Blockbuster loss widens on tough rental market

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Blockbuster's 5-month-old online offering, Total Access, is a hit with consumers but a big drag on the company's bottom line.

The nation's No. 1 movie-rental chain said Wednesday its first-quarter loss swelled to $46.4 million from a loss of just $1.9 million in the year-ago quarter, with the bigger-than-expected loss mostly attributed to Total Access.

Revenue rose 5.4% to $1.47 billion, better than the $1.37 billion analysts had predicted, though the hit to the bottom line was more than investors could stomach, and the stock was crushed by 13% Wednesday to $5.40.

The company also announced it had sold its European video game retail business, the Game Group, for $150 million in cash and that it expects to use the proceeds for paying down debt. The company has already paid down half of its former $1 billion debt.

But most of the attention during Wednesday's conference call was directed to Total Access, the plan that lets online subscribers exchange movies via U.S. mail or at Blockbuster stores.

Blockbuster CEO John Antioco, who plans on retiring at year's end, said the company spent $70 million in the first quarter to market Total Access and to purchase more DVDs for the large amount of new customers it was attracting.

Antioco said his company captured 60% of the growth of the subscription DVD-by-mail industry, with leader Netflix getting the bulk of the remaining growth.

Total Access added nearly 1.5 million people to Blockbuster's sub base, bringing the total to 3 million, Antioco said. Netflix had 6.8 million at the end of the first quarter.

The aggressive way in which Blockbuster is growing Total Access has resulted in a squeeze of gross margins down to 51.7% from 56.5% a year ago, a decline that clearly spooked some investors and analysts, but Antioco said he has no intention of tapping the brakes even though, if he did, Total Access could be profitable now as opposed to next year.

"We now have the fastest-growing online rental service in the marketplace and intend to keep it that way," he said.

Without mentioning Netflix, Antioco said the advantage Blockbuster has over its competitor is its bricks-and-mortar stores.

"It will be very difficult for our major online competition to impact our growth, since we don't think they have an answer to what we believe is a superior integrated service," he said.

While the competition's strategy appears to be to wait for Blockbuster to raise its prices on Total Access or lessen its appeal in other ways in order to save costs, Antioco said "they may have a long wait."

He did, though, say Blockbuster would consider tweaking the service in various ways in order to save subscribers money, such as offering an online-only version or some sort of a la carte pricing.

"Clearly, our results were impacted by our investment in the growth of this offering," he said of Total Access.

Although Antioco complained of "an extremely tough in-store rental market," Blockbuster's domestic same-store rental revenue actually increased 3.2%, while worldwide it increased 1.3%.
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