Here's the thing: I don't really want to like Blockbuster (NYSE:BBI). Years and years of late fees, poor selection, and unhelpful staff have predisposed me against the video rental chain. Without that corporate, um, "culture," there would never have been a Netflix (NASDAQ:NFLX) to begin with, and it kept the competition strong for a long time.
But I can't help liking the new, post-John Antioco Blockbuster. Read on to see why, as we dive into the company's third-quarter conference call from last Thursday.
Blockbuster on a diet
CEO Jim Keyes cleared up plenty of outstanding issues in this call, starting with an overview of a leaner, meaner corporate structure. "We now have only three layers of management between the CEO and the store manager, and additionally my direct reports have increased from four to about 12," he said. This streamlining effort cut out 400 nonessential positions and reduced annual operating costs by about $45 million.
Keyes noted that the previous management team tried to grow the online DVD-by-mail business too far, too fast. Total Access started life as an unbeatable value proposition for the consumer, which would override other concerns like quality of service or convenience. Because of this miscalculation, Blockbuster gained "a significant boost in subscriber count but we attracted some of the most price-sensitive and the heaviest consumption customers with our offer of free in-store exchanges."
That's clearly not the most attractive customer base, so when Keyes dialed the cost-benefit equation back a bit, he was fully prepared to "walk away from some of our subscribers, those at the far end of the usage scale who are not willing to pay a higher price for unlimited free exchanges." When some of those unprofitable customers left, Keyes was "happy to see [them] move to the competition."
To everything (sell, sell, sell), there is a season
Blockbuster has three "overarching goals" in mind now. First, to rescue the DVD rental business in all its forms from red ink and shrinkage. Second, to move the physical stores from a rentals-only mindset and into retail. Echoes of 7-Eleven, anyone? Third, to "position the company for the eventual transformation from DVD to digital."
Retail used to be an afterthought in those beautiful blue-and-yellow stores, and the old team never seemed to have any clear plans on how to go digital somewhere down the road. Now, my local store has cleared out a few display aisles by making old inventory available for sale and then pushing it hard with displays, discounts, and a plethora of signage.
One of the biggest in-store problems to Keyes was a failure to keep new, hot titles in stock. Free Total Access exchanges didn't help any, so lower coupon volumes will help a bit. The newfound retail focus is another weapon in this battle. Put for-sale DVDs right next to the for-rent platoon of the same title, and some customers will walk out owning a new movie. "The movie Transformers, as an example, sold over 200,000 copies in the first week, possibly a record for our channel by taking a more proactive stand in trying to work to both sell and rent that title," said Keyes.
The digital plan hinges on, but does not live and die by, the recently acquired Movielink service. Five major movie studios pumped $60 million of capital contributions into their digital baby, but Viacom (NYSE:VIA-B), Sony (NYSE:SNE), General Electrics' NBC Universal, and Time Warner (NYSE:TWX) settled for a $6.6 million buyout in the end. Blockbuster is also a major backer of the CinemaNow download service, alongside Microsoft (NASDAQ:MSFT) and Cisco Systems (NASDAQ:CSCO), giving the company a choice of platforms and two negotiated content libraries.
That has made all the difference
There's a lot more of the good stuff in that call, but it's time to bring this rumination to a close. If you had given me the keys to the Blockbuster kingdom in the spring and told me to fix what was wrong with it, I would have done many of the things Keyes is doing. Scale back Total Access, take the physical stores from liabilities to assets, tighten operations, plan ahead, but don't overdo it.
The Total Access launch created a temporary illusion of hypergrowth in online rentals, if you add up Netflix's and Blockbuster's subscriber base trends. This quarter kicked that mirage to the curb and returned to the natural market growth line from the time before that experiment. It looks like a dip until you correct it for those money-sucking freeloaders Keyes was talking about.
So here, two roads diverge in a yellow wood, and Netflix goes down the online specialist path while Blockbuster takes what by-mail audience it can get and spends more time grooming its stores back to health. I'm sure they'll cross paths again, and maybe swords, too. But for now, they appeal to different customers. And there's plenty of room for both models, especially after the fall of Movie Gallery.
Thanks for the chat, Jim. I'm a Netflix shareholder, but your company isn't even the enemy anymore.
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