Blockbuster Inc. Business Information, Profile, and History
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History of Blockbuster Inc.
Blockbuster Inc. is the largest video rental chain in the world provi ding in-home rental, retail movie, and game entertainment. Blockbuste r operates about 9,100 video stores, serving approximately three mill ion customers each day in the United States, its territories, and 24 other nations. Founded in the mid-1980s as an alternative to small, l ocal operations with limited video rental selection, the company grew quickly into a global chain, offering videos, DVDs, and video games in its stores as well as through an online subscription program. Viac om sold off a minority stake in the company in 1999 and sold its rema ining interest in 2004. The company appeared to be in a state of flux during 2005 due to litigation surrounding its "no late fees" policy, lost income from extended viewing fees, a failed attempt to merge wi th competitor Hollywood Entertainment Corporation, and corporate raid er Carl Icahn's efforts to oust CEO John Antioco.
An Immediate Hit in the Mid-1980s
Blockbuster traces its history to the formation of Cook Data Services , Inc., in 1982. This company was founded by David Cook to supply com puter software services to Texas's oil and gas industry. When the ind ustry went bust, the company was left without a strong customer base. Cook was searching for another source of revenue when his wife, Sand y, a movie fan, suggested entering the video rental business.
Cook learned that the video rental field was highly fragmented. Most stores were relatively modest family operations that carried a small selection of former big hit movies. Providing a large selection of mo vies required a large investment of capital, since distributors typic ally charged approximately $70 per tape. In addition, tapes were generally not displayed, but kept behind the counter to discourage th eft, and had to be fetched and laboriously signed out to the customer . Cook saw that operations could be greatly streamlined by a computer ized system for inventory control and checkout, something his softwar e background prepared him to develop.
After Sandy Cook conducted several months of research into the video rental industry, David Cook sold his oil and gas software business to its managers and entered the movie rental business. In October 1985, Cook opened the first Blockbuster Video outlet in Dallas. With 8,000 tapes covering 6,500 titles, it had an inventory many times larger t han that of its nearest competitor. In addition, tapes were displayed on shelves throughout the store, as in a bookstore, so that customer s could pick them up and carry them to the front desk for checkout. A magnetic strip on each video and sensors at the door discouraged the ft. Computers were used to keep track of inventory, and a laser scann ing system, which used barcodes on the tapes and on members' cards, s implified and reduced the time involved in conducting transactions.
The first Blockbuster store was an immediate hit. The Cooks discovere d that the public had a much greater appetite for renting video movie s than anyone had previously suspected. People were interested not ju st in seeing hit movies they had missed in the theaters but also in a broad variety of other features.
By summer 1986, Cook had expanded the Blockbuster concept to three ad ditional stores. To reflect the different nature of the company, Cook Data Services became Blockbuster Entertainment Corporation in June 1 986. In September, the company set out to raise money for further exp ansion with an initial stock offering. Days before the sale was to ta ke place, however, a financial columnist wrote a damaging article cit ing Cook's background in the oil industry and questioning the company 's know-how in the video field. The article caused the equity offerin g to be canceled, and without this infusion of cash, Blockbuster bega n to run out of money. The company finished 1986 with a loss of $ 3.2 million.
In February 1987, however, Cook sold one-third of Blockbuster to a gr oup of three investors, who were all former associates at another com pany, Waste Management, Inc. Wayne Huizenga had in 1972 cofounded Was te Management, which grew to be the largest garbage disposal business in the world, and served as its president and chief operating office r until 1984, when he retired. John Melk, the president of Waste Mana gement's international division, was first to invest in a Blockbuster franchise. Joined by Donald Flynn, the chief financial officer of Wa ste Management, the group invested $18.6 million in Blockbuster s tock.
New Management and Aggressive Expansion in the Late 1980s
With this move, Cook surrendered future control of Blockbuster, and H uizenga became the dominant voice in determining the company's future . Where Cook had envisioned growth through franchising, selling Block buster's name and computer system to individual entrepreneurs, Huizen ga foresaw growth through company ownership of stores. In April 1987, two months after the men from Waste Management bought into Blockbust er, Cook left the company. Soon thereafter, the company's headquarter s were moved to Fort Lauderdale, Florida.
By June 1987, Blockbuster owned 15 stores and franchised 20 others. W ith this base, Huizenga set out to transform Blockbuster into the ind ustry's dominant player. He kept most of Cook's policies, such as sto re hours from 10:00 a.m. to midnight every day; a three-day rental po licy, which encouraged customers to rent more than one tape at once; and a broad selection of titles. Despite conventional wisdom that the videotape rental business was heavily dependent on hits, 70 percent of Blockbuster's rental revenues came from non-hit movies, which had the added benefit of being less expensive to purchase from distributo rs. In addition, Blockbuster's management decided to eschew revenue f rom X-rated adult films, opting instead for a family environment.
With these policies in place, Blockbuster set out on a program of agg ressive expansion. The company began to buy back franchised operation s with the goal of 60 percent company-owned Blockbuster outlets. In a ddition, Wayne Huizenga began to buy up chains of video stores that a lready dominated their local markets, using this as a shortcut to qui ck expansion. In March 1987, Blockbuster bought Southern Video Partne rship as part of this policy. Two months later, it purchased Movies T o Go, Inc., of St. Louis, for $14.5 million.
To support its expansion, Blockbuster established six regional office s, including a distribution center in Dallas that prepared tapes to b e placed in stores. By the end of 1987, Blockbuster was operating 133 stores and had become the country's fifth largest video chain in ter ms of revenue. Sales rose from $7.4 million in 1986 to $43.2 million that year.
Blockbuster continued its ambitious expansion program in 1988. In Mar ch, the company purchased Video Library, Inc., for $6.4 million p lus stock. The following month, Blockbuster made a deal with the Unit ed Cable Television Corporation (UCTC) to open 100 franchised stores over the next two-and-a-half years. In addition, UCTC purchased 5 per cent of Blockbuster's stock for $12.25 million. By November, this stake had risen to 20 percent. With 200 stores, Blockbuster had beco me the largest video rental chain in the country. At the end of the y ear, the company's number of stores had risen to 415.
In January 1989, Blockbuster finalized its purchase of Las Vegas-base d Major Video, Inc., the country's fourth largest video rental chain, for $92.5 million. It also purchased Oklahoma Entertainment, Inc . The following month brought the purchase of Vector Video, Inc., and Video Superstores Master LP, which, with 106 stores, had been Blockb uster's largest franchisee. By June 1989, two years after Huizenga's takeover, the company ran 700 stores. Sales had tripled, profits near ly quadrupled, and the value of the company's stock had risen seven-f old.
Despite these gains, in April 1989, Blockbuster's efforts to buy up o ther chains with stock suffered a setback when an analyst at a large stock brokerage issued a report condemning what he considered to be t he company's misleading accounting practices. In calculating its earn ings, Blockbuster spread out the costs of purchasing video store chai ns and building new stores over a 40-year period, and also spread out the cost of buying large numbers of hit tapes over three years, much longer than tapes retained their value. In addition, the company rel ied on one-time-only franchise fees for 28 percent of its revenue. De spite this criticism, Blockbuster declined to change its accounting p ractices, and the company's stock price eventually regained its forme r level.
In November 1989, Blockbuster's largest shareholder, the United Artis ts Entertainment Company, announced that it would sell its 12 percent holding in the company, having previously sold its 28 franchised Blo ckbuster stores, in an effort to streamline its own business holdings . Worries that the video rental industry was reaching a saturation po int cast doubts on Blockbuster's ability to keep opening stores indef initely.
Foreign Expansion and Diversification in the Early 1990s
One response to this concern was to look to markets outside the Unite d States for growth. Accordingly, original investor John Melk was dis patched to start up a British subsidiary, with the company's first fo reign store to be opened in South London called the Ritz. Blockbuster 's management continued to maintain that since the video "superstore" concept was open for anyone to copy, it needed to grab market share as fast as possible in order to exploit its ground-breaking concept. Carrying out this philosophy, the company opened its 1,000th store be fore the end of 1989.
To increase business, Blockbuster embarked on a $25 million ad ca mpaign, and also undertook joint promotions with fast-food outlets su ch as Domino's Pizza and McDonald's. In addition, the company acceler ated foreign expansion, augmenting its operations in Britain and plan ning for operations in Australia and the rest of Western Europe. In t he United States, the chain had opened its 1,200th store by June 1990 ; new outlets opened at a rate of one a day.
In October 1990, Blockbuster announced plans to cooperate with Den Fu jita, the company that ran McDonald's franchises in Japan, in the dev elopment and franchising of video rental stores in that country. The following month, Blockbuster made its largest acquisition to date, wh en it acquired Erol's, a video store chain with 200 outlets on the Ea st Coast and in the Midwest, for $30 million, including cash, not es, and debt assumption.
Although Blockbuster continued its strong pace of new store openings in 1990, the slowing growth of the video rental industry was becoming evident. Even though the company's earnings grew an astronomical 114 percent in 1988, they contracted to a still-impressive 93 percent ra te of growth in 1989, followed by a rate of 48 percent in 1990. In ke eping with this trend, first quarter financial results for 1991 were disappointing. Huizenga blamed the Gulf War for keeping people intere sted in television news instead of rented videos. In early May, Cox C ommunications, one of the company's franchisers, announced that it wo uld sell all 82 of its Blockbuster stores.
Faced with a rapidly maturing industry, Blockbuster began to expand i ts offerings to maintain profitability. The company began to offer vi deo game equipment and Sega Genesis video games at some of its stores . The company considered selling audio cassettes and compact disks. B lockbuster also acquired the right to market tapes of the 1992 Olympi c games.
In a further effort to encourage rentals, the company launched an adv ertising campaign themed "Win in a Flash," and made an agreement with the Showtime cable network for a joint promotion. In August 1991, Bl ockbuster dropped its rental price for hit movies for the first three months after their release and shortened the time they were taken ou t, as a further step to raise earnings. In an effort to ensure that t he company would be just as good at running video stores over the lon g haul as it was at opening them, Blockbuster hired more senior execu tives with long-term experience in the retail field.
In addition to these efforts to increase earnings in the United State s, Blockbuster increased its foreign efforts. Along with its operatio ns in the United Kingdom and Japan, the company found markets in Euro pe, Australia, and Latin America. With 30 stores already established in Britain, Blockbuster announced in November 1991 a large expansion in that country, designed to make it the nation's number one video re ntal chain. Further foreign involvement came later that month, when P hilips Electronics N.V., a Dutch firm, agreed to invest $66 milli on in the company. As a result of this partnership, Blockbuster said that it would market Philips's newly introduced interactive compact d isc systems and software in its stores. Five months later, Philips pu rchased an additional six million shares to raise its investment to & #36;149 million.
To streamline its corporate management, Blockbuster bought a large of fice building in Florida and consolidated the company's five regional offices. As Wall Street pundits continued to predict that Blockbuste r's success was short-lived, and that the video rental industry would be made obsolete by new technologies, Blockbuster's systemwide sales of $1.5 billion in 1991 earned $89 million. By the end of th e year, the company had opened stores in Japan, Chile, Venezuela, Pue rto Rico, Spain, Australia, New Zealand, and Guam.
In further overseas expansion, Blockbuster bought Citivision PLC, the largest video rental chain in Britain, for $135 million in Janua ry 1992, anticipating that this property would provide valuable expos ure in the United Kingdom, and a jumping-off point for further Europe an growth. The company hoped that, through joint ventures, internatio nal operations would contribute a quarter of revenues by 1995. With 9 52 stores in nine foreign countries, Blockbuster began to intensify i ts efforts to expand both in products and geographically.
In October 1992, Blockbuster embarked on a series of agreements that were designed to expand the company's operations beyond its core movi e rental business. Blockbuster bought Music Plus and Sound Warehouse from Shamrock Holdings, a California company, for $185 million. O ne month later, Blockbuster entered into an agreement with the Britis h conglomerate Virgin Group plc to set up "megastores" in the United States, Europe, and Australia. In December 1992, the first such store in the United States opened in Los Angeles, the precursor to a netwo rk of stores that Huizenga envisioned not only renting videos, but al so selling and renting music, computer programs, and games, and conta ining high-tech "virtual reality" entertainment arcades. The company also hoped to improve on the traditionally low profits of music retai ling by adding other, more profitable products.
By 1993, the distinctive bright blue and yellow Blockbuster logo ador ned more than 3,400 video stores worldwide, about one-third of them o verseas. Late in January of that year, Blockbuster branched out furth er, paying $25 million for a one-third, controlling share in Repu blic Pictures, a movie and television production and distribution com pany based in Hollywood. Republic's most valuable asset was its film library of television shows and films, including several John Wayne m ovies and the hit television series Bonanza. In March 1993, Bl ockbuster also purchased 48.2 percent of Spelling Entertainment, a pr oducer of popular television shows with a large library of past progr ams. Moreover, Blockbuster began construction of a prototype family e ntertainment center in Florida.
The Controversial Viacom Merger: 1994
With its ever-growing number of corporate activities, Blockbuster was committed to diversification as a means of ensuring its future in th e entertainment industry in the face of the potential onslaught of ne w formats--video-on-demand and satellite TV--and the shift from renta ls to lower-priced tapes. In September 1993, Huizenga's Blockbuster m akeover hit full stride when the company proposed a $4.7 billion merger with media giant Viacom Inc..
Toward that end, Blockbuster invested heavily in Viacom, reportedly t o help strengthen Viacom's bid to purchase Paramount Communications a gainst rival QVC Network Inc. Viacom did win the war for Paramount, b ut the merger talks with Blockbuster stalled, and the move cost Block buster a great deal as Blockbuster shareholders lost confidence in th e company and wondered if its investment in Viacom would pay off. By April 1994, Blockbuster's and Viacom's stock had tumbled dramatically .
Blockbuster's glory days appeared to be over. Insiders assessed that the company was suffering from dramatic changes in the industry. Spec ifically, with competition stiffening due to newly emerging formats, the video industry's meteoric growth began to level off. Moreover, th ere was trouble internally. The merger between Blockbuster and Viacom , though eventually effected, had been rough, and Viacom was reported ly depending heavily upon Blockbuster's cash to help pay its debts an d have money for future investments.
In addition, leadership at Blockbuster seemed unstable. Wayne Huizeng a ceded his leadership role in the company in September 1994 and was replaced as president by Steven Berrard, who focused on rapidly expan ding the company during his year-and-a-half on the job. Amid legal en tanglements involving earlier business dealings, however, Berrard lef t to be succeeded by Bill Fields in March 1996. Soon thereafter, Fiel ds was named CEO as well and during his brief tenure attempted to rev italize the company's image. Specifically, he set about transforming Blockbuster's video rental stores into whole entertainment centers, s elling t-shirts, toys, snacks, books, magazines, and CDs as well as s elling and renting videos. Fields also oversaw the company's move fro m Fort Lauderdale to Dallas to be closer to its new, centralized dist ribution center. He also downsized the company's workforce, paring ba ck about one-third of its senior staff and two-thirds of its overall staff before he left for a position at Wal-Mart. In 1996, in the wake of slipping sales, Blockbuster's worth was estimated at $4.6 bil lion with its stock worth only 50 percent of its 1993 price. Parent V iacom's stock price was 60 percent off its former high.
New Leadership and Independence in the Late 1990s
By the time John Antioco took over in the summer of 1997, Blockbuster was floundering. New releases were not making it to stores by their "street date," and the loss of so many key people with the company's move left it stumbling in basic store operations. Cash flow for the s econd quarter of 1997 at Blockbuster dropped a precipitous 70 percent . As a result, the chain scaled back on expansion and moved to refocu s on its core business, video rentals. In late 1997, it exited the co mputer business, closing its PC Upgrades stores only months after acq uiring the business.
Under Antioco, the company revived its old tag line, "Make it a Block buster Night," and sought to smooth out the problems with its state-o f-the-art distribution system, which allowed it to use a customer dat abase to determine store sites and inventory based on consumer prefer ences. Although the company had fallen on hard times, it still contro lled 25 percent of the $16 billion a year home video market. Unde r Antioco, the company signed "revenue sharing" agreements with the m ajor Hollywood studios, making them financial partners. Now instead o f paying $65 for new tapes, Blockbuster paid $4 and turned ov er 30 to 40 percent of the rental income to the studio. In 1998, the company boasted that it had served nearly 60 million people who rente d more than 970 million movies and video games. In early 1999, it con tinued to expand overseas, purchasing a Hong Kong video chain, and at home with the acquisition of Denver-based Video Visions and Videolan d in Oregon and Washington. The chain was making money again, and its share of the home video retail market increased to 31 percent. Still , the video market was shrinking, dropping 2.6 percent in 1998 and 8. 4 percent in the first half of 1999. While revenues at Blockbuster we re increasing, the company was still reporting losses, of $336.6 million in 1998, for example, compared with a $318.2 million loss in 1997.
Nevertheless, Blockbuster seemed to be effecting a turnaround, when i n August 1999 Viacom made an initial public offering of around 18 per cent of its stock in Blockbuster; it divested its remaining shares in 2004. The initial offering raised only $465 million; clearly, in vestors did not take the future of Blockbuster for granted and the co mpany needed to search for a viable business model. Toward that end, management worked on increasing Blockbuster's market share in the gro wing VHA/DVD tape and disc rental category. Moreover, it also made a commitment to exploring new distribution channels, such as those offe red by e-commerce.
Blockbuster in the New Millennium
During the early years of the new millennium, Blockbuster's competito rs included cable and satellite companies offering video-on-demand mo vies, online movie rental firms offering mail-order rentals, and larg e retailers like Wal-Mart Stores that sold inexpensive movies and gam es. As such, Blockbuster continued to look for ways to remain competi tive in the industry while shoring up sales and profits. In 2001, the company announced that it would reduce its VHS and video game invent ory by 25 percent in order to give DVDs more shelf space. The company also created DEJ Productions, an independent film acquisition and di stribution subsidiary, and signed a deal to distribute DIRECTV satell ite systems through its stores. Blockbuster debuted on the New York S tock Exchange that year.
During 2003, the company began offering its customers an in-store sub scription pass. This program was expanded in 2004 and enabled custome rs to rent unlimited movies for a monthly fee. The company also made several purchases, including Movie Trading Company and U.K.-based Gam estation. To compete with new online movie rental firms like NetFlix Inc., Blockbuster rolled out its Blockbuster Online subscription serv ice, which offered DVDs delivered to customers' homes with no shippin g charges. Chairman and CEO Antioco commented on Blockbuster's strate gy in a July 2004 EQUIS release stating, "We realize the movie rental business alone won't give us the kind of growth we want in the futur e. That's why we're determined to transform Blockbuster from a place where you go to rent movies to a place where you go to rent, buy or t rade movies and games, either in-store or online."
In December 2004, the company began running television ads touting it s new "no late fees" policy. The new program, which eliminated daily late charges, was launched on January 1, 2005. Early that year, 47 st ates filed suit against the company for false advertising, claiming t hat customers had been charged fees for unreturned and late DVDs, vid eos, and games, despite the "no late fee" promotion. The suit claimed that in its advertising, Blockbuster had failed to reveal that custo mers who kept an item more than seven days would be charged the curre nt selling price for the item. If the item was returned within 30 day s, the customer would receive a refund, but would be charged a $1 .25 restocking fee. In the end, Blockbuster agreed to pay $630,00 0 to settle the litigation.
At the same time, the company dropped its bid to buy its closest comp etitor, Hollywood Entertainment Corp., after the Federal Trade Commis sion delayed its ruling on the merger proposal. Corporate raider Carl Icahn--Blockbuster's largest shareholder--began to attack the compan y's strategy and made a play to oust several Blockbuster directors, i ncluding Antioco. In May, Blockbuster shareholders voted to appoint I cahn and two of his allies to the board. A new director's seat was cr eated, allowing Antioco to remain chairman.
In the midst of the boardroom politics, Blockbuster's financial posit ion came under fire when it announced in September 2005 that it would not pay a quarterly dividend for the first time since 1999. A major factor contributing to the company's financial woes was the eliminati on of late fees, which were responsible for approximately $250 mi llion in operating income. Antioco stood behind the strategy, however , claiming it was crucial to Blockbuster's future success. Management expected that revenue from new and existing ventures would make up f or lost income and leave Blockbuster well positioned for success in t he years to come.
Principal Competitors: Hastings Entertainment Inc.; Movie Gall ery Inc.; Netflix Inc.
- Key Dates:
- 1985: The first Blockbuster video store opens in Dallas.
- 1986: Blockbuster goes public.
- 1987: Founder David Cook leaves the company; company headquart ers move to Fort Lauderdale.
- 1989: Blockbuster opens its first stores in London and in Cana da.
- 1992: Blockbuster acquires the Sound Warehouse and Music Plus chains to create Blockbuster Music stores.
- 1994: Media giant Viacom Inc. acquires Blockbuster.
- 1996: Company headquarters move to Dallas.
- 1999: Viacom spins off a minority stake in Blockbuster.
- 2001: Blockbuster debuts on the New York Stock Exchange.
- 2004: Viacom sells its remaining interest in Blockbuster.
- 2005: The company pays $630,000 to settle litigation relat ed to its new "no late fees" policy.
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