Lack of late fees causing cash crunch

The end of late fees is coming back to haunt Blockbuster in a big way, and that’s making the Hollywood studios very nervous.

Eliminating late fees has thrown Blockbuster into such a cash crunch that studios have taken extraordinary steps to make sure they get paid for their big fall DVD releases.

Facing a critical ordering deadline last week on a major fall release, one studio successfully demanded Blockbuster pay cash upfront on Thursday and began shipping product Friday.

At least two studios have taken out third-party insurance for receivables to protect themselves from possible delays in payment by Blockbuster on upcoming titles. At least one studio is said to have put the vidtailer on credit hold, although that could not be confirmed with Blockbuster or the studio.

A specific deal had to be worked out recently for Paramount’s “The Longest Yard” before the studio would ship the title, which debuts Sept. 20.

Blockbuster dropped its late fees at the beginning of this year in a strategic move to combat online rental services such as Netflix. That strategy is expected to cost the chain about $400 million in revenue this year. Company claims the move will eventually boost overall rental transactions to where their revenue will exceed what it was before it eliminated the fees.

But that hasn’t happened yet, and in the short term, the strategy has taxed Blockbuster’s inventory, requiring deeper buys and further stretching its financial resources.

On Friday, Blockbuster said it will not pay its usual cash dividend to shareholders for the third quarter — the first time since it went public in 1999 that it has skipped the quarterly payment. Blockbuster said in a statement that its board of directors had determined that “at this time, it is more important to use the cash … for the business.”

Urgent meetings

Meanwhile, the retailer has been taking urgent meetings with studios and other product suppliers in the past couple of weeks, appealing for extended payment terms beyond the typical 60 days and making deals to ensure it will be able to offer the biggest titles of the fall to its customers.

The chain also has recently stepped up its revenue-sharing with the studios to reduce the strain on its cash flow.

Vidtailer obtained about 70% of its rental DVDs via rev share in the second quarter, compared with its typical quarterly average of about 50%.

While studio sources say they are monitoring Blockbuster’s outstanding payables closely, the situation is not considered critical.

“They have the cash, but they have a lot of uses for their cash right now,” independent equity analyst Dennis McAlpine said.

In fact, one studio exec said “it’s business as usual” for them with Blockbuster, noting the retailer is “current” and sent a check just last week.

Studio sources said it appeared Blockbuster was trying to conserve as much cash as possible to bolster its fourth-quarter earnings.

“They are not in imminent danger. They are just using the situation to manipulate vendors,” one senior studio exec said.

Last month, the chain reported a net loss of $57 million for the second quarter and warned investors the third quarter would be difficult as well.

Better times foreseen

In comments since then, however, chairman-CEO John Antioco has vowed Blockbuster will be back in the black in the fourth quarter.

A Blockbuster rep said skipping the third-quarter dividend would save about $3.6 million.

Historically, relations between Blockbuster and many of the studios have often been strained, sometimes contentious and, in a couple cases, litigious. Still, none of the studios wants to see Blockbuster go away or struggle with a bankruptcy reorganization. Vidtailer ranks as no less than one of the top 10 customers for most studios and is among the top five for others, representing approximately 12%-15% of revenue in most cases.

Blockbuster is even more important for smaller suppliers of rental-oriented fare.

Still, some execs say they are suspicious of Blockbuster’s strategy, noting the retailer has presented a similar desperate case before when it was really only looking to improve its financial picture for that quarter.

Skeptical execs

That kind of perception of Blockbuster’s tactics has left some execs with a bad taste in their mouth and a skepticism about helping out the retailer any more than they have to.

“They are some of the biggest renegers of all time,” said one exec. “And they approach us with arrogance.”

“They come in and lie to our face about their situation,” said another, who said that in recent days the retailer’s reps told each studio they only have financial issues with the one they were speaking with at the time.

Others expressed sympathy for the retailer’s position, however.

“This has happened with Wal-Mart and other accounts,” one supplier said. “I think people are blowing it out of proportion.”

One indie supplier blamed any problems at Blockbuster on the state of the industry in general.

“We’re very much aware that there is an issue here,” the supplier said. “I’ve been explaining to the credit department that it’s soft at the box office, soft on the street, soft on sell-through and rental. No one is immune. It’s not just Blockbuster.”

(Susanne Ault contributed to this report. Ault and Sweeting are reporters for Daily Variety sister publication DVD Exclusive.)

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