Blockbuster Inc.

Blockbuster Inc.

Type	Public (Pink Sheets: BLOKA; Pink Sheets: BLOKB)
Industry	Home Entertainment
Founded	1985
Headquarters	Renaissance Tower Dallas, Texas, U.S.
Area served	North America, South America, Europe, Australia
Products	Retailing and renting of DVD, Blu-ray, and Video Games
Revenue	US$4.06 Billion (FY 2009)
Operating income	US$(355 Million) (FY 2009)
Net income	US$(558 Million) (FY 2009)
Total assets	US$1.54 Billion (FY 2009)
Total equity	US$(314 Million) (FY 2009)
Website	http://www.blockbuster.com

Blockbuster Inc. (Pink Sheets: BLOKA; Pink Sheets: BLOKB) is an American-based chain of DVD, Blu-ray, and video game rental stores. As of January 3, 2010, there are over 6,500 Blockbuster stores in the U.S. and 17 countries worldwide. It is headquartered in the Renaissance Tower in Downtown Dallas, Texas.^[1]

Contents 1 History 1.1 Under Viacom 1.2 After independence from Viacom 1.3 Near Bankruptcy 2 Business model 2.1 Marketing 2.2 Quantity and selection of titles 2.3 Progression to Blu-ray 3 Retail operations 3.1 GameRush stores 4 Blockbuster Online 4.1 United States 4.2 United Kingdom 4.3 Brazil 4.4 Brazilian Online Service 4.5 Movielink acquisition 5 Late fee lawsuits 6 References 6.1 Other sources 7 External links

History

The first Blockbuster store opened in Dallas, Texas on October 26, 1985 at the corner of Skillman and Northwest Highway. The founder of the company was David Cook, who grew the business and brought it public. The innovation was derived from Cook's experience with managing huge databases. After the first few stores opened, he built a $6 million warehouse in Garland, TX that could pull and package multiple stores in a day. Key to the early success of Blockbuster, was their ability to customize a store to its neighborhood, loading it up with films geared specifically to demographic profiles in addition to the popular new releases, and a sizeable collection of catalog titles.^[2] The logo was created by Lee Dean, working for the now defunct Rominger Advertising agency.

Scott Beck, a young businessman in Dallas, approached John Melk, prior executive with Waste Management, about buying a franchise. Melk brought the idea to his friend and business associate, Wayne Huizenga, who agreed to buy the company after overcoming initial concerns about the video industry.

Huizenga and Melk used similar techniques in growing Waste Management, and soon, they were opening one store every seventeen hours. They also bought every Blockbuster franchise they could get their hands on (removing pornographic movies). The company became a multi-billion dollar company and was sold to Viacom for a price of $8.4 billion.^[3]

The Blockbuster Block Party concept was test-marketed in Albuquerque, New Mexico and Indianapolis, Indiana; Block Party was an "entertainment complex" aimed at adults, containing eight themed areas housing a restaurant, games, laser tag arena and motion simulator rides and was housed in a windowless building the size of a city block. During the 1990s Blockbuster bought out their major UK rival Ritz Video and changed the name of all the stores to their own, which made them the number one video rental store in the country by a wide margin.

In 1992, Blockbuster acquired the Sound Warehouse and Music Plus music retail chains and created Blockbuster Music. In August 1998, Viacom sold the Blockbuster Music chain to Wherehouse Entertainment, who was subsequently purchased by Trans World Entertainment in 2003.^[4]

Under Viacom

In 1993 Blockbuster proposed a merger with Viacom, however, after both companies' stocks tumbled in 1994, Viacom eventually purchased Blockbuster.

In 1996, the Blockbuster Entertainment Corporation was renamed Blockbuster, Inc. and the retail stores, then called Blockbuster Video, were renamed Blockbuster. Older stores have not changed. During that year Blockbuster, which was then headquartered in Fort Lauderdale, Florida, began studying the idea of moving its headquarters into the Renaissance Tower in Downtown Dallas.^[5] In November 1996 Blockbuster confirmed that it was moving into the Renaissance Tower.^[6] Most of the workers at the Florida headquarters did not want to relocate, so Blockbuster planned to hire around 500 to 600 new employees for its Dallas headquarters. The company had offered various relocation packages to all of its Fort Lauderdale employees.^[7]

In 2002, Blockbuster acquired Movie Trading Company, A Brooklyn chain that buys, sells, and trades movies and games, to study potential business models for DVD and game trading. Also that year, they acquired Gamestation, a 64 store UK computer and console games retailer chain.

After independence from Viacom

Blockbuster separated from Viacom in 2004 and launched Game Pass nationwide. Online DVD subscription was introduced on Blockbuster.com (aka Blockbuster Online).^[8] Blockbuster also rolled out its Game Rush store-in-store concept to approximately 450 domestic company-operated stores. Blockbuster began game and DVD trading in select US stores.^[9]

Blockbuster has lost significant amounts of money in recent years: $1.6 billion in 2002, almost $1.0 billion in 2003, and $1.2 billion in 2004. As of February 2006, the company had a market value of almost $500 million.

In May 2005, financier Carl Icahn waged a successful proxy fight to add himself and two other members to the board. Icahn accused Blockbuster of overpaying Chairman and CEO John F. Antioco, who served in that capacity since 1997, and who received $51.6 million in compensation for 2004. Icahn was also at odds with Antioco on how to revive profit at Blockbuster; Antioco scrapped late fees in January, started an Internet service, and wants to keep the company independent, while Icahn wants to sell out to a private equity firm.^[10] Icahn's initial move was the oust Antioco but later expanded the board by one seat to retain his services, since Antioco's departure would have triggered a lucrative severance package of $54 million. Icahn abandoned plans to take control of Blockbuster last year in a tacit show of support for Antioco. However, Icahn continued to wrangle with Antioco over CEO pay.^[11] An amended and restated employment agreement resolves a dispute over Antioco's 2006 bonus. Antioco received a 2006 bonus of $3.1 million. The board had previously conditionally offered Antioco $2.3 million while the CEO said he was entitled to $7.7 million under his previous employment agreement and Blockbuster's 2006 senior bonus plan. Upon his departure, Antioco received a lump sum of $5 million as compared with the lump sum of $13.5 million that he would have been entitled to receive if he had been terminated without cause or had resigned for good reason on Dec. 31, 2007, under his previous employment agreement. Antioco's departure package was estimated at $24.7 million, plus 5 million stock options that vest by Dec. 31 and can be exercised for the following 30 months.^[11]

On July 2, 2007, the company named James W. Keyes (former president and CEO of 7-Eleven) as the new chairman and CEO. Keyes had worked at the convenience store chain for 21 years until 2005, when it was sold to Seven & I Holdings Co. Since this point, he has introduced a new business strategy that includes de-emphasizing the unprofitable Total Access online service, in favor of an in-store, retail-oriented model. His predecessor John F. Antioco attempted this same plan initially in 1997. Additionally, Blockbuster Inc. lifted the ban on using check cards to secure rentals of movies and games in excess of the per-visit check out limit. Customers who were once required to use a major credit card are now free to use their check card.

On September 14, 2007, Blockbuster GB Limited bought a number of retail stores from ChoicesUK Plc. ChoicesUK is an AIM listed multi-channel distributor and retailer of DVDs, computer games and CDs. The sale will secure employment for approximately 450 employees across 59 stores in the UK. As part of the transaction, Blockbuster GB will re-brand the stores as BLOCKBUSTER.

On February 17, 2008 Blockbuster, Inc. proposed a buyout of struggling Circuit City. However after a due diligence review of Circuit City's financial books by Blockbuster (pushed for by Carl Icahn), Blockbuster withdrew its offer in July 2008. Analysts were not favorable to the proposed deal, viewing it as a desperate effort to save two struggling retailers rather than a bold turnaround initiative.^[12] It even earned CEO James Keyes a spot on Jim Cramer's Mad Money Wall of Shame before the offer was withdrawn. Subsequently Circuit City filed for bankruptcy on November 10, 2008 and after liquidating all its stores ceased operations on March 8, 2009.^[13]

In December 2009, Blockbuster partnered with NCR to begin installing Blockbuster Express Kiosks in an effort to compete with Redbox.

Near Bankruptcy

On February 10, 2010, Blockbuster announced that it would cease all its operations in Portugal, closing down in the process 17 outlets and leaving over 100 workers unemployed. Blockbuster representatives in Portugal blamed internet piracy and the lack of government response to it as the key factors to the company's bankruptcy in the country.^[14] By March 2010, Blockbuster was in talks of selling its European operations altogether, but would not disclose the details.

On March 1, 2010, Blockbuster began "Extended Viewing Fees" for rentals not returned by their due date in the United States, having already used this procedure in other countries such as the UK for many years. An "Additional Daily Rate" is charged for each day a member chooses to keep the rental beyond the rental terms.

On March 12, 2010, PricewaterhouseCoopers, Blockbuster's independent registered public accounting firm, issued its audit opinion disclosing substantial doubt about Blockbuster's ability to continue as a going concern. This report was included in Blockbusters's 10-K SEC filing. On March 17, 2010, Blockbuster issued a bankruptcy warning after continued drops in revenue threatened its ability to service its nearly 1 billion dollar debt load.^[15]

By April 1, 2010, Carl Icahn, a significant minority shareholder since 2004, had resigned from Blockbuster's board of directors and sold nearly all his remaining Blockbuster stock.^[16]

In May 2010, dissident shareholder, Gregory S. Meyer, in an effort to be elected to Blockbuster's board of directors, engaged in a proxy battle with Blockbuster's board alleging that the board has been responsible for significant destruction of value to shareholders. Mr. Meyer was elected to the board at Blockbuster's shareholder meeting in Dallas, Texas on June 24, 2010.

On 1 July 2010 the company was delisted from the New York Stock Exchange after its shareholders failed to pass a "reverse stock split" plan aimed at heading off involuntary delisting due to the share price trading well below $1 per share.^[17] The stock now trades on the over-the-counter bulletin board (OTCBB).

In addition, Blockbuster was unable to make a $42.4 million interest payment to bondholders and was given until August 13, 2010 to pay off the debt. The company hired Jeff Stegenga to be its chief restructuring officer (CRO) in an effort to satisfy bondholder demands and recapitalize the company. After failing to pay on August 13, bondholders gave Blockbuster until September 30, 2010.

On August 26, 2010, news media reported that Blockbuster was planning on filing a pre-packaged Chapter 11 bankruptcy in mid-September.

Business model

The standard business model for video rental stores was that they would pay a large flat fee per video, approximately US$65, and have unlimited rentals for the lifetime of the cassette itself. Sumner Redstone, whose Viacom conglomerate then owned Blockbuster, personally pioneered a new revenue-sharing arrangement for video, in the mid-1990s. Blockbuster obtained videos for little cost and kept 60 percent rental fee, paying the other 40 percent to the studio, and reporting rental information through Rentrak. What Blockbuster got out of the deal, besides a lower initial price, was that movies were not available for sale during an initial release period, at least at an affordable price point - customers either had to rent, wait, or buy the film on tape at the much higher MSRP targeted at other rental chains and film enthusiasts, at that time then between $70–$100 before the end of the initial release period.

Marketing

One of Blockbuster's most well known advertising campaigns was launched during the 2002 Super Bowl. It starred the voices of Jim Belushi and James Woods, as a rabbit and a guinea pig in a pet shop, located across the road from a Blockbuster store. The first campaign ended in 2003. The Carl and Ray campaign started again in 2007 starting with a commercial in the first quarter of Super Bowl XLI.

Blockbuster uses Pre-installed software in marketing agreements with smartphone service providers, that cannot be removed without rooting the phone and voiding its warranty.

Quantity and selection of titles

Blockbuster, like most other rental stores, tends to stock more copies of new movies than older releases, in order to capitalize on heavy consumer demand for new release titles. The trade term is "depth of copy".^[18] Titles that are more than 12 months past their initial release date are stored as "Blockbuster Favorite" (non-new release) titles. Typically only one to four rental copies of each title are retained past the first year of release. The large volume of new release copies are typically sold after the initial renting rush. Some of these copies are sold as "previously viewed" for around $10–$15, sometimes as low as $3.99. Most Blockbuster locations also accept trade-ins of used DVDs which are sold alongside the existing stock of previously rented movies.

Representing itself as a family-friendly chain, Blockbuster has never rented or sold pornographic titles in the US market (other markets vary), though the stores carry R-rated and unrated films, including a large number of "soft porn" titles (including Red Shoe Diaries. Red Shoe Diaries was distributed exclusively by Blockbuster in a now expired agreement with then-sister cable network Showtime during the Viacom era). Blockbuster requires employees to check ID and does not allow rental of Youth Restricted Viewing titles with a rating over R to children under 17 unless their parents have specifically allowed it through a family account.

Blockbuster has been the exclusive rental chain for The Weinstein Company movies since January 1, 2007,^[19] although due to the First Sale Doctrine, other rental stores and online DVD rental-by-mail companies, like Netflix, can still rent DVDs released by The Weinstein Company.

On February 6, 2009, Blockbuster was listed first on U.S. News and World Report's "15 Companies That Might Not Survive 2009."^[20] 24/7 Wall Street has also listed Blockbuster as the number one brand that will disappear in 2010.

Progression to Blu-ray

On June 19, 2007, after a pilot program launched in late 2006, Blockbuster announced that it had chosen Blu-Ray over HD DVD rental format to rent out in a majority of its stores. In the pilot program, Blockbuster offered selected titles for rental and sale in 250 stores. Blockbuster now stocks Blu-Ray titles in almost 5,000 stores across the United States, Canada, United Kingdom, Mexico and Australia.^[21]

Retail operations

As of January 3, 2010, Blockbuster has over 4,000 U.S. stores, of which it plans to close between 810 and 960, while planning to open as many as 10,000 video rental kiosks by mid-2010.^[22] As of January 3, 2010, it has more than 2,500 international stores (operating under Blockbuster and other brands).^[23] It has been claimed that there are more than 43 million U.S. households with Blockbuster memberships.^[24]

The company had an Irish subsidiary, Xtravision, which did not operate under the Blockbuster brand name. Blockbuster sold Xtravision at a loss in August 2009 to Birchhall Investments Limited.

In Australia, the company pursued a franchising model whereby its corporate stores, which peaked at 133 in 1998, were converted into franchises. The company also disbanded its chain of Game Rush video game stores, presumably as a part of the U.S. headquarters’ strategy to focus on core rental business. Metropolitan Victoria (Melbourne) was the last remaining significant concentration of corporate stores.

In December 2004, Blockbuster announced it wanted to pursue a hostile takeover of Hollywood Video, its major U.S. competitor. In response, Hollywood Video agreed to a buyout in January 2005 by a smaller competitor, the Dothan, Alabama-based Movie Gallery. Since then, Movie Gallery has filed for bankruptcy twice and all Movie Gallery and Hollywood Video stores were liquidated by 2010. Movie Gallery's liquidation was completed on July 31.

In February 2007, Blockbuster announced plans to sell its Australian subsidiary and franchising rights to Video Ezy, subject to approval from the Australian Competition and Consumer Commission. Blockbuster's Australian operations encompassed 29 company-owned stores and 341 franchises, which Video Ezy would continue to operate using the Blockbuster brand.^[25]

On June 29, 2007, The Hollywood Reporter announced 282 US stores would close that year.

On December 18, 2007, a store in Dallas was renamed Blockbuster Media.

Blockbuster announced that it plans to shut down its stores in Peru due to poor revenues, which it blamed on the effect of piracy on the movie market.^[26] The company has already closed down its stores in Ecuador, Spain, Portugal and El Salvador. In March 2010, Blockbuster announced that it intended to sell all operations in Europe.

In July 2009 Blockbuster began rolling out "Blockbuster Express" machines that are designed to compete with Redbox and other DVD rental kiosk companies.

In December 2009 Blockbuster announced a partnership with Wind Mobile. Launch day would see a roll out of 13 stores in Toronto and 3 in Calgary carrying Wind Mobile phones inside Blockbuster stores.^[27]

In March 2010, Blockbuster paired up with Time Warner Inc. to have Warner Bros. movies be available in Blockbuster stores on the DVD release date and not be subject to a four-week delay in availability. Similar agreements were also made with Universal and 20th Century Fox.

Also in 2010, Blockbuster shuttered 545 operated stores in the 2010 fiscal year.

GameRush stores

In Summer 2003, Blockbuster started converting select stores in select regions to GameRush stores. These stores sell and buy consumers DVDs, games, gaming systems, and accessories. It is offered as a direct competition to stores such as GameStop and Game Crazy. Blockbuster used their location status to get instant coverage; it also promotes these stores by hosting video game tournaments, special trade-in offers, and a more "hip" look to the selection and staff. However when Blockbuster introduced "The End of Late Fees" GameRush was put on the chopping block. As of April 2007, GameRush stores are being reduced back to just a games section.

Blockbuster UK operates Trade functions in all their stores, buying in and selling preowned consoles, dvds games and accessories with customers, and pricematching with other high street competitors by offering either store credit against other purchases, or cash for trade ins.

Blockbuster Online

United States

In August 2004, Blockbuster introduced an online DVD rental service in the U.S. to compete with the established market leader, Netflix.^[28]

Blockbuster's U.S. online operation started with around 10 warehouses; further expansions every year have brought that number to 41, plus 1400+ stores in the Blockbuster Online network. Most Blockbuster independent franchises do not honor the Total Access program. The company had 1.5 million subscribers at the end of the third quarter of 2006.^[29] Blockbuster's move to follow the business pattern with its online rentals as was established by Netflix prompted Netflix to sue Blockbuster for infringement of patent. Blockbuster counter sued with a counterclaim alleging deceptive practices with its patent which it alleges was designed to maintain an illegal monopoly. The suits were eventually settled, and while the terms were not disclosed it was later reported that Netflix recorded a settlement payment from Blockbuster of $4.1 million in the second quarter of 2007.^[30]

Currently Blockbuster offers several online movie rental plans. In select cities customers can add games to their movie rental queue as if they were included in their plan, but game rentals result in an separate additional fee which is not displayed or charged until the end of the billing cycle.^[31] Until July 26, 2007, Blockbuster offered and advertised unlimited free in-store exchanges of online rentals with all plans, included free of charge. Since then there have been several changes back and forth with regard to this policy; as of March 2010 customers are allowed a limited number of in-store exchanges.

At the end of 2006, Blockbuster Total Access had 2.2 million customers, exceeding their original goal of 2 million, according to the official website.^[32] After an aggressive media campaign that accounted for much of Blockbuster's $46.4 million net loss in the first quarter of 2007, the Total Access subscriber base surpassed 3 million customers in total, marking the company's highest subscriber growth quarter ever.^[33] By 2009, however, the company was declining to provide figures when asked by the Wall Street Journal.^[34]

On January 5, 2007, Southern Stores Inc, one of Blockbuster's largest franchise operators in the United States, filed a lawsuit in federal court alleging that, by introducing Blockbuster Online and Blockbuster Total Access, the rental chain has undercut the group's franchise agreement.^[35]

On August 6, 2010, Blockbuster By Mail subscribers gained access to Blockbuster's library of platform games, in addition to movies and television shows.

United Kingdom

In the UK, Blockbuster has been providing a version of online rentals since October 2002 with its "Pay Per Rent" service.^[29][36] This is more like a postal version of store rentals than the traditional online DVD rental subscription model, with per-rental prices of £3.50-£4.50, with a rental period of 5 nights (usually Monday-to-Friday, not including postal delivery times), and late fees (£0.70-0.90 per disc).^[37]

In May 2004, Blockbuster also introduced a conventional online subscription service. The unlimited 3-disc plan is £14.99/month. Unlike the US service, there is no in-store disk exchange.

Blockbuster's online service has continued to make headway against its more heavily promoted rival LoveFilm, earning accolades in 2006 as the best DVD rental service in a head-to-head test against other similar services by UK magazine Web User, as well as being judged as having the fastest turnaround of titles by DVD rental comparison site ChooseDVDRental.

Blockbuster UK is no longer a part of the US business and has been for sale for a number of years with no prospective buyers.

Brazil

Blockbuster is the largest rental store in the entire country. But finances were not good enough due to the high rental prices. Lojas Americanas the largest Brazilian department store acquired half of the shares and now it is named under Americanas Express Blockbuster. The store layout is now similar to a regular American store with a Game Rush. But instead of games it offers electronics goods like computers and DVD Players, groceries like candies and microwave popcorn, and even toys from Mattel and Hasbro's board games. Blockbuster sold its Brazilian stake in 2007 for a steep loss.

Brazilian Online Service

In January 2006, Blockbuster Brazil also introduced an online rental service now featuring both DVD and Blu-ray plans. There are currently four Block plans available with prices ranging from R$34.90 to R$79.90. The 3-disc plan with unlimited exchanges is R$49.90/month. Unlike the US service, there is no in-store disk exchange.[5]

Movielink acquisition

On August 8, 2007, Blockbuster announced that they have reached an agreement to purchase Movielink. According to the 8-K filing by Blockbuster, the total purchase price was $6.6 million. The exact terms of the agreement have yet to be disclosed, but it can be assumed that the deal will include content agreements with the major studios, thus giving Blockbuster access to one of the largest libraries of downloadable movies.

Late fee lawsuits

In 2005, Blockbuster launched a marketing campaign describing changes in its late fees policy and offering "No Late Fees" on rentals. The program sparked investigations and charges of misrepresentation in 48 states and the District of Columbia, as state attorneys general including Bill Lockyer of California and Eliot Spitzer of New York argued that customers were being automatically charged the full purchase price of late rentals and a restocking fee for rentals returned after 30 days. In a settlement, Blockbuster agreed to reimburse the states the cost of their investigation, clarify communication to customers on the terms of the program and offer reimbursement to customers charged fees prior to the clarification. New Jersey filed a separate lawsuit and was not a party to the settlement.^{[38][39][40][41][42]}

The 2005 controversy came after a related lawsuit settled in 2002 in Texas. That lawsuit, alleging exorbitant late fees, led the company to pay $9.25 million in attorney fees and offer $450 million in late fee refund coupons (which were rent-one get-one-free coupons, and thus required the customer to make an initial expenditure). The company estimated that the coupons would ultimately cost about $45 million depending on the redemption rate; an attorney for the plaintiffs estimated the final cost at closer to $100 million at a redemption rate of about 20% (calculated based on a similar case in Michigan).^[43][44]

References

Other sources

• [6]

External links

• Official website
• November 2008 The Onion spoof of a Blockbuster Store becoming an historical experience 'museum'