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Blockbuster might

Vidchain plans growth via more outlets, kiosks

Having successfully engineered a turnaround of the Blockbuster video rental chain, Viacom Inc. now aims to lift Blockbuster’s vid market share from 30% to 40% in coming years by blanketing the country with new Blockbuster franchised stores and kiosks placed in banks and at retailers.

Outlining the aggressive growth target, Viacom deputy chairman Philippe Dauman also revealed Tuesday that Blockbuster’s recovery has strengthened in the second quarter after showing robust growth in the first quarter.

Addressing Nationsbanc Montgomery Securities’ annual media conference, Dauman said Blockbuster’s same-store rental revenue had increased at a faster rate in the second quarter than the first quarter, when same-store growth was 9%. A Viacom spokesman declined later to elaborate on Dauman’s comments.

Dauman told the conference that Blockbuster would continue to focus on increasing its market share in video rental, which has grown from 25% to 30% in the past few months since Blockbuster implemented new revenue-sharing deals with most major studios to allow for deeper inventories of new release videos.

“We are going to pursue profitable growth with a much more efficient use of capital than Blockbuster has followed in the past,” Dauman said, adding that Viacom wanted to drive Blockbuster’s market share to 40% but “not by building a lot of stores.”

In a reversal of the strategy followed by Blockbuster until its earnings plummeted last year, Dauman said Blockbuster would franchise more stores. For the past few years Blockbuster has focused on buying up franchise stores to increase the number of company-owned outlets.

‘Stores within stores’

Dauman also said Blockbuster planned to start trying out Blockbuster kiosks and “stores within stores,” small versions of a Blockbuster outlet placed within department stores and other retailers. Blockbuster already has nine such outlets in WalMart stores in Kansas, Colorado and Texas and plans to roll out more.

Blockbuster will also roll out vending machines, already in use overseas in such countries as the U.K. and Australia, where consumers can rent videos using a credit card.

“We are going to do a lot of things to make Blockbuster present at more points of sale and grow the business without using a lot of the great cash flow that Blockbuster produces,” Dauman said.

In the past Blockbuster has soaked up most of its cash flow in building new stores, an issue long criticized on Wall Street. A spokesman for Viacom said later that Blockbuster would focus on franchising new outlets in underserved markets.

Media Group Research analyst Curt Alexander said the 40% market share target was “definitely doable,” given the fragmentation of the market. After Blockbuster, the only other operator with more than 5% is Hollywood Entertainment, which has been aggressively building new stores in the past couple of years.

Most other outlets are mom-and-pop stores that will find it increasingly hard to compete against Blockbuster and Hollywood, both of which are able to offer more copies of popular titles under new revenue-sharing arrangements.

Pay-per-view competition

The big question is whether increased market share will allow Blockbuster to raise its prices. Alexander said that the chain would likely attempt to do so, he noted that it would take Blockbuster two or three years to gain the extra market share and by that time digital cable services would be much more widespread offering many more channels of pay-per-view.

These services may prevent Blockbuster from raising its prices too much, Alexander said, as consumers would have the option to rent via pay-per-view rather than going to the video store. Viacom stock fell 69¢ to $54.87 Tuesday.

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