John Palys William Hetfield Ariana Schuster April 20, 2005
Total Page：16
File Type：pdf, Size：1020Kb
John Palys William Hetfield Ariana Schuster April 20, 2005 Blockbuster Inc. Table of Contents Executive Summary .......................................................................... 3 Company History .............................................................................. 4 Competitive Analysis ........................................................................ 7 Industry...................................................................................................7 Entry ........................................................................................................8 Substitutes and Complements..................................................................8 Buyer and Supplier Power........................................................................9 Financial Analysis ........................................................................... 11 Key Issues and Solutions................................................................ 14 Conclusion ...................................................................................... 17 References ..................................................................................... 18 SageGroup, LLP 2 Blockbuster Inc. Executive Summary Blockbuster Inc. thrived throughout the 1990’s as the video rental industry grew, with VHS tapes the dominant format and VCR’s in the majority of American households. The introduction and spread of new technologies, however, has in recent years caused the rental industry to stagnate and even recently contract. The DVD format has seen relatively far more sales than rentals compared to VHS tapes, and pay-per-view, video-on-demand, and the ever-expanding number of choices on cable television have hurt the traditional rental model. These problems, combined with costly introduction of new initiatives aimed at changing that rental model, have led to large financial losses for the company in the last two years. Early this year, the company failed in its bid to acquire Hollywood Video, Blockbuster’s closest rival in in-store rentals. All these issues have raised questions regarding Blockbuster’s viability as a major entity in the broader home entertainment industry. Despite the expectations of a continued decline in Blockbuster’s traditional operations, we believe the company can return to enjoying sustained growth by shifting its brand image towards attracting internet users and technologically savvy consumers of home entertainment. Furthermore, we believe an expanded and better integrated trading model for used titles can allow Blockbuster to take advantage of the growing secondary market in DVD and video game sales. SageGroup, LLP 3 Blockbuster Inc. Company History Blockbuster’s history can be traced earliest to the formation of Cook Data Services by David Cook in 1982. Founded in Dallas, Tex., to perform data services locally for the oil and gas industries, Cook Data Services struggled as those industries became increasingly irrelevant in Dallas. By 1985 Cook sold his software business, and in October of that year opened the first Blockbuster Video store, which had an inventory of nearly ten times its nearest competitor. Cook used barcode technology, combined with his software expertise, to create a state-of-the- art inventory system that made transactions much faster for customers than was typical of contemporary video stores and reduced inventory tracking costs. By 1986, Cook had expanded to four locations in the Dallas area and officially named his company Blockbuster Entertainment Corporation. In 1987, Wayne Huizenga headed an investment group which injected over $18 million into Blockbuster, which had actually suffered losses of over $3 million in 1986. By the end of 1987, Huizenga’s group had managing control of the company and Cook was no longer associated. Huizenga’s vision for the company involved majority company ownership of rental stores, whereas Cook had foreseen operations as primarily franchised. With Cook out of the picture, Huizenga began buying back some franchises, aiming for 60 percent company ownership, and also began a major expansion undertaking in which it purchased several existing video rental chains. Blockbuster increased sales nearly sixfold between 1986 and 1987 with this expansion. Huizenga also oversaw the move of corporate headquarters from Texas to Ft. Lauderdale, Fla. In 1988, Blockbuster continued expanding by buying more and increasingly large video rental chains. Some it operated, while others, such as those resulting from a deal with United Cable Television Corporation, were franchised. By the end of the year, Blockbuster had 415 stores and was easily the largest video rental chain in the country. Expansion within the U.S. continued rapidly in 1989 and 1990; by the middle of 1990, Blockbuster was expanding at the rate of one new store per day, and it had a total of well over 1,000 stores. Blockbuster’s last major acquisition, and the largest in its U.S. history, was of Erol’s, a rental chain of over 200 stores. In the early 1990’s, Blockbuster’s major undertaking was foreign expansion. In addition to opening stores in countries as diverse as Japan, Chile, Spain and New SageGroup, LLP 4 Blockbuster Inc. Zealand, Blockbuster undertook a major expansion effort in Britain, seeking to become the largest video rental retailer there. That goal was accomplished in 1992 after the purchase of 875-store Cityvision, the country’s largest such chain at that time. In December of 1992 Blockbuster began a major domestic undertaking by buying music retailers Sound Warehouse and Music Plus, and thereafter creating Blockbuster Music stores. This diversification effort was coupled with further expansions into video game, software, and virtual reality. These efforts, as well as Blockbuster Music, were not particularly long-lived. Another major acquisition was of rights to Republic Pictures and Spelling Entertainment features, which included libraries of classic films and television programs. An unsuccessful period for Blockbuster began at least as early as Viacom’s 1994 takeover. With the merger, Huizenga stepped down and was replaced by Steven Berrard, who presided over unsuccessful attempts to further expand geographically. By the time Berrard was replaced in 1996 by Bill Fields, Blockbuster’s stock was at half its 1993 price, and Viacom’s had also slipped significantly. Fields’ tenure as CEO was hardly more successful. His major undertaking was an attempt to revise Blockbuster’s image to fit that of a “family entertainment center” with video rental as just one part. The company also closed several stores and downsized about two-thirds of total staff, while moving corporate headquarters back to Dallas. In 1997, Fields stepped down and was replaced by John Antioco, who scaled back many of Fields’ efforts and focused on video rental as the centerpiece of Blockbuster. He oversaw updates to the inventory tracking system and helped further streamline the distribution center in Dallas. His major achievement, however, was a revenue-sharing agreement with the major Hollywood studios, by which Blockbuster could purchase videos at a fraction of what it was previously paying. The studios would then be entitled to a percentage of Blockbuster’s rental revenue. Additionally, Antioco oversaw the sale of Blockbuster Music in 1998, returning Blockbuster primarily to a video rental business as he had intended. In 1999, Viacom, having announced intentions to divest itself of Blockbuster, made an initial public offering at $15 per share and raised $465 million. 1999 also saw the first of three partnerships. First, it teamed with AOL, which invested $30 million into Blockbuster with the purpose of developing online broadband content. SageGroup, LLP 5 Blockbuster Inc. In 2000, a partnership with food.com was forged to attempt to create a joint food- movie home delivery service. That year Blockbuster also allied with DirecTV to begin joint branding of the latter’s pay-per-view home movies and programs. Later, in 2002, Blockbuster would team up with Coca-Cola to advertise and sell its products in Blockbuster stores. By late 1999, Blockbuster was moving decisively towards DVD’s as the dominant rental medium rather than VHS cassettes. This continued with the introduction of Nigel Travis as president and COO, who also pushed the company further into DVD sales in addition to rentals. It found out fairly quickly, however, that these efforts were undermined most directly by broader retailers such as Best Buy, Wal-Mart, etc., which have had a significant cost advantage over Blockbuster in retail. By the end of 2004, however, Blockbuster had eliminated VHS sales from its stores in order to focus its retail operations on DVD’s. Also in 2004, Viacom finally sold its controlling stake in Blockbuster. At the end of the year, the company announced the elimination of late fees in most markets would take effect in 2005, to be replaced by a ten-day grace period, after which the customer is charged for the entire price of the tape or DVD. With the introduction of this program and loss of late-fee revenue, major operating losses are expected in 2005 as was the case in 2004. The company hopes that eventually, however, customers will rent more titles and more frequently with the new policy. SageGroup, LLP 6 Blockbuster Inc. Competitive Analysis Industry Blockbuster is by far the leader in market share for home entertainment rentals, with total revenues at more than triple those of its nearest competitor, Hollywood Video. There are