Blockbuster's (NYSE:BBI) board and CEO John Antioco have finally made amends and will part ways at the end of the year. Things got a little hairy when the board decided to trim Antioco's bonus, invoking the "negative discretion" clause that allows it to do exactly that.
The two sides have settled. Antioco's 2006 bonus will be $3.0525 million. That's higher than the $2.28 million bonus that the board had initially offered, yet substantially less than the original $7.65 million reward. And now that we know that Antioco will be gone come 2008 (if not earlier), the two sides have agreed to drop the lump-sum severance of $13.5 million to a less suffocating ransom of $4.9875 million. All of his unvested stock options will become exercisable once he's gone.
Irony, table for one
It's a tough situation. Blockbuster is in a financial funk. Analysts have been slashing the company's profit targets for 2007 in recent months, all the way down to $0.08 per share. The number of stores has been shrinking.
It all sounds pretty bleak, yet the company's stock is on a tear. Its share price has more than doubled over the past year, in large part due to the runaway success of the Total Access model. The company expects to nearly double the number of subscribers to its Web-based rental system with free in-store exchanges this year. If it hits that 4 million-subscriber mark by the end of 2007, it would be signing up as many net new DVD renters as pioneer Netflix (NASDAQ:NFLX) is expecting this year.
Critics knocked Antioco for taking too long to respond to the Netflix threat. Even though the company is paying for that oversight with steep marketing costs to promote Total Access, at least it's not fooling around anymore. Wal-Mart (NYSE:WMT) tiptoed in too quietly, and wound up handing over its subscriber list to Netflix. Amazon.com (NASDAQ:AMZN) launched a similar service in the United Kingdom, but thought better of entering the cutthroat domestic market.
Chip off the old block, buster
This doesn't mean that everything is rosy in Blockbuster's Total Access workhorse. TheStreet.com dug into some of the program's shortcomings last week. Slow turnaround times, the scarcity of hot titles, and a potential rate hike may slow that freight train.
I had always figured that Blockbuster would have a problem with availability. Netflix has years of experience in nudging its subscribers toward broadening their queues. Obscure releases, indie favorites, and foreign films are popular recommendations. Blockbuster, on the other hand, has the tall task of educating the consumer who is used to gravitating to the new release wall at the neighborhood store.
The backlash of frenetic renters to the Netflix policy of throttling, or limiting the number of videos they can rent, may also be washing up the most taxing rental refugees on Blockbuster's shoreline. If Blockbuster is too successful in signing up the hyperactive renters, it would free up Netflix to provide its higher-margin customers a better product. There's nothing quite like running a buffet for picky eaters while letting Blockbuster become the Golden Corral of flick renting.
Despite these obstacles, watching Blockbuster shares wallow around in the single digits and the "feast or famine" nature of Total Access has speculative investors rallying around the stock in hopes of making it a blockbuster. It doesn't have to end badly, especially if Blockbuster is able to successfully monetize the in-store foot traffic gains.
Rest in peace, or in pieces
It may be the ultimate head-scratcher for chart watchers. A CEO watches his stock rise 110% over the past year, yet still agrees to talk down his bonus and make his own corporate funeral arrangements. Then again, Blockbuster will be heading into 2008 as a company with a lot of heavy questions to tackle:
- Can Total Access be profitable?
- How do you get Total Access subscribers to spend money in the stores during exchanges?
- Will digital delivery make mail-order and storefront rentals obsolete?
These won't be easy questions to answer. Despite the huge stock gains, a turnaround pro will need to be brought in. As for Antioco, I'd like to suggest the wording on his corporate tombstone: He gave 110%, but that wasn't enough.
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Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He also enjoys the bang for his buck he gets at Golden Corral, OK? He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
