Blockbuster rental rates key to earnings
Business segment more important for near-term finances, CFO says
By Danny King -- Video Business, 12/11/2008
DEC. 11 | Blockbuster will focus on boosting rental prices over broadening its digital delivery service, chief financial officer Thomas Casey said yesterday. The largest U.S. movie-rental chain also plans to try to improve earnings by getting better terms from studios on DVD inventory and renegotiating many of its store leases.
Increasing prices for DVD rentals will have much more of an impact on near-term financial results, Casey said at the Wedbush Morgan California Dreamin' Management Access Conference in Santa Monica, Calif., because the DVD rental market, at about $8 billion a year, is five times that of the digital-content delivery market.
Meanwhile, the chain is testing per-day rental rates as low as 99¢ for come "classic" catalog titles, a price close to what rentals kiosks charge for all titles.
In July, Blockbuster integrated its acquired Movielink digital-download service into Blockbuster.com and last month introduced a set-top box allowing customers to download content directly to their TVs.
"The dollars involved in digital download is nominal," said Casey, adding that digital delivery won't have a material affect on earnings until at least 2011. "As far as what matters to earnings in 2009 and 2010, the rental business is the principal engine of that growth."
Casey said Blockbuster's net rental rate—it charges $4.37, but, factoring promotions and free titles, receives $3.15—lags the DVD rental industry, giving the company an opportunity to boost business per customer.
Last month, the company said its third-quarter loss narrowed 48% on a 5% increase in same-store sales partially because it used improved in-stock inventory levels to boost both revenue per customer visit and net rental rates by at least 15%.
With a slumping real estate market and the chain's average lease term less than three years, Blockbuster might achieve further earnings improvements by renegotiating its store leases over the next few years, said Casey, who estimated that the company pays about $450 million a year on rent for its U.S. stores.
Further earnings improvements could be achieved through better inventory-stocking terms with studios. Blockbuster's year-to-date costs related to its efforts to keep more titles in stock increased $67 million from a year earlier, Casey said.
"Our challenge is to limit that $67 million number by continuing to gain their cooperation in buying product in optimal ways," said Casey, who declined to be more specific about what kind of agreements might be reached with the studios.