Keyes unlocks B'buster's vision

Digital vital but 'stores key to success across whole platform'

Revamped membership offers, a push into digital downloads and strengthened studio relationships are among the key priorities for Blockbuster as the firm heads into 2008 to continue reinventing itself under chairman and CEO James Keyes.

New activity could start taking shape early in the new year. The former 7-Eleven CEO, who took the reins at Blockbuster in July, recently said, "a lot of the changes we're making, we're targeting for the first quarter."

Overall, Blockbuster must do a better job at satisfying people's needs for media entertainment across all distribution channels, including stores, mail, online and even mobile devices, Keyes said.

"There is no one dominant player beyond Blockbuster that can participate in all of those channels," he said. "That is our competitive advantage. Most of the competition is limited to one or two of the various channels but Blockbuster expands to virtually all."

Asked whether the current range of online subscription and other offers might be confusing for Blockbuster consumers, Keyes said his team has been working on "a new (enhanced) membership program that literally can be one and the same with our subscription program but offer in-store customers the same kinds of advantages that people now perhaps get online or by mail."

In line with that, Keyes also argued that the brick-and-mortar business remains key in the digital age.

"The stores in many ways represent the key to success across the whole platform," he said. "The base of 60 million customers that we have in our stores can serve as an economic flywheel to help fund the eventual evolution of DVDs into a digital format."

While industry observers have different takes on how soon digital downloads will become a significant business, Keyes wants to be ready for a possible increase in usage during the short-term.

"It will be increasingly strong starting in the next year to two years as more product is made available through our Web site and we are able to make a better user experience," he said. "The future is bright in particular because of the accelerated platform of personal devices," including Apple's iPhone.

Of course, the pricing of content in the digital arena is a tricky issue, he said.

"Most of the price of a movie is in the intellectual property," he said. "So the prices won't change a lot," even though "the consumer tends to think of the disc as being physically more about what the cost is." Keyes expects that this will pose "a bit of a challenge for us to communicate to the consumer."

One important focus for Keyes also has been to redefine and strengthen the rental giant's partnership with Hollywood studios, which has been based on old business models and strained at times.

Among other things, Keyes wants to ensure better availability of key titles in Blockbuster stores in modified risk-sharing arrangements that also benefit the studios.

"My challenge is to find a few studios to partner with to prove together that incremental availability will provide incremental use," he said, hinting that revenue splits could change. "If we can increase the size of the pie, then the percentage of each piece of the pie is less relevant because the pie itself is bigger."

Keyes also said he wants to work closely with studios to take advantage of the DVD and other merchandise sales opportunities in Blockbuster stores in addition to rentals. "We have not been good retail hosts historically," he said.

One early example of how Keyes is taking new approaches and risks is Blockbuster's recent deal with Viacom's Paramount for "Jackass 2.5" (HR 12/13).

Wall Street observers have at times also suggested that Blockbuster could acquire the second big video rental firm, Movie Gallery, which this year filed for a bankruptcy reorganization. But Keyes said he wants to stay away from the financially troubled company and focus on building Blockbuster's business.

And the competitor's weakness is not necessarily a good thing. "We are actually hoping for the ultimate resolution of Movie Gallery's fate, that they will somehow find a way to survive, because, frankly, good competition is healthy for an industry," Keyes said.

"Our challenge is to fix our core business before we look at any sort of aggressive asset or acquisition," he added.

Keyes also went against analyst sentiment in the case of the WGA strike. Some on the Street have suggested Blockbuster could benefit from a lack of new TV fare.

"We don't think the strike is good for anybody -- for the strikers or for the studios or for the distribution points," he said. "We are hopeful that everyone will be able to resolve their differences and we will get content soon. But we do have a bit of an edge versus other channels in that ... (we have) a bit of a cushion from the impact."
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