As studios sweat over 2007 DVD sales, their longtime partner and occasional albatross, Blockbuster, is refocusing on rentals.
Yes, that’s right, rentals. Since Jim Keyes, former chief exec at 7-Eleven, took over as Blockbuster topper in July, the retailer has rethought its recent online push and is trying to breathe some life into brick-and-mortar stores.
Keyes believes stores suffered as the company raced to establish itself online.
While the company has been closing more stores of late, the layout and operation of the 7,800 worldwide Blockbusters “hasn’t changed much since 1985,” Keyes acknowledges.
One variable that is often a hurdle to customer loyalty has been inventory. “Moviegoers wouldn’t like it if they went to a theater trying to see ‘Elizabeth’ and the theater said, ‘That’s sold out, but we have ‘Jackass’ at half-price,’ ” he says. “That’s what we’ve been telling customers, and it’s not good for the studios or for Blockbuster to have that mindset.”
It isn’t online vs. stores, Keyes stresses. The two are complementary. During a recent visit to Gotham, the genial but serious exec brandished a binder of research and charts. The most important, he says, demonstrates a shift from the prior regime’s goal of migrating customers from stores to the Web and then eventually to digital.
“We want to think of it more horizontally, so that all of these revenue opportunities can coexist,” Keyes says. One analog to Blockbuster would be Barnes & Noble, he says, which balances bricks with clicks.
Having the vision is one thing, but executing it is quite another. When the company reported a drop of 500,000 online subscribers in its third-quarter earnings, it got cuffed around on Wall Street.
Lost in the shuffle was an estimable 2.3% gain in same-store domestic rentals, far better than the industry’s overall 10% decline. Movie Gallery’s Chapter 11 filing and closure of 520 locations also creates some opportunity. While it’s been flat in recent years, movie rentals at Blockbuster are still a $4 billion a year business.Chastened by the reaction to the subscriber losses, the company will no longer report online subscriber numbers, preferring to ballpark unique worldwide customers at roughly 20 million.
Since Netflix’s emergence, the race to control the online market has made both stocks fluctuate. “Everyone loves a good fight,” Keyes says. “Everyone wanted to focus on us versus Netflix without realizing that we’re in different businesses.”
The volatility has been much greater for embattled Blockbuster, which has seen a lifetime of drama in just the past few years, from its spinoff from Viacom, board-management fights and technology and competition threatening to turn it into today’s equivalent of a Fotomat.
Reaction to Keyes and his strategy has been decidedly mixed. Jeffrey Logsdon, a veteran entertainment analyst now with BMO Capital Markets, headlined a recent note “Management Presentation Underwhelming, We Remain Skeptical,” after Blockbuster met with analysts.
“Although the strategic and financial missteps of the past were adequately and accurately addressed,” Logsdon wrote, “We were disappointed by the lack of ‘outside-the-box’ thinking.”
The stock hasn’t held up after an initial rally that followed Keyes’ hire. It’s down almost 30% since late October, in part because of those weak third-quarter results.
An open question is whether the studios will go along with a rental-minded Blockbuster, even as they cater to sell-through giants like the big-box stores. In the Wal-Mart and Best Buy era, 80% of homevid revenue comes from sell-through, to just 20% from rentals.
“I have no misconceptions about the perception of the rental market,” Keyes says. “Studios have been very candid with me about the history.”