It wants to be nimble. It wants to be quick. It wants to be the source of your next rental flick.
The problem is that Blockbuster (NYSE: BBI) is not nimble. It's not quick. And going by the diminishing number of Total Access subscribers and the disappointing store-level traffic, it's probably not going to be where you turn for your next DVD.
That's not stopping CEO Jim Keyes, and rightfully so. He was brought in last year after doing a bang-up job turning 7-Eleven around. It's probably that Big Gulp and Brain Freeze mindset that finds Keyes predicting that Blockbuster's future rests in transforming the money-losing juggernaut into an "entertainment convenience store" before it's too late.
Superbad and a Slurpee
When you're a leveraged company with antsy creditors, time is not a luxury. When you're coming off three consecutive quarters of posting wider-than-expected losses, the leash is going to be short. Wall Street is looking for Blockbuster to get back on track and post meager profitability at this point, but the marketplace is changing so quickly that it's hard to be upbeat.
When Keyes was addressing the crowd at the Citigroup Global Entertainment, Media & Telecommunications Conference out in Phoenix last week, my biggest worry wasn't his vision. He seems to be more than capable. What got me was that his "entertainment convenience store" push is a three-year makeover strategy. That may be more than the ticking time bomb can spare.
There's also the tab to worry about. As much as I love hearing Keyes delve into new technologies, like Blockbuster's effort in creating a flash-memory-based product that will hold rentals capable of playing on a growing slate of portable devices, one has to wonder if he's making promises that his R&D budget can't keep.
The acquisition of MovieLink was a necessary step into digital delivery, but Blockbuster is dangling perilously in a risky high-wire balancing act. By encouraging store-less rentals, it's throwing itself into the pit against better-financed netizens like Netflix (Nasdaq: NFLX), Apple (Nasdaq: AAPL), and Amazon.com (Nasdaq: AMZN). At the same time, tethering shoppers to a physical store is ironically inconvenient for an aspiring convenience store of the future. Eyeing the past few money-losing quarters, you also see that Blockbuster is attempting this tricky circus act without a net.
Misplacing your Keyes
Keyes argues that this is a favorable climate for Blockbuster. He points to high gas prices, making a trip to the multiplex more expensive. He singles out the Writers' Guild of America strike as a catalyst for rental activity, given the lack of freshly scripted television content.
I'm not sure if I entirely agree with either premise. As for the pain at the pump, who wouldn't rather make a round-trip to the local multiplex than two round-trips to Blockbuster (to rent and return) for a movie? Higher energy prices also make it slightly more expensive to consume a flick at home. Even if you argue that a Blockbuster store may be closer than a movie theater (which isn't the case for me) and that it may be on the way to or from somewhere else, I don't think higher gas prices can be seen as a Blockbuster-friendly trend. At the very least, that's more disposable income out of the pockets of potential renters.
Higher fuel prices may help Blockbuster's Total Access plan, but that will only shoo away more customers from the physical locations. It's also not Blockbuster's strongest hand at the moment. After raising prices over the summer, the Total Access subscriber base shrank from 3.6 million to 3.1 million during the third quarter.
What about the screenwriter strike? That's a double-whammy for Blockbuster. If Total Access subscribers are going through more monthly rentals at the Blockbuster smorgasbord, given the dearth of original television programming, it will cost Blockbuster more money.
Both Blockbuster and Netflix have to deal with their "all you can eat" programs. Someone who goes through a half-dozen rentals a month with each company's most popular plan (unlimited rentals, with three DVDs out at any given time) is a good customer. If the subscriber doubles the consumption, it's going to be hard to turn a profit when the rental company has to pay postage both ways and foot the revenue-sharing bill with the movie studios.
And even if you're not feeling the screenwriter pinch when it comes to celluloid, you may get stung later this year. Keep in mind that several film productions are also derailed by the strike. Blockbuster has also turned a pretty penny on the sales and rentals of television shows released on DVD. Don't expect that to be much of a cash cow, given this abridged season.
Blockbuster version 2.0
In speaking to our own Anders Bylund two months ago, Keyes proved that he's not beyond making drastic changes to turn Blockbuster around. Maybe he's dreaming if he thinks he can channel companies like Starbucks (Nasdaq: SBUX) to create a more social store or mimic RadioShack (NYSE: RSH) in offering a wide range of consumer electronics gadgetry in a small-box format.
I think it's his company's billfold -- and not his vision -- that will ultimately cheat the company of its potential. Keyes it the right person for the job. He just doesn't have the right balance sheet. Whether it means that Blockbuster's best chance is with a sugar daddy suitor or with filing for bankruptcy reorganization, Blockbuster is going to need a hand if it wants to earn a little visionary applause.
