Pass or Game Pass to the customer who is going to go from spending more money with us to less, then we've lost money. We know there will be some of those -- that's unavoidable. But if, on average, I can get a customer to go from spending $150 per year with us to $200 per year and my costs remain relatively stable, then I have a good economic model. But at this point, we're not sure yet.

(Editor's Note: In a recent third-quarter earnings call, Antioco confirmed the chain will roll out the DVD Freedom Pass subscription service nationally in early 2003.)

VSM: Some studio execs would just as soon see the rental aspect of the business be replaced by a combination of sellthrough and VOD.

Antioco: I don't agree with it. I think you can conjure up all sorts of scenarios in terms of what happens over the long term. You might be able to sell the top 50, the top 100 films even, but what about the other 200 that are released theatrically in a very limited schedule every year? What about the 400 or more that are put out direct to video — how many of those can you sell?

One of the things we have found in our research is the intensifying of what you might call “swapping” or “sharing.” That tripled last year. Someone at a cocktail party might see a movie somebody has in their home and say, “Wow, you bought We Were Soldiers -- can I borrow that?” That's not a movie everyone wants to own. Lots of people will want to own Lord of the Rings. The rentailer is a gatekeeper of that dynamic forever. If you rent it, you only have it for a couple of days; you couldn't do that pass-around.

And you have more used discs in the market, right? Now people are starting to go to various outlets and selling their used DVDs. The studios don't get any cut of that. What's that going to be like in a total retail market?

VSM: How are you dealing with the balance of VHS vs. DVD?

Antioco: My view is that in the case of VHS we know very few people who are unplugging their VCRs and throwing them into the garbage. It's a single percentage of the owners who are abandoning VHS. Therefore it's still a viable format. People are going to be keeping their VCRs for a very long time. They are not going to be replacing their entire movie collections or transferring their home movies onto DVDs any time soon. That's not what the average consumer is going to do. My view is that VHS will be in the minority, in terms of rental, by the middle of next year but will still be a significant part of our company. That eventually could be 20 percent of the business, but that's still a lot of money.

VSM: Do you look at the pace of migration from VHS to DVD by market demographics, zip codes?

Antioco: We manage DVD and VHS mix store by store. So demographics is part of that, but I would bet there is no pattern across the board. I can eventually see some of our stores being 90 percent DVD and some of our stores only being 50 percent several years from now. I don't think we're headed for 100 percent in one format or another any time soon.

VSM: You have identified video games as a major growth category, anticipating it to be about 10 percent of your revenue this year, with a target of 20 percent in the next several years. What are your strategies for this sector? Are we talking about two distinct groups of customers?

Antioco: Games have historically been more a retail-based format (approximately 90 percent), and some suppliers have historically believed that rental would cannibalize retail sales. Our experience and research have clearly demonstrated that rental is a great way to try products before they are bought, and that rental generates future sales.

The majority of our game rentals are not the same customers as video rental, but we do have a large incidence of members who rent both (movies and games) primarily within the family. Our strategy going forward is to offer better merchandising at our stories, greater selection, greater copy depth, heavier marketing, more flexible terms, and the addition of new hardware and software and accessories to complement the expansion of the software.

(Editor's Note: In the third-quarter earnings call, Antioco confirmed that the Games Freedom Pass will be changed to allow only one game rental out at any one time.)VSM: Is revenue-sharing critical to the growth of the game business for you?

Antioco: We have a couple of rev-share deals. Rentrak is moving ahead with something like this, so there is obviously some appetite for it. Blockbuster is constantly working with suppliers on how to increase customer satisfaction and growing revenue in ways that are wins for everybody -- for the customer, the supplier and Blockbuster. Rev-sharing is an avenue for achieving that.

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