Will it Be a Blockbuster Summer?

Layoffs. Forced vacation time. This summer seems bent on keeping consumers at home without the financial security to dash off to exotic destinations. Video rental chain Blockbuster is there peddling reality escapes on the cheap. Branded a fad and a leisure fossil, Blockbuster is actually holding up better than ever right now. Thriving in this economic lull, Blockbuster appears worthy of its moniker.

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By Rick Aristotle Munarriz (TMF Edible)
July 2, 2001

Compaq (NYSE: CPQ), Sun Microsystems (Nasdaq: SUNW), and Dell (Nasdaq: DELL) will be down this week. No, not the respective stocks -- the companies themselves. Turning the country's Independence Day holiday into an all-week affair, companies are looking to cut costs during these demand-stagnant times, in some cases without pay.

You also have companies like Hewlett-Packard (NYSE: HWP) asking their troops to volunteer for short-term pay cuts or consume accrued vacation time. Tack on the seemingly never-ending stream of corporate layoffs that have sent hundreds of thousands out to scour want ads until severance checks get milked dry, and you have a country full of belt-tightening citizens spending summer at home.

Blockbuster (NYSE: BBI) wouldn't have it any other way. With over 7,700 stores worldwide, the company is the leading renter of videos, DVDs, and home console video games. As a publicly traded Viacom (NYSE: VIA) subsidiary, Blockbuster has become a welcome source of affordable entertainment. For less than the price of a single movie ticket, a family can enjoy one of the latest home market releases for a few days. With homebound penny pinchers needing a leisure escape more than ever, this summer is shaping up to be Blockbuster's blockbuster season.

Then again, saying Blockbuster is hot isn't exactly a well-kept Wall Street secret. The stock has more than doubled so far this year. Same-stores sales have risen for 13 consecutive quarters. Revenues will top the $5 billion mark this year. Meanwhile, the retailer has used its countrywide proliferation as a lucrative trading post to let everyone from DirecTV parent Hughes Electronics (NYSE: GMH) to RadioShack (NYSE: RSH) set up their own brand of lemonade stands inside its shops, selling their wares and services on consignment. (Your neighborhood Blockbuster is also one more place that will gladly set you up with an America Online signup disc thanks to its partnership with AOL Time Warner (NYSE: AOL).)

How times have changed. It wasn't all that long ago that Blockbuster was the bully getting sand kicked in its face at the beach. The film industry hated how the blue and yellow storefronts ate into home video sales. Entertainment futurists figured the days of lugging around rentals were numbered with the dawning of pay-per-view. Even investors who had bid up the stock early on in the company's growth cycle began to hit the rewind button and stuff "Dear John" letters into drop-off return chutes.

So when Viacom proposed an acquisition without much in terms of a buyout premium, Blockbuster chose to take the money. Being part of the Viacom family that included Paramount's movie studio was only the first step towards industry acceptance. Whereas Blockbuster used to be charged high sums for its rental copies, forcing the company to hold back on new release orders that would quickly grow stale, both sides brokered a revenue-sharing deal where both sides won. Blockbuster was able to stock plenty of the most popular titles cheaply while the moviemakers had a viable revenue stream.

As for the genre's extinction, tomorrow never came. Pay-per-view's selections remain relatively limited and patrons still savor the social selection experience. But Blockbuster isn't counting on today lasting forever: The company has teamed up with DirecTV to offer the Blockbuster Ticket branded pay-per-view service. And last summer, Blockbuster teamed up with Enron (NYSE: ENE) on a 20-year agreement to introduce Blockbuster-branded broadband video-on-demand. Right now, its website is testing online rentals in the Denver and Austin markets.

Blockbuster has also become a big player in the DVD market, its DVD rental business growing threefold during the March quarter. With cost-conscious movie buffs looking to forgo outright purchases in favor of cheaper rentals, it's just another feather in Blockbuster's ever-growing wingspan. So while the economy has had more plot twists than a Mexican novela, we're all banking on a happy ending.

Until the well-rounded prosperity arrives, it's good to know you can still watch it from the cozy, sheltered perspective of your trusty armchair. Thanks, Blockbuster. 

Rick Aristotle Munarriz has never been nominated for a Blockbuster Award, though he'd like to see you register to vote for The Motley Fool to bag a Webby's People's Voice Award. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.