Sad, happy returns for B'buster
Total Access adds red ink but grows market shareBlockbuster's five-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 that its first-quarter loss swelled to $46.4 million from a loss of $1.9 million a year ago, with the bigger-than-expected loss mostly attributed to Total Access.
Revenue rose 5.4% to $1.5 billion, better than the $1.4 billion analysts predicted. But the hit to the bottom line was more than investors could stomach, and the stock tumbled 13% on Wednesday to $5.40. Blockbuster led the decliners on The Hollywood Reporter's Showbiz 50 stock index.
The company also said it has 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 already has paid down half of its former $1 billion debt.
But most of the attention during Wednesday's conference call was focused on 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 number 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 from 56.5% a year ago to 51.7%, a decline that clearly spooked 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.
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 rose 1.3%.