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Movielink losses revealed - October 25, 2007

Call it the price of an education. For the five studios involved in Movielink, the price was $148 million over six years. That's how much they sank into the movie download joint venture since its inception, according to an SEC filing today by Movielink's new owner, Blockbuster Inc., containing historical financial data on the venture.

What the studios learned for their pricey education was not disclosed.

Formed as a joint venture in 2001, Movielink was capitalized through what amounted to a sinking fund. According to the filing, the five partners agreed to provide capital for the venture in equal amounts up to an aggregate limit of $150 million. Any amount beyond that would have to be approved by the partners.

The company could make capital calls on the partners each fiscal quarter to fund its operations, subject to a budget plan approved by the partners. In 2005 and 2006 the company made total capital calls of $25.8 million and $23.8 million, respectively, part of the $148 million ultimately invested. No capital calls were made in 2007, presumably because the partners had already committed to seeking a buyer for the company.

The fundamentally educational nature of the venture can be seen in its income statement for 2006, its last full year of operation. The company spent roughly $16 million on infrastructure development, research and marketing, against revenue of $4 million.

Essentially, the partners put a cap on how much they were prepared to lose, and then operated the company until the accumulated losses reached that level. Then they sold it.


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