Viacom Inc. Chairman Sumner Redstone, 77, has had an extraordinary year. He acquired CBS Inc., found a likely successor in Chief Executive Mel Karmazin, and whipped two younger media moguls, Barry Diller and Herb Siegel, in court battles over broadcast assets.
But there’s still one thorn in Redstone’s side: Blockbuster Inc., the video-store chain.
Viacom purchased Blockbuster in 1994 for its huge cash flow, to help pay for its acquisition of Paramount Communications in Hollywood that same year. But Blockbuster was dogged, even then, by predictions that its business would erode when new technologies delivered on-demand movies to the home.
Blockbuster, the world’s largest video-store chain, is still growing, but at a slower rate than most of Viacom’s businesses. Viacom has wanted to shed the company for years. It took the first step last August when it sold 18 percent to the public at $15 a share. It has been stymied in shedding the rest.
Blockbuster has fared poorly with investors. Except for a brief period last August, and in November and December, the stock has been trading below its offering price since the stock sale almost a year ago. The stock closed Aug. 1 at $11.94 a share. That’s up from a low of $9 in June, but a long way from the $20 level that Redstone says is necessary for Viacom to proceed with a “split-off” by exchanging its Blockbuster shares for Viacom stock.
Blockbuster has embarked on a campaign to reinvent itself as a “new media” company, even while it insists that its bricks-and-mortar video rental business will continue to expand. Investors seem skeptical.
Clouds ahead
With each “new-media” announcement, Blockbuster fuels some concern that its core video rental business will become obsolete.
Why, after all, should consumers continue driving to stores to rent videocassettes or DVDs if they can download movies over cable or telephone lines? And are consumers ready to buy new services, such as DirecTV or high-speed phone lines, from their local Blockbuster clerk?
Blockbuster said last month that it will offer a video-on-demand service over high-speed telephone lines, starting the service with 300 to 500 movie titles in two cities by the end of the year. It was a bold announcement, made bolder by the fact that Blockbuster hasn’t obtained rights from Hollywood studios to distribute their films over any video-on-demand service. Not even Paramount Pictures a wholly-owned Viacom subsidiary has granted such rights to Blockbuster yet.
Hollywood isn’t keen to see Blockbuster muscle into the potentially huge business of electronic delivery of movies.
“Why the world needs them to be in the middle of it, I haven’t a clue,” says USA Networks Chairman Barry Diller, who ran two major studios Paramount and Fox for a total of 18 years before forming his current company. Still, Diller says his company, which has acquired several independent film companies, will listen to Blockbuster’s pitch.
No one in Hollywood can afford not to. Blockbuster is Hollywood’s biggest single customer, spending more than $1.7 billion last year for product for its stores. Indeed, the studios’ fortunes have become more entwined with Blockbuster since 1998, when the rental chain switched to revenue-sharing to lower its costs for videocassettes.
Financial outlook
If Blockbuster gobbles market share faster than it loses ground to new technologies, its cash flow (earnings before interest, taxes, depreciation and amortization) should continue to grow at about 8 percent annually, says Scott B. Davis, an analyst at First Union Securities Inc. The company is currently reporting losses.
The company said its new-media segment generated an operating loss of $14 million in the first quarter, reflecting the costs of its Web site. Blockbuster said in November that America Online Inc. would make a $30 million equity investment in Blockbuster.com, but AOL hasn’t funded the commitment yet.
Under the terms of the agreement, AOL had the right to withdraw its investment if Blockbuster.com didn’t complete an IPO within 18 months. With the stock market soured on many dot-coms, Blockbuster hasn’t pursued such an offering.
Likewise, talks continue between Blockbuster and Metro-Goldwyn-Mayer Inc., following another January announcement that they would explore ways to download MGM movies through the Internet or other home delivery technologies. No movies have been licensed yet.
Blockbuster has even agreed to sell two competitive services direct broadcast satellite and high-speed telephone lines that may siphon business from its own stores.
Blockbuster said in May that it would begin selling DirecTV’s direct broadcast service by September, as part of an agreement to “co-brand” a pay-per-view service on DirecTV. And last month, Blockbuster said it would sell digital subscriber lines, or DSL, for partners in its video-on-demand venture, through a partnership with Enron Corp.
Bob Alexander, a media consultant who heads Alexander & Associates Inc. in New York, is skeptical about Blockbuster’s two latest plans. He says he is doubtful that major Hollywood studios will agree to license their movies to Enron and Blockbuster, partly because of concerns about the security of the digital signal.
Nor does Alexander see any synergy between Blockbuster and El Segundo-based DirecTV. “It really makes no sense,” he says.
Ironically, Alexander says that the core video-rental business “has never been better than it is this summer” because DVDs are reinvigorating the business.
