Blockbuster to stop skid?
Vid biz bullish about long-term viability
Speaking to analysts and investors at a Smith Barney leisure conference in Gotham Thursday, Blockbuster exec VP and chief financial officer Larry Zine said potential threats to the vid retail business are "grossly exaggerated" by the investment community. Zine tried to dispel concerns about the near-term impact of new technologies such as VOD and cut-price retail on Blockbuster's core business.
The video retail giant's core rental biz has taken a pounding of late by mass-market retailers like Wal-Mart that sell DVDs below cost. But Zine believes the rental market should stabilize by 2005 and bring more users back to rental. He bases this prediction on the fact that it's simply not in studios' interest to slash wholesale prices to the point that it would undermine the rental business. He is equally confident that the studios are not likely to shift more emphasis to another perceived threat, video-on-demand.
Describing VOD as an "exciting upgrade to pay-per-view," Zine doubts studios will risk giving up $15 in gross profits per sale of a DVD in exchange for the $3 or so it makes from VOD transactions. "It doesn't make sense in the near term," he said.
While the chain has seen its rental growth slowed by the DVD sales wave (and the fact that its business is still tilted toward VHS), Zine insisted the dawn of low-cost DVD is only a win-win for the company. Despite threats that studios would look to cut wholesale DVD movie prices to induce greater demand, Zine is confident that lower prices won't make up for lost margin.
"The tradeoff isn't there ... I don't think the studios would benefit (from cutting prices again)," said Zine, who also noted that price competition this year is not as tough as a year ago. Even if there is a price cut, Blockbuster will still benefit on the cost side and could even contemplate reducing its own rental charges, he said.
Blockbuster also stands by its conviction that while piracy is a threat, the $4 rental price point is a good value defense against illegal copies.
The company's new focus is on transforming its movie rental stores into destinations for movie and game rentals, sales and trade-ins. Blockbuster is warning Wall Street that profit margins will take some heat from some much-needed capital spending to roll out such new initiatives such as its own online and in-store DVD subscription services (to compete with NetFlix), videogame "stores in stores" and a game and movie trade-in service. Rolling out these new business this year will cost up to $90 million in incremental operating expense and $250 million-$280 million in capital spending.
