Blockbuster (BBI) turned in generally positive Q1 results with predictable falling sales but increased profits, indicating CEO Jim Keyes is having some success managing the declining rental DVD business.
Big question: What does acquiring Circuit City have to do with setting up Blockbuster to compete digitally?
Answer: nothing. But Keyes argues that the electronics-media worlds are colliding and that consumers want to shop for both at the same time. He envisions stores where consumers can try out video games or movies in Blu-ray format and then buy the device and the related media.
On the digital front, Keyes reminds everyone that Movielink has way more day-and-date movies than Apple’s (AAPL) iTunes, and that the company is planning more aggressive marketing for both Movielink and for its mail-order business Total Access.
Blockbuster dialed back spending on Total Access, but Keyes says subscribers are stable at 3.1 milliom, and and the business is now profitable. Most Total Access plans undercut Netflix (NFLX) subscriptions by $1, but Blockbuster won’t get into an expensive market-share war with Netflix. The DVD mail-order market is a small one and not worth trying to dominate.
Blockbuster CEO Jim Keyes starts out the call by talking about the bid for Circuit City (CC):
We will only pursue a transaction if it makes sense for shareholders. We remain confient that our core business is healthy and in our ability to transform company with our without Circuit City.
On the DVD rental business: We are restoring the rental DVD business. We recognise that physical distribution is a mature business and we plan to manage it accordingly. We believe there are better ways to satisfy customers than by competing on price. We believe customers will pay a price for convenience.
Update on Total Access: Total Access subscriptions are stable at 3.1 million. The business is now profitable. Now well-positioned for growth. Says offering superior to Netflix (NFLX). $1 lower price than Netfilx. In-store exchange is huge advantage. Offering Blu-ray at same price to stimulate demand.
Our strategy is to be convenience retailer for entertainment. Wants to sell Blu-ray players. PS3s, other game consoles, portable players, electronics. Video game industry is growing at rapid pace. Casual gamers are coming into our stores and we are working to expand our offerings to satisfy demand.
We are putting games on the new release wall for the first time. Keyes thinks GTA will be biggest rental title of all time.
Finally rolling out 500 “better Blockbuster” stories–new format. It’s a window into the future of our business. Important to mention we are managing development costs of new formats. we are encouraged–8-12% lift in revenues in the new retail formats.
On the acquisition of Movielink–integration going well. New online service in beta-testing now. Expect to launch in June.
Also launching digital download kiosks. These are just a few of many examples of work underway in digital space. We called a time-out from the mail-order business to make that profitable and to re-think digital strategy. Our goal is to be the most convenient source of retail media business.
When will you get the CC deal done? Update progress on download kiosks?
Keyes: We are doing due diligence. First stage in coming weeks–getting enough information to validate our assumptions to give us the go/no-go decision. Then we will decide to do more due diligence, or get back to our core business.
On kiosks–still 6 months away from talking about the roll-out. The initiative is 2-3 years out in terms of deployment and consumer acceptance. Plan to step-up advertising for online products, including Total Access and MovieLink. Will get much more aggressive with Netflix and with GameStop. We will continue to dail it up as our results continue to improve.
Any impact projected in the event of actors strike or Olympics?
Keyes: Not expecting any impact from strike. Olympics generally brings rental softness… but says rolling out enough new products to offset that.
Circuit City of the future is less about selling electronics and more a media experience. New stores under BBI management would have demo games, devices. Keyes sees blurring of devices and entertainment. In bigger “Rock The Block” stores already selling electronics.
10:34 am Keyes: We have too many pricing programs. As a consumer its confusing. What we found in tests is simplicity helps with customer satisfaction. We’ve been rewarded for the more simple approach we have given our customers and greater level of convenience.
What are your updated thoughts on studio day-and-date announcements?
Keyes: Two announcements were troubling: the Apple announcement. What most people forgot is Movielink already has larger catalogue of films already available on day-and-date, so Apple is catching up. The other announcement is Warner. We don’t see a big change. We’re not overly-concerned about that change. On balance, the opportunity that day-and-date creates, is it makes the digital offering more relevant. We think we are positioning as the best digital provider of content. In the short term–only 30% of US households have access to cable VOD. We want to keep the rental open and are taking to the studios about preserving it–for the short-term. In the long term we know the window is collapsing and we will evolve our business to serve customers.
On Circuit City process… is there a scenario where you get the synergies without actually acquiring the company (a partnership)?
Keyes: We are looking at all possibilities. It is early. Everything is a possibility.
What is the cost of the “Rock The Block” stores?
Keyes says $50k for the remodel.
How are you going to add subscribers to Total Access?
Keyes: We believe there is a finite number of people looking for subscription DVDs by mail. it is not an unlimited pool of potential subscribers. Don’t want to foolishly invest in a business that may be too costly to grow. We think there is an opportunity to capture some of that market share back. But we will be careful with media spending so we are not buying those customers. We are not in the business of buying subscribers, but in growing profitable subscribers.
We are trying to compete in the future with the Blockbuster brand as the largest aggregator of content for sell-through, rental and digital platforms.
Keyes talks about stepping back from the expensive marketing of Total Access. Said the perception that BBI was turning back on business is untrue–Keyes just believes the market for mail-order DVDs is limited and not worth losing money on.
Question on in-store rental pricing: can you give a sense of where average rental revenues is going?
Keyes: We tried a $0.99 per day model. You get movies returned more quickly. But then its tougher to make money at it. The feedback we get on a per-diem environment it feels a little too much like a late fee for customers. The perception is that since its a daily charge it might be a return to late fees. We’ve tried a 3-day model for $3.99 for 3 days out, $4.99 for 4 days out. That model seems to be the one the customers respond most favourably to.
Increasing credit card transactions?
Keyes: We are exploring pre-paid cards that are also credit cards. If we can develop this we would like to, over time, eliminate cash completely from our system. Yet we don’t have a convenient system for this today. In the mean time trying to get more people to use credit cards.
11:02 am: Difference in pricing internationally vs domestic stores?
Keyes: Pricing is all over the place in different markets. In UK have evolved from traditional rental to a more retail model. Have been moving into electronic devices in Ireland and the UK. Another example is licensee in Brazil. Have transformed stores into more retail format. As we go forward we will share more of those international learnings.
Final remarks: Keyes says performance demonstrates strength of core business. Says he hopes it demonstrates the turnaround strategy is working. They are all part of restoring our core rental business, growing retail, and developing our digital platforms. This industry needed a new sense of urgency. We are making progress and believe we have all the pieces we need in place.
11:09 a.m.: Call ends.
Blockbuster (BBI) missed its sales numbers, but an improving bottom line shows that the company is doing a nice job of managing its decline (and hopeful transition to a new, as yet-to-be-determined future). So why on earth is it still pressing forward with a Circuit City deal?
Revenue: $1.39, down 5.4% y/y vs. $1.44B consensus. The decline is intentional: BBI has been shuttering underperforming stores for several quarters now. It’s now at 7,719 worldwide, down from 8,201 a year ago.
EPS: 20 vs. 15 cent consensus. A year ago BBI lost 27 cents in the same quarter.
Same-store revenues were up 2.9% in the U.S., down 1.5% internationally, and up 1.4% all-in. The company hasn’t released numbers on its subscription service; we may hear more about that during the 10am call, which we’ll cover live.
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.