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Blockbuster to Close 500 Stores in the First Half of the Year

23 Feb, 2012 By: Erik Gruenwedel

Dish eyes Blockbuster as UltraViolet conduit for studios; Blockbuster@Home streaming service added 6,000 programs in January

Dish Network Corp. Feb. 23 said it plans to close 500 underperforming Blockbuster stores in the first half of 2012 — a third of the 1,500 Blockbuster stores the satellite TV service operated at the end of 2011.

CEO Joe Clayton said the store closures were due to multiple reasons, including fiscal underperformance and landlords unwilling to renegotiate stores leases.

“We have been very clear from the beginning that we would take action when necessary,” Clayton said in a call with analysts. “The vast majority of these stores have flexible termination provisions. Now our goal is to reach a steady-state store count so that we can leverage with our current pay-TV business and our future wireless enterprise similar to the way that we've incorporated Blockbuster at homes by mail and streaming services into our pay-TV business.”

The closures underline ongoing changes in the rental market, including larger numbers of consumers renting from kiosks, in addition to accessing content via subscription video-on-demand services such as Netflix and Hulu Plus.

Dish acquired Blockbuster from bankruptcy on April 26, 2011, for a net purchase price of $234 million.

CFO Robert Olson said the costs associated with the closures would be minimal. Olson said the fact Dish acquired Blockbuster for its salvage value allowed it to post lower-than-expected cost opf sales in 2011.

“This impact will diminish over time as Blockbuster's inventory is replenished with new content,” Olson said. “So we still have a lot of work ahead of us to improve the retail stores.”

Indeed, Blockbuster stores contributed $975 million in revenue and $4 million in net income to Dish’s consolidated 2011 results of operations, which ended Dec. 31. When deducting $347 million in revenue and $3 million in net income in the third quarter, Blockbuster generated about $1 million in net income and $628 million in revenue in the fourth quarter (October to December 2011) and in May and June.

Tom Cullen, EVP of corporate development with Dish, added that the satellite TV operator would continue to view Blockbuster as a separate business that adds incremental consumer value to Dish subscribers with a tight margin for failure.
“It’s a work in process,” Cullen said. “We have a low tolerance for losses. We look at it very closely.”

Regardless, Clayton attributed Blockbuster and the $10 monthly Blockbuster@Home digital service for lowering Dish’s churn rate to 1.63 in 2011 from 1.76 in 2010, in addition to luring new Dish subscribers.

“By introducing new Blockbuster-branded services, we've begun to turn the tide in subscriber losses while continuing to face increased competitive pressures,” Clayton said. The Blockbuster brand is a significant brand in the marketplace, which focuses on family and movies. And that's clearly what Dish is all about.”

Blockbuster@Home added 6,000 programs in January due to a content license agreement with Univision. A majority of new Dish subs come from the Hispanic market. The digital platform has 25,000 movies viewable on the PC, in addition to 10,000 titles available for streaming. Subscribers also have access to 100,000 titles by-mail and in Blockbuster stores.

“We did have a positive impact on Blockbuster Movie Pass [Blockbuster’s in-store subscription plan],” Clayton said. “I think for the small increases that we received, I think I would attribute that to the Blockbuster Movie Pass and to some seasonality.”

When asked whether Blockbuster could be used to spearhead sales of UltraViolet packaged media, Dish chairman Charlie Ergen said the studio-backed cloud-based digital storage platform remained a promising concept in the early innings of development. Ergen said Blockbuster stores offer studios an integral retail presence to sell Blu-ray and DVD movies with UltraViolet — a reality that is helping forge a tighter relationship with studios.

“It has changed the conversation with the studios a little bit,” Ergen said.

Meanwhile, Dish is rolling out new high-speed set-top box/digital video recorders called the Hopper and Joey, which enable subscribers to record up to eight days of TV content, in addition to playing content in up to four separate TVs in the home at the same time.

In the fourth quarter, Dish added 22,000 subscribers while generating net income of $312 million, compared with net income of $251 million in 2010. Dish lost 166,000 subs for the year, compared with a gain of 33,000 subs in 2010.

About the Author: Erik Gruenwedel

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