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Blockbuster to Launch Set-Top Box for the Holidays

6 Nov, 2008 By: Erik Gruenwedel

Blockbuster is planning to bow for the holidays a set-top box that would deliver movies on demand from its Movielink download service. The Dallas-based DVD rental chain next year also will bow a Blockbuster-branded widget on Intel-manufactured chips imbedded in IPTV monitors.

Chairman and CEO Jim Keyes, who made the announcement Nov. 6 during a call with investors, offered no additional information on the set-top box, including manufacturer, price and availability.

Analyst Edward Woo with Wedbush Morgan Securities in Los Angeles said the set-top box device sounded ambitious, but wondered how consumers under pressure from the current economic downturn would receive it.

“Until I hear more concrete information, I'm not sure how receptive consumers will be and whether it will be different or better than other boxes out there or planned be out there,” Woo said.

Blockbuster downplayed posting a third-quarter (ended Oct. 5) net loss of $17.8 million and 2.7% decline ($33.6 million) in total revenue to $1.2 billion, citing a limited slate of movie titles and competition from Olympic telecasts.

The Dallas-based DVD rental giant said the loss was 48% less than the net loss of $34.4 million during the previous year period.

Domestic same-store revenue increased 5.1% due to a 0.8% growth in same-store rental revenue and a 30.7% increase in same-store merchandise sales, driven largely by increases in sales of games software and hardware.

Blockbuster chairman and CEO Jim Keyes said in a call with analysts that the chain’s ability to overcome a 53% drop in August theatrical box office comps and the public’s growing interest in the presidential campaign underscored the resilience of DVD.

He said Blu-ray rentals now account for 2% of the chain’s domestic revenue. Keyes said Blockbuster stores will increase availability of player selections at prices competitive with other CE chains.

International same-store revenue decreased 3.4% compared to last year, reflecting a 2.2% decline in same-store rental revenue and a 5.0% decline in same-store merchandise sales.

Global same-store revenue grew 1.9% from the same period last year.

“We weathered a third-quarter storm that in hindsight proved to be even a little bit more challenging than we anticipated,” Keys said. “Key initiatives around merchandise assortment, in-stock availability (at 60% from 25% last year in first week) and expense reduction allowed us to deliver our third consecutive quarter of positive domestic same-store sales.”

He said the improved offerings resulted in the average net rental rate rising from $2.98 last year to $3.43 this year.

The CEO said he remained confident in what is expected to be a difficult fourth quarter due to a flurry of encouraging year-to-date data.

Specifically, paying actives per store are up 1.4%; revenue per visit up 15.4%; net paid rental rate up 17%; net total revenue per square foot up 7.6%;“gross profit per square foot up 2.4%; same-store rental revenue up 11%; and total same-store revenue up 16%, he said.

Keyes said Blockbuster’s DVD-by-mail had been intentionally ignored until the chain refined other aspects of its business.

“We don’t see it as a dominant growth engine,” he said.

Finally, Keyes tempered expectations for the digital download market, which he said is dominated by cable VOD and estimated to be $1.4 billion today and $2.5 billion by 2011.

“Right now we’re mostly interested in understanding consumer response and keeping pace with the emerging technologies available,” he said.

Analyst Marla Backer with Soleil Securities Group said she remained positive about Blockbuster and Keyes, especially with the chain’s improved customer service and availability of new releases.

“There is still considerable upside opportunity,” Backer said in a research note.

Separately, Blockbuster said it has been experimenting with three pricing models in test markets in Florida, but had no immediate plans to alter its current prices throughout 7,500 worldwide stores.

The tests include “demand pricing,” whereby higher profile titles most coveted during their initial week of release would rent for $4.99 for two days, compared to $3.99 for other new releases and 99 cents for classic titles.

Keyes said consumers had responded favorably to five-day rental terms and lower priced daily rental rates. The company also is testing weekly memberships that include a rewards program for a $20 annual fee and unlimited monthly rentals for games and movies.

“We are working toward a market-by-market deployment of some variation of the daily, weekly and monthly rates between now and the first quarter of next year,” Keyes said.

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