More shop talk for Blockbuster

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In the midst of a digital revolution, Blockbuster's focus is suddenly on its old-fashioned roots: the neighborhood store.

The company, after reporting its first full quarter under new CEO Jim Keyes, downplayed its by-mail business that competes with Netflix and said forthcoming changes are meant to drive customers away from their computer screens and back into stores.

Blockbuster reported Thursday that it had just 3.1 million online subscribers at the end of the third quarter, down from 3.6 million a year ago.

Keyes told The Hollywood Reporter that because of a price hike and rules change designed to weed out unprofitable subscribers, investors and analysts shouldn't have been surprised at the drop in subscribers. About 300,000 of those who ditched Blockbuster online were only trial customers to begin with, he said.

Keyes said going forward that the company probably won't divulge how many customers it has online, opting instead to share its "discrete per month" count. That means each customer — be they the by-mail, by-store or Movielink variety — is counted once, as long as some sort of commerce took place between them and Blockbuster during the month. Right now, that number is 20 million.

"It's a much more relevant number for us," Keyes said. "We've been reporting on a niche business that isn't our core. It's good we chased that growth, but it's time we report on our whole portfolio."

Keyes acknowledged that quarterly decline in the by-mail business probably resulted in a boost for Netflix, but he doesn't regret his focus on profitability over subscriber additions.

"We were getting hurt from subscribers who paid $17.99 a month and were getting 20 movies every month," he said.

So far, though, the move away from a cheap, all-you-can-watch, by-mail service hasn't resulted in overall profit at Blockbuster. The company reported a net loss of $35 million in the quarter, compared with a loss of $24.7 million last year. Revenue fell about 6% to $1.2 billion as the company not only lost online subs but also closed more than 500 stores. It ended the quarter with about 8,000 stores worldwide.

The company said it implemented a plan for cutting $45 million in annualized costs, including outsourcing that could result in lost jobs, though not at stores that remain open, and Keyes said no stores should close in the next two quarters.

Keyes is so focused on the in-store experience that he doesn't even intend on much promotion of the online business at stores, where presumably the company could advertise for free.

The CEO, who ran 7-Eleven when it was a publicly traded company before joining Blockbuster this year, said new layouts and prototypes are being worked out for stores and that he'll discuses details with analysts Thursday.

Part of the solution, though, includes selling DVDs, something Blockbuster — the leader in movie rentals — has seemed reluctant to do. While each Blockbuster store in the past might have been supplied with five copies of a new release to sell, they might each get 100 nowadays. And they'll sell them for a heftier price than they cost at the behemoth discount stores, a concept that ought to thrill studios.

"Why should you have to drive to Best Buy or Wal-Mart to buy DVDs? Customers will pay a premium for convenience," Keyes said.

That new focus helped Blockbuster to sell 200,000 copies of "Transformers" during the first week the movie hit shelves.

Of course Blockbuster also recently paid $7 million to acquire the Movielink digital download service, and Keyes doesn't plan to ignore that high-tech asset. He said he's mulling ways, including partnerships, for making it much easier for customers to watch movies on-demand from Movielink on their TV screens, as opposed to their computers.

But, he said, even as more folks get comfortable with digitally delivered rentals, bricks-and-mortar stores will continue to play a big role, and he cites Apple, a pioneer in the digital media realm, as an example.

Apple stores, he said, earn $4,000 per square foot annually compared with $300 at Blockbuster.

"There's a wave of opportunity coming in retail," he said. "In 1985, VHS was the most convenient way to get a movie. The trouble is, our stores have been locked into that same model since then."

Whether investors, though, come around to Keyes' way of thinking remains to be seen. So far, it appears the competition might be benefiting more than Blockbuster, as Netflix shares climbed 36% in the third quarter, while Blockbuster's rose 15%.
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