Blockbuster changes Total Access terms after loss

By Cindy Spielvogel -- Video Business, 7/26/2007

JULY 26 | Blockbuster reported a $35.3 million second-quarter loss and made a move toward improving profitability by changing the terms of its Total Access program, limiting the number of in-store exchanges a customer can make before being charged more.

Blockbuster is emphasizing the limit to five in-store exchanges per month for its most popular plan, the unlimited online rentals of three movies out a time for $17.99.

But if a customer wants to stick with unlimited in-store exchanges, the price leaps to $24.99, according to the company’s Web site, effectively a $7 price hike. That plan is now called Total Access Premium.

Analysts had been expecting a price hike, but the shift to an in-store exchange limit emphasis was largely a surprise.

James Keyes, Blockbuster’s new chairman and CEO, was somewhat vague about the term changes during the company’s conference call with analysts on second-quarter results, as was a press release on the changes issued shortly after the call.

Rather than characterizing the modifications as a price hike, Keyes stressed the limit on in-store exchanges. If a customer on the $17.99 plan wants to make more than five in-store exchanges per month, an additional $1.99 per rental will be charged, he said. Customers who subscribe to the online-only Blockbuster by Mail program also will have that option, he said.

According to the press release, customers will now be able to exchange their online rentals for discounted in-store game rentals in addition to movies. Previously, Total Access members had the option to get one free game rental per month through a once-per-month coupon.

Blockbuster announced it increased its subscriber count by 600,000 in the second quarter to a total of 3.6 million subscribers, more than 3.3 million of them paid. Netflix, in contrast, lost subscribers during the quarter for the first time.

But Blockbuster’s subscriber increase came at a cost of about $50 million in the quarter, chief financial officer Larry Zine said.

Blockbuster will now suspend its marketing spending on the online program, according to Keyes.

Changes ahead

In presenting an overview of what he expects for the company in the near term, Keyes said he sees “opportunity” in Blockbuster. He plans to develop ways to meet consumers’ changing preferences for the ways they receive entertainment, making it more convenient for them.

Keyes plans to draw on his experiences at his former company, 7-Eleven, in using technology to tailor each store for increased product turnover and possibly add new products as well. As an example, he noted that a Blockbuster franchisee successfully capitalized on Harry Potter mania by selling the new book in the series.

Blockbuster will look at partnering with studios on ways to provide consumers with entertainment, Keyes said. Most of Blockbuster’s business, about 70%, involves revenue sharing with the studios, he said, although he didn’t divulge details of any specific deals.

He also admitted that the video-on-demand tests being conducted between studios and Comcast in Denver and Pittsburgh have had enough of an impact on Blockbuster stores in those cities to warrant Blockbuster’s monitoring, but he said the company isn’t ready to reveal the results of its evaluation yet.

Keyes also said he believes Blockbuster can operate with smaller footprints and indicated that as more competing stores close, existing Blockbuster stores will gain some of their revenue.

Although the quarter’s results were down, Blockbuster continues to gain market share both in-store and online, added Zine.

Revenue down

Blockbuster reported a 2.8% decline in total revenue for the quarter to $1.26 billion from $1.3 billion for the same quarter of 2006. The net loss of $35.3 million compared with net income of $68.4 million in the preceding year’s second quarter.

Worldwide same-store revenue was down 1.3% from last year’s second quarter. The company ended the quarter with 7,878 stores worldwide.

Zine said a weaker film slate was partly to blame for the drop in second-quarter revenue, along with store closings and the sale of the company’s 217-store Game Station chain in the U.K. Blockbuster expects the release schedule to improve in the second half, particularly in the fourth quarter.

Zine said second-quarter in-store rentals, without the online business factored in, probably were down around 10%, but he stressed that the figure needs to be considered in the context that many in-store renters were converted to online subscribers.

He said in-store traffic is up, largely because of in-store exchanges by Total Access members. And the vast majority of the company’s online subscribers use the Total Access online/in-store program rather than the new lower-priced, online-only Blockbuster by Mail, he said.

Total Access terms

Other changes in Total Access terms, now posted on Blockbuster.com, include the following: unlimited rentals of two DVDs out at a time for $14.99 now have a limit of three free in-store exchanges per month; unlimited rentals of one DVD at a time, $9.99 per month, limit of two free in-store exchanges; one DVD at a time, two per month, $7.99, limit of two free in-store exchanges.

Prices for the newly named Total Access Premium for unlimited exchanges are $24.99 for unlimited rentals of three out at a time, $21.99 for unlimited two at a time and $16.99 for unlimited one at a time.

Blockbuster’s stock price rose 2¢ in morning trading, from $4.17 to $4.19.