B'buster eye on Street with run at new tech
When Viacom Inc. spun off the first 20% of its Blockbuster Video unit back in August 1999, it was supposed to be the first step toward a complete divestiture of a business that was no longer a good "strategic fit" for the parent company.
The stock went out at $15 in its initial public offering, climbed as high as $16.85 over the next few months, then, around the beginning of 2000, fell off a cliff, taking down with it any hopes of a further spinoff.
But lately, Blockbuster stock has begun to claw its way back, rising more than 55% since the beginning of this year, and is now within hailing distance of its IPO price.
Last time we heard from Viacom chairman Sumner Redstone on the subject of a second offering -- about a year ago -- he said Blockbuster shares would need to reach the mid-20s before another stock sale would be attractive. That's still a ways off.
But many of the vidtailer's recent moves seem aimed as much at repackaging itself for Wall Street as they do at bolstering its business. And so far, those moves appear to be working.
Blockbuster chairman John Antioco's recent announcement, in a conference call with analysts, that the vidtailer had reached a deal for video-on-demand rights with Universal helped push the stock up 11% over the next week.
At the time the deal was announced, however, nothing was yet on paper, and Universal's official position was that negotiations were "ongoing." Given Blockbuster's past secrecy over its studio deals, the urgency of announcing the multiplatform deal with Universal seemed to have as much to do with Antioco's audience -- securities analysts -- as its substance.
The Enron VOD system on which Blockbuster plans to exploit U's titles has only 700 subscribers and is fully operational in only three cities. It's going to be a long time before those Universal VOD rights contribute materially to Blockbuster's business.
Antioco also noted to the analysts that the vidtailer is slated to launch a 42-channel pay-per-view system with DirecTV in June, for which it also secured rights from Universal.
That sounds impressive, but the real value to Blockbuster of its deal with DirecTV comes from the far-less sexy sale of satellite dishes in its stores --and the cut of the basic subscription fees from every customer it signs up -- not from its likely share of the pay-per-view revenue.
Those dish sales and subscription fees will continue to contribute to Blockbuster revenues regardless of whether the vidtailer secures PPV rights from any more studios.
As it happens, Blockbuster's stores have produced more than respectable operating results over the past year as measured by any of the standards Wall Street usually applies to publicly traded retailers.
But Antioco knows that no chain of videostores, no matter how well run, will ever again capture the fancy of Wall Street, which is convinced that homevideo is a dying technology. If he's going to keep the stock moving -- let alone reach the point where a secondary offering might fly -- he's going to have to show continued progress in gaining access to VOD and PPV rights from the studios -- and he'll use the leverage that a 45% share of the video rental market gives him to do it.
Nevertheless, with more than $3 billion annually in video rentals, Blockbuster is, fundamentally, a chain of videostores. And it's going to be a long time before any other business comes close to matching video rental's importance to Blockbuster's well-being, no matter what Wall Street thinks.
