Fool.com: Will a Public Blockbuster Be a Hit? (News) August 11, 1999

Will a Public Blockbuster Be a Hit?

By Dave Marino-Nachison (TMF Braden)
August 11, 1999

There are a ton of Blockbuster Video stores out there -- some 6,500 in the U.S. and elsewhere -- and the company, through its advertising efforts, is probably the first word that comes to mind when most Americans think video rental. The company believes it has more than 27% market share in the U.S., with nearly 60% of the country's population living within three miles of at least one of its stores.

But shares of stock are bought, not rented, and the fees for holding on to them too long can get pretty steep. Today, Blockbuster (NYSE: BBI) enters the public market, having yesterday sold 31 million shares -- about 18% of its common stock -- for $15 each. Blockbuster traded publicly under the symbol "BV" before Viacom (NYSE: VIA) bought it in 1994.

So should investors add this one to their video libraries?

After an ill-fated foray into music retailing that ended last October, Blockbuster has reaffirmed its commitment to the video rental business under Chairman and CEO John Antico. The company is six quarters into a revenue-sharing agreement with Hollywood's major studios that exchanges a portion of rental revenues for the opportunity to obtain more videos at more reasonable prices with the idea that per-visit rentals will increase with an improved selection. Blockbuster began reporting same-store sales numbers in the double digits almost immediately and gross margins have also benefited substantially.

The plan has succeeded so far. Although video rental is a highly fragmented industry, it's not the sort of market where customers are likely to comparison-shop looking for the best deal -- they want to visit just one store, and it darn well better have the video they want, or at least a heck of a lot of choices. (Not everyone has been thrilled with the new approach. A Texas video chain sued Blockbuster last month, saying the revenue-sharing deal is driving smaller competitors out of business.)

Coupled with this initiative are aggressive expansion plans. Blockbuster intends to open approximately 1000 stores, most of them company-owned, in the U.S. and, to a lesser degree, overseas over the next three years.

By that time, Blockbuster hopes, it will have claimed 40% domestic market share.

It's worth pointing out now that all of the proceeds from the offering are going to pay off debt, which might be a sobering bit of information for those accustomed to reading the registration filings of Internet companies that all plan to plow their newfound funds into marketing, acquisitions, and other growth initiatives.

As with pretty much every media industry, technology and the Internet presents a threat of sorts. Video-on-demand, digital cable, pay-per-view, and other systems that allow viewers to pick and choose between programs whenever they want are likely to gain popularity in time and certainly won't help Blockbuster and its huge network of stores. How cooperative studios are with companies offering this kind of technology will be telling, particularly in light of their revenue-sharing deal with Blockbuster.

But with VCRs essentially ubiquitous in this country and DVDs apparently catching on as the next-generation video platform after laserdiscs and Divx flopped, Blockbuster should be able to parlay its size, scope, and marketing muscle into an advantage based on pricing and selection. Still, it would be nice to know the company had a contingency plan.

Until that happens -- or at least until Blockbuster moves back toward profitability after two years (plus Q1 of 1999) in the red -- it might be wise to hold out before going to see this one.

Investors seem to think so, at least this morning, as the shares haven't moved more than a few frames past their offer price as of this writing.

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