Blockbuster to broaden entertainment reach

Focus back on in-store customers, with eye on future expansion

By Ned Randolph -- Video Business, 11/9/2007

NOV. 9 | Blockbuster CEO Jim Keyes yesterday laid out for analysts the company's new strategy to improve its performance by refocusing on its 20 million in-store customers, updating its image from one associated with DVD rental to become a broader entertainment brand and better executing its Total Access mail subscription service.

Keyes said the country's largest movie rental company will refocus on the core business that it deviated from in 2006 when it began pushing its Total Access online subscription program to take on Netflix. Blockbuster's move to eliminate late fees and allow in-store returns to monthly subscribers for movies on the spot boosted its subscriber base to 3.1 million but at a significant cost to profits.

Between 2004 and 2007, Blockbuster's average rental price dropped to $2.79 from $3.60, while the amount of days a title stayed out grew to five, from 3.6, according to the company.

"The concept of Total Access—brilliant. The execution of Total Access left a little to be desired," Keyes said.

In-store customers are twice as profitable as Total Access subscribers, but Total Access cannibalized its own in-store customer base, he said.

"As Netflix grew this channel ... the Blockbuster response was to drive its in-store customers into a subscription program," he said. "I can with hindsight now say I'm not sure we wanted to take 500,000 customers each quarter from within the store."

Blockbuster's annual total revenue per square foot fell from $158 in 2004 to $132 in 2007.

Keyes said there are still opportunities in the mail space but as part of an overall strategy to deliver entertainment to customers in whatever way they want it.

"We've decided that instead of a horizontal shift [to mail], we think there might be more of a vertical opportunity to move customers across channels so that store customers don't have to only move to digital or by mail," he said. "The ability to transform these customers and allow them to have different use occasions and sources of access, we think is a more relative model for us and will be the more likely migration path over the next few years."

Blockbuster also plans to develop video-on-demand to the home PC through Movielink. The recent purchase of the online movie service gives Blockbuster digital rights to 6,000 titles—the "largest amount of digital title rights in the marketplace today," he said.

Eventually, Blockbuster must partner with telecoms and cable providers to get movies on demand into the homes of Americans, he said.

"Let's very carefully explore and continue to penetrate a digital model but not prematurely," he said.

In the meantime, the company will look to better execute its core services, by testing new rental pricing, keeping inventory in stock and better communicating to customers what the expectations are for returning movies on time.

Keyes said Blockbuster will look to tighten the number of days customers can keep films to help boost in-store inventory and mend the chain's reputation for often being out of stock on first-run titles.

The company also plans to cut back on ad spending for the next six months until it's ready to roll out its new face. Total Access will be redefined as access to entertainment through any way available to consumers, through laptops, home computers, TVs, media players, flash drives and cell phones, Keyes said.

Blockbuster will begin testing various store prototypes as early as the first quarter of 2008, he said.

Some stores will include digital stations that focus on downloading digital content onto portable media devices and kiosks with PlayStation 3 consoles. In other prototypes, stores will have a self-serve beverage area where customers can browse the shelves not only for movies and games, but also books and magazines.

Blockbuster stores also might feature an interactive area for kids and a destination for "family-friendly" browsing and purchasing entertainment with a focus on kids, entertainment-related toys and kids' videos, Keyes said.

Inside the stores, customers can expect to see more evidence of partnerships with studios with product tie-ins from studio promotions such as beverages, games and toys. Shoppers at malls and air travelers might see Blockbuster kiosks offering digital downloads of movies onto portable players. And Web surfers and TV watchers might expect to see more Blockbuster branding online for movies on demand on personal computers or cable operators through its Movielink service.

"We are changing our mission from a DVD rental company to a convenient access to media entertainment," Keyes said.