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Blockbuster fills in the vision thing - May 15, 2008

Blockbuster CEO Jim Keyes seems to have talked most of the critics his company's proposed acquisition of Circuit City off the ledge if not quite won them over. Questions about the deal on BBI's Q1 analysts call Thursday were wary but not overly hostile. It certainly didn't hurt that Blockbuster's results included the first increase in worldwide  domestic store comps in five years and a $94 million increase in net income. Keyes opened the call by emphasizing that Blockbuster will precede with the proposed acquisition only if "it makes senses strategically and financially," the same message he's been sending major shareholders in the days leading up the Q1 report.

He also promised not to turn the pursuit of Circuit City into a Microsoft/Yahoo-type melodrama.

"Our objective with the due diligence is to sort of do this in two phases," Keyes said on the call. "The first phase I see happening in a matter of weeks, not months, and that is to get enough information to validate our assumptions and made a go/no-go decision. Then we'll either dig deeper into the due diligence or go back to focusing on transforming our core business. I'm very concerned about the distraction risk of dragging this out."

Keyes emphasized, however, that transforming the business ultimately means moving in the same direction that acquiring Circuit City would take the video rental chain.

Blockbuster has already converted about 500 stores to emphasize games, electronics sales, sell-through and eventually digital download kiosks as part of its "Rock the Block" initiative. Chain would pursue a similar strategy with Circuit City stores, Keyes said. The new-look stores a showing an 8-12% increase in revenue and a 3-5% increase in the active customer base.

"The Circuit City of the future is less about just selling electronics and more about the total entertainment retail environment," he told analysts. That could include game demos, digital kiosks, portable devices, etc. "We really see the lines blurring between devices and content and see that coming together in the retail environment," he said.

Other highlights:

• BBI has inked a deal with NCR Corp. for download kiosks and plans to begin pilot tests in June. Pilot will run "at least six to 12 months," per Keyes, with full deployment and consumer acceptance "probably two to three years off."
• Company will bow a new Movielink offer sometime this summer, but is still having a difficult time securing the rights necessary for a subscription download business. "Subscription is an important missing piece," Keyes said. "We want our digital business to basically mirror our core business, with the ability to buy, rent and subscribe electronically."
• Blockbuster isn't "turning its back" on online DVD rentals, just the "expensive subscriber acquisition" strategy the company had been pursuing. Now that Total Access is profitable, Keyes said, "we're in a position to be much more aggressive with Netflix, much more aggressive with Game Stop."

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