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Will Big Blue Break Its Bank?

9 Sep, 2005 By: Thomas A., Erik G.

Speculation about Blockbuster Inc.'s financial condition swirled recently after the world's No. 1 video rental chain said it would not pay a quarterly dividend for the first time since it went public six years ago.

Chain spokesman Randy Hargrove dismissed rumors that Big Blue was running out of money, saying, “We are paying all of our vendors, and our supply lines are wide open.”Analyst Michael Pachter concurred that Blockbuster isn't in serious trouble. “They don't have any kind of cash squeeze at all,” said Pachter, with Wedbush Morgan Securities in Los Angeles.

However, studio sources said the situation is significantly more dire. The president of one major studio home entertainment division said he would ship Blockbuster copies of his studio's next hit release only if payment was received in advance.

“I told them they're going to have to pay cash or not get it,” said the executive, who asked his name not be used.

Sources say several other key titles, including Paramount Home Entertainment's The Longest Yard, required upfront cash payments or other special conditions, despite pleas from Blockbuster for standard 30-day terms.

The move to a cash-only basis was triggered by consistent late payments, one high-ranking studio source said. “They're late 30 to 40 days with almost everybody,” he said.

Not all studios are requiring upfront payments, although most reportedly have insured their receivables against delays or bankruptcy.

Twentieth Century Fox Home Entertainment's “business arrangement with Blockbuster remains the same,” said SVP of marketing communications Steve Feldstein. Still, sources said Fox took out credit insurance.

Buena Vista Home Entertainment, which in 2004 settled a suit with Blockbuster for $18 million, also still offers the chain a line of credit, sources said.

Another home video president said Blockbuster “has been late in paying us, but my strong preference is not to take out credit insurance but rather work out the issues between us.”

In August, Blockbuster reported a $57 million second-quarter loss and warned of a difficult third quarter. CEO and chairman John Antioco promised Blockbuster would make a profit in the fourth quarter, but skepticism remains.

The problem, according to one studio source, is that by ending late fees, Blockbuster cut off nearly 20 percent of its revenue. Subscriptions have not filled in the gap. “Let's say your revenue is 10, and by ending late fees, you're down to 8,” said the source. “To grow back to 10, you have to grow 25 percent, which is virtually impossible. They stupidly thought they could do that by subscriptions, but to tell people about that, they've been spending money like drunken sailors.”

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