Notes from Blockbuster CFO Investor Presentation

Blockbuster CFO Larry Zine gave a presentation yesterday at the Harris Nesbitt "Playtime 2004" conference in New York. Here are my notes from the call.

- Ratio of rental to purchase has changed over the years from 8 to 1 to 2 to 1, with more customers buying movies.
- Blockbuster is spending $120 million on new initiatives like the subscription program.
- Rental margin has increased due to cheaper cost of DVD vs. VHS.
- Expecting 8% subscription penetration of active renting households. Customers spend about $15/month on all items at Blockbuster. With average subscription over $20 customer value has increased.
- They didn't enter the market because they thought the market was only 2 - 3 million households. Believe margins are too tight with online-only model, expect 50-60% of customer product needs will be handled in store by mid-next year.
- Believes they can be profitable, especially when in-store service is ready.
- Blockbuster buys most movies but has ability to revenue share DVD rentals.
- Said the three key points are customer aquisition costs, product cost and postage.
- Early info suggeests that BB online subscribers are renting 6 - 8 titles per month.
- In-store subscription price is higher because the typical user rents more.
- Games are a problem because of the high cost, but they might experiment with it. $20 game pass (1 at a time) is popular.
- Faster at writing product cost off vs. competitors.
- Says it's an expensive game to get into to do it right, "not for the faint of heart."
- Said Netflix spent $100 million to get 1 million subscribers (rough numbers). Wondered what would motivate Amazon or Walmart to spend that much money to enter the game.
- Significant customer use of the rental coupons.
- Will enable customers to keep a movie if they like it.
- Opening 200 - 400 new stores per year with 6,000 - 8,000 movies per store.
- Average DVD household has 50 movies. Most will not be watched again (except for children's movies). BB will offer half of what they think they can sell it for. Hope for 40% margin over time. Example: customer brings in Van Helsing, BB pays $5 - $7 to customer in store credit, sells it for $10 - $14. Gone with the Wind was not available to BB for rental, but they will buy copies.
- Same model for games, but higher price.
- Says 25,000 titles is 90% of available movies, will continue to add new releases.
- Thinks majority of customers are satisfied by in-store coupon, but if customers want mixed store/online model they will build it.
- Studios made $23 billion, with $7.5 billion from rental and $15.5 billion on retail. Blockbuster pays $18 (ave.) per movie. Pay-per-view and Video on demand are about $700-$800 million in revenue, and the studios only make about 50%, which is much less than on rental and retail. Studios won't risk revenue by increasing PPV/VOD availability. PPV/VOD only expected to double in the next 4-5 years.

Comments

[Becky]

Great notes. Thanks for sharing them with us.

[vn]

Yeah, thanks. Regarding DVD versus VOD, aren't they also phased so that DVD release occurs before VOD is available? I guess the studios won't change that practice so long as DVD brings in the money.
"Will enable customers to keep a movie if they like it." Seems to me pricing a used DVD for the online customer would be tricky. You have no idea of the quality of the disc and do you depreciate the price with each rental?
Did you guys see the news about comcast & microsoft getting together on a set top box? The microsoft guy said he has canceled his Netflix subscription because "all the movies are now available on the set top box."

[Aron]

Way to stay on top of it Mike. The 3 notes I took from the webcast as most interesting were:

1) A definate suggestion that the full, idealized hybrid mail/store service is being indefinately postponed. He indicates the belief that 80-90% of the value to the customer of this full blown service is provided with the coupons (thus reducing the marginal value of implementing it). Also they appear to be concerned about scenarios where a customer is credited for a return while a movie is in the mail, resulting in excess inventory in "float". Now, for store based fulfillment, he remained optimistic.
2) Hints that they will be introducing a "keep it" button soon.
3) He indicates that they are not using rev.share agreements for their online content, and indirectly indicates that their service is detuned for new release service because of it.

[Sonja]

Average DVD household has 50 movies. Most will not be watched again (except for children's movies).

Interesting. If I purchsed a movie I'm watching it again. I don't buy movies not to watch it again. I only buy titles I know I will watch over and over again. Blade, Face off, Swordfish, Breaking All the Rules, Boomerang, Soulfood Season 1, Friends Season 1, Boomtown Season 1, etc. I watch many of my titles monthly. With the TV shows on DVD I tend to watch my favorite episodes of that season.

[vn]

The interesting take away is that DVD rental is being protected by a much larger DVD retail business. If it weren't for that, the 45-day window before pay-per-view release would not exist. I see DVD rentals becoming more & more weighted towards new rentals. Netflix's catalog advantage in this regard may cease to be a big factor.

[vn]

Please read as "I see DVD rentals becoming more & more weighted towards new releases.