Blockbuster's woes didn't let up in the third quarter

Beleaguered DVD renter and retailer Blockbuster Inc. got no respite from its problems last quarter as revenue plunged 21% and net loss, excluding one-time costs, more than doubled.

Blockbuster stock, which was already trading at under $1, plunged 13% in after-hours trading to 72 cents on the news.

The company had a net loss of $116.8 million for the third quarter, much of which was connected to one-time costs from the company's recent debt refinancing and the sale of an Irish subsidiary. Excluding those events, net loss was $38.3 million.

Total revenue for the quarter ended Sept. 30 was $910.5 million.

Blockbuster attributed its problems to cutbacks in marketing and inventory in order to conserve costs and pay debt, ongoing store closures and the "macroeconomic environment." The ongoing recession and particular weakness in the DVD market hit Blockbuster hard. Domestic same-store rental revenue fell 14.5%, compared with the year-earlier quarter, while same-store sales revenue plummeted 35.6%.

In the quarter that ended Sept. 30, Blockbuster closed 216 stores. The DVD retailer it said was expecting to shut as many as 115 in the current quarter. In September, the company said it would close nearly 1,000 locations by the end of 2010.

One of the few pieces of good news for Blockbuster was an increase in its gross profit margin to 57.3% from 53.7% a year earlier. The company said it has increased its revenue-sharing arrangement with movie studios for rentals of some top-selling DVDs and that it was shifting focus away from video games, a once-hot business that has slowed down this year and carries smaller profit margins.

In a statement, Blockbuster Chief Executive Jim Keyes said that with debt financing issues solved for the time being, he is aiming for growth this quarter. "In the fourth quarter we are adding inventory, expanding product assortment, increasing advertising and reaching out to our customers in new and exciting ways," he said.

The company is also rolling out Blockbuster-branded rental kiosks with partner NCR Corp. to compete with Redbox and is deploying its digital download and streaming service to new devices, including TiVo digital video recorders.

-- Ben Fritz

Photo: "Duplicity" DVDs at a Blockbuster store in Park Ridge, Ill. Credit: Tim Doyle / Bloomberg

Best Buy making a second try at digital media

About three years ago, Best Buy embarked on a project to start offering movies via digital download, according to two people familiar with the company's plans. It ultimately abandoned the effort, however, apparently deciding the market was too nascent and risky to invest the necessary money in the service.

This year the electronics giant has decided that the time has come again. The company just announced a partnership with CinemaNow to create a service that will distribute movies and TV shows to televisions, Blu-ray players, phones, computers, and any other Internet-connected devices it sells. Last year, it made its move into digital music by acquiring Napster for $121 million, though it still remains  far behind Apple's iTunes in that market.

In the face of declining DVD sales, Best Buy is being more aggressive than competitors like Wal-Mart and Target in positioning itself for the digital future. But it's still very unclear whether brick-and-mortar retailers have an important role to play in a world of downloadable media. In the best-case scenario, Best Buy could be the trusted partner that explains how to make a networked digital home work seamlessly. In the worst-case scenario, it could go from leader in the physical world to also-ran in the virtual one.

The major studios, of course, would probably rather see Best Buy succeed so they can keep working with a retailer they know and trust.

For more on Best Buy's digital strategy, its prospects for success, and what it means for the future of the entertainment industry, read the story in today's Times.

--Ben Fritz

Photo: A Napster display at a Best Buy store in Culver City. Credit: Stefano Paltera / For the Times.

Redbox revenue still booming, but growth is slowing

Good news for the three Hollywood studios lined up against Redbox: the $1-per-night DVD rental kiosk company's revenue growth slowed in the third quarter.

Good news for the four studios that have signed deals with Redbox: Its revenue was up 90% in the same three-month period that DVD and Blu-ray sales revenue plunged 13.9% and overall home entertainment revenue dropped 3.2%.

Redbox's parent company, Coinstar Inc., reported today that third-quarter revenue for its DVD rental subsidiary grew 90% to $198.1 million. In the second quarter, it grew by 110% and in the first quarter, it increased 155%.

A substantial part of that growth was driven by the increasing number of kiosks. Same-store sales were up a much less impressive but still healthy 26%, down from 33% in the second quarter and 35% in the first.

That raises the question of whether Redbox's growth curve will continue to bend down and eventually hit zero.

The company added 2,700 kiosks in the quarter, bringing its total to 20,600 as of Sept. 30, near its goal of between 21,000 and 22,000 by the end of the year.

20th Century Fox, Warner Bros. and Universal Pictures are in court with Redbox over their efforts to impose a window of several weeks during which the kiosk company wouldn't be allowed to offer their movies. The three studios believe that $1-per-night rentals undervalue their products and undermine more lucrative disc sales and video-on-demand.

Lions Gate Entertainment, Sony Pictures and Summit Entertainment have signed multiyear distribution deals to place their movies in Redbox kiosks. Paramount is in the midst of a test with Redbox that will last until the end of the year.

-- Ben Fritz

Photo: A Redbox kiosk at an Albertson's grocery store in Santa Monica. Credit: Lawrence K. Ho / Los Angeles Times.

Wal-Mart slashes DVD prices to $10, potentially spurring price war

In an unprecedented discounting move that could signal a price war that would benefit the major movie studios and cash-strapped consumers, Wal-Mart has slashed the price of a number of the upcoming DVDs of big-budget summer movies to $10 on its website.

That appears to be the lowest price ever offered by a major retailer on highly anticipated new releases, according to people at studios' home entertainment divisions. Among the films on sale for $10 are "Star Trek," "Night at the Museum: Battle of the Smithsonian," "Harry Potter and the Half-Blood Prince" and "Terminator Salvation."

The big discounts are only for the top 10 pre-ordered movies on the site. Recently released hits like "Transformers: Revenge of the Fallen" and "Ice Age: Dawn of the Dinosaurs" cost $13.98 and up. In addition to the price cutting, Wal-Mart.com is also offering free shipping on all of its DVDs.

A link on its website indicates that Target is moving to match Wal-Mart's discounting. There isn't yet any indication whether Amazon.com will follow as well.

The price cuts are good news for movie studios, because they will spur demand in a year during which DVD sales are down more than 13% thus far. The wholesale price paid by Wal-Mart and its competitors remains unchanged at about $18, meaning studios will make the same profit on each disc.

It's normal for retailers like Wal-Mart to price DVDs below their wholesale cost at physical locations and online to draw customers who often spend more money on other items.

The deepest discounts usually go to about $14, however. $10 marks a big loss that Wal-Mart and Target will be taking on each movie, especially with free shipping.

The move comes as Wal-Mart.com and Amazon.com are in the midst of a book price war that has seen the price of some new-release hardcovers fall as low as $9. If Wal-Mart's discounting spurs a similar price war over movies, it could provide a significant boost to holiday movie sales and the studios' bottom lines.

-- Ben Fritz

Photo: A shot from the Wal-Mart.com website.

Home entertainment honchos see growth returning in 2012

Sit tight, Hollywood, a turnaround in the DVD business is only three years away.

That was the consensus of four of the six major studios' home entertainment presidents, who spoke this morning at Blu-con, a daylong event in Beverly Hills dedicated to the business of Blu-ray high-definition discs.

"By 2012 is when the physical/digital combination will get to the point where we tend to see a growth trend again," said 20th Century Fox Home Entertainment President Mike Dunn, referring to Blu-ray and online movie distribution, the industry's two growing segments as sales of standard DVDs are falling.

Ron Sanders, president of Warner Home Video, Craig Kornblau of Universal Pictures and David Bishop of Sony Pictures all agreed with Dunn's assessment as they joined together for a panel moderated by Merrill Lynch senior media and entertainment analyst Jessica Reif Cohen.

"Prior to the recession, we thought it would be 2010, [but] now that date has moved out," said Kornblau.

"I think in 2010 we will be down, but not by as much as this year," said Sanders. "In 2011 we have a shot at getting to flat, though we have to see how pricing and other things evolve."

So far this year, total home entertainment revenue is down more than 3%, driven by a more than 13% drop in DVD sales. That has been a blow for movie studios, which have in recent years relied on the home entertainment market for more than half of their revenues.

Accelerating the growth of Blu-ray and digital is critical to turning that around. Though the two categories were up 66% and 18%, respectively, last quarter, their growth hasn't been enough to make up for the drop in DVD revenue, as many in Hollywood had hoped.

In a keynote address that kicked off Blu-con, Mike Vitelli, executive vice president of customer operating groups for retail giant Best Buy, urged studios to merge Blu-ray, standard DVDs and digital downloads into more of a combined offering in order to reduce consumer confusion and simplify purchases.

"I have a mental picture of walking up to a coffee shop and saying 'How much do I owe you?' [and their replying] 'Well, where are you going to drink that?' " he said by way of comparison to the different prices for DVDs, Blu-ray and digital copies.

The current result, he said, is that consumers who have a Blu-ray player in one room and standard DVD players or computers in others are buying the regular DVD so that they can pay one price for a movie that will work everywhere they want to watch it.

"What's looming in front of us is an increasing amount of confusion as Blu-ray players and televisions and other set top boxes are becoming more connected to the Internet," he stated. "Until all of this gets settled, there will be massive confusion. And in massive confusion, you get a pause."

--Ben Fritz

Sony's aborted attempt to release 'This Is It' DVD before Christmas

Sony Pictures desperately wanted to release the DVD of the Michael Jackson concert movie "This Is It" for the holiday shopping season, but backed down after movie theater owners balked that it was too soon following the film's theatrical premiere.

"This Is It" opened in 99 countries yesterday and is scheduled for a limited two-week run, though the studio may extend that depending on ticket sales.

Sony had hoped to capitalize on audiences' heightened interest in what turned out to be Jackson's final performance by releasing the DVD in mid-December, about a month after the movie ends its short time in theaters. The disc is now expected to come out in late January or early February.

Selling DVDs before Christmas can be particularly lucrative for studios as they are timed to to capture the holiday gift giving season.

While that made sense for Sony, owners of the nation's cinemas were none too happy at the prospect. They have historically urged studios to wait at least 90 days, but preferably four months, from the day a movie opens in theaters to start selling the DVD, in order to maximize ticket sales. For years, studios have honored that "window," in part out of concern that theaters would retaliate by not booking some of their movies or driving harder deal terms.

Sony executives tried to persuade theater operators to make an exception for "This Is It," given its short life span on the big screen and the uniqueness of the picture.

"We felt we made a pretty good case as to why this movie was different," said Jeff Blake, vice chairman of Sony Pictures Entertainment, who oversees worldwide marketing and distribution.

However, the movie theater owners refused to budge.

"We had several conversations with Sony and so did our members," said John Fithian, president of the National Assn. of Theatre Owners, an industry trade group. "Anytime we see the window go under three months, we alert our members and raise concerns with the studios."

After hearing complaints from executives at several of his member companies, Fithian said, "I raised a general concern with Sony about the extraordinarily short window."

After talking with theater owners, Sony, whose DVD releases on average come out four months and four days after a movie's theatrical run, reluctantly decided to back off from its request in order to preserve good relations with them.

"We didn't want it to be an issue," said Blake. "At the end of the day, we wanted a big theatrical run and they certainly stepped up and supported that with 6,000 screens in 3,481 theaters."

However, the Sony executive acknowledged that he was sorry the studio didn't get what it it wanted. "It would have made a big financial difference to us," he noted.

All of Hollywood is feeling the pain of an industry-wide decline in DVD sales, which are down more than 13% this year.

Sony is not the only studio that has recently attempted to push up the traditional DVD window. Paramount Pictures is releasing its summer event film "G.I. Joe: The Rise of Cobra" in the home entertainment market on Nov. 3, 88 days after it first hit theaters, which raised the ire of many exhibitors.

In 2005, Walt Disney Co. chief executive Bob Iger suggested that the studio might someday respond to consumers' growing impatience to see entertainment when and how they want it by releasing films simultaneously in theaters and on DVD. After theater owners responded in outrage, along with Disney's then-studio chief Dick Cook, Iger went silent on the subject for years.

However, in a keynote address earlier this month, Iger revisited the topic. "In order to keep the DVD business vital, that product has to be perceived as being fresh in the marketplace," the Disney chief said  at a conference at the University of Southern California. "The press to move the DVD window up, be it physical or digital, will grow because of that phenomenon."

--Claudia Eller and Ben Fritz

Photo: Michael Jackson in "This Is It." Credit: Sony Pictures.

Netflix preparing for future with delayed rentals, more Internet streaming

After another quarter of stunning growth, Netflix is preparing for a future in which its business may look very different.

On the way out: rentals of new DVDs. On the way in: more Internet streaming across a variety of devices.

In a conference call with analysts after earnings were released yesterday, Netflix Chief Executive Reed Hastings opened up about a subject that has been privately discussed by many in Hollywood recently: the looming possibility of a delayed DVD rental window. Under such a plan--which people close to the home entertainment operations of three major studios confirmed is under discussion--no rental outlet would be able to offer a movie to its customers until several weeks after the movie goes on sale.

The studios hope that would drive some consumers toward DVD purchases, which are significantly more profitable than rentals, and help stem the ongoing decline in home entertainment revenue.

For more on the possibility of a sales-only DVD window and what it would mean for Netflix, Redbox, Blockbuster Inc. and consumers, read the story in today's Times.

While such a system might somewhat depress the revenue of Netflix and its competitors, it would probably result in reduced costs as well, as studios would have to lower the wholesale cost of DVDs for rental companies to get them on board.

Hastings said he would be fine with that scenario and already has plans for the money his company would save on DVD purchases.

"A short DVD sales window would benefit sales and therefore the health of the entire ecosystem," he said. "Plus it would allow us to spend less on discs and more on streaming content."

Netflix considers Internet streaming, which it offers via computers and a growing number of living room devices such as the Xbox 360, crucial to its future rentention and acquisition of subscribers. Last quarter, 43% of Netflix subscribers streamed at least one movie or television show online, up from 22% in the same period a year ago.

The biggest challenge for Netflix is acquiring content for its streaming service, which requires an entirely different set of business considerations than DVDs.

Hastings also told analysts that Netflix will soon announce a new partnership to stream movies through a consumer electronic device "that has a material installation base" by the end of the year. Likely candidates include the two major video game consoles that don't currently offer it: Sony's Playstation 3 and Nintendo's Wii.

It will still be a long time until Netflix goes entirely digital, however. "We expect to be renting DVDs until 2030," Hastings said.

--Ben Fritz

Correction (Oct. 25, 5:10 PM): An earlier version of this post incorrectly quoted Hastings as saying that Netflix expected be renting DVDs until 2020.

Photo: Netflix streaming "The Wizard of Oz." Credit: Netflix

Netflix revenue surges 24%; subscriber additions nearly double

It used to be Hollywood that was recession-proof. Now it's Netflix.

Continuing its huge growth in the midst of a brutal recession, the DVD-by-mail subscription company increased its revenue by 24% last quarter and added a net 510,000 subscribers, 95% more than it did in the same three months last year.

Netflix's big gains underscore that it is one of the key drivers, along with $1-a-night DVD kiosk company Redbox, in the 9.9% growth in total rental revenue for the home entertainment industry in the third quarter.

The Los Gatos, Calif., company reported net income of $30.1 million, up 48% from a year earlier, on revenue of $423.1 million. The total number of subscribers as of Sept. 30 was 11.1 million, up from 8.7 million a year earlier.

All three numbers were on the upper edge or slightly over the guidance Netflix provided to its investors three months ago.

Most significant for those who own Netflix stock, the company modestly increased its financial projections for the end of the year from those it provided in its last earnings report. The company expects to have 12 million to 12.3 million subscribers, up from previous guidance of 11.6 million to 12 million. Revenue is projected to be $1.666 billion to $1.672 billion, up from $1.65 billion to $1.67 billion, and net income guidance is $106 million to $111 million, compared with its previous prediction of $99 million to $109 million.

Netflix stock was up 4% before earnings were announced but is down slightly in after-hours trading.

-- Ben Fritz

Photo: Netflix Chief Executive Reed Hastings. Credit: Randi Lynn Beach / For The Times.

Accelerating rentals prop up shrinking home entertainment biz in third quarter

In what passes for good news these days, Hollywood's biggest and most profitable business shrank a little slower in the third quarter than in the first half of the year, thanks entirely to rentals.

Overall home-entertainment revenue, including DVD and Blu-ray sales, rentals, video-on-demand and digital downloads and streaming, fell 3.2% in the third quarter to $4 billion, reflecting an ongoing decline driven by the economic downturn and plummeting consumer interest in buying movies and TV shows on shiny discs.

The Digital Entertainment Group, an industry trade association, reported that rental revenue rose 9.9% in the three-month period ending Sept. 30, even faster than the 8.3% growth it experienced in the first half of the year.

Every other sector of the home entertainment business, including DVD sales, high definition Blu-ray disc sales and digital transactions, grew slower or shrank faster than during the first half of 2009.

In its news release with the data, DEG attempted to highlight sales of Blu-ray disc sales, which rose an impressive 66.3% in the quarter. That's a substantial slowdown, however, from the category's 91% growth in the first half of the year.

Studios love Blu-ray disc sales more than any other type of transaction because profit margins are the highest. Although they're growing fast, Blu-ray sales in the quarter were $161 million, just 4% of the home-entertainment industry's $4 billion total. Industry hopes that Blu-ray could make up for plummeting sales of standard-definition DVDs have not been realized.

Total disc sales, including standard DVDs and Blu-ray, plunged 13.9%, a slightly bigger drop than the 13.5% decline in the first six months of 2009. In an effort to downplay just how dismal revenue from DVD sales has become, DEG didn't disclose total revenue for the category.

[Update (5:45 PM): According to Rentrak Corp., which tracks industry sales and provides data to DEG, total DVD and Blu-ray sales were $1.98 billion last quarter, while rental revenue was $1.57 billion.]

Digital distribution, which includes online downloads and streaming as well as cable video-on-demand, rose 18%, down slightly from 21% in the first six months. It remains about 10% of the total industry with $420 million worth of revenue.

The accelerating growth of rentals appears to be driven almost entirely by fast-growing mail subscription service Netflix and $1 per night kiosk rental company Redbox. Blockbuster, the nation's biggest physical DVD rental company, saw its revenue plunge by 22% in the quarter ended June 30.

However, the profit margins on rentals are substantially lower than for sales. That's why three studios -- Twentieth Century Fox, Universal Pictures and Warner Bros. -- are attempting to block Redbox from offering their movies until several weeks after they go on sale. Warner Bros. is also trying to do the same to Netflix.

The fourth quarter is always the biggest by far for home-entertainment revenue, as that's when most summer tentpole films, such as "Harry Potter and the Half-Blood Prince" and "Transformers: Revenge of the Fallen," are released on DVD. Many studios this year are taking aggressive steps this year to push consumers toward buying discs, particularly Blu-ray, instead of renting them.

Update (5:35 PM): Fox, Warner Bros. and Universal have all instructed their distributors not to provide DVDs to Redbox until several weeks after they go on sale at retail outlets. However, a Fox spokesman noted that that his studio did offer potential terms to Redbox for it to rent movies the same day they go on sale, but the two companies were unable to reach a deal.

--Ben Fritz

Photo: A Redbox kiosk in San Rafael, Calif. Credit: Justin Sullivan, Getty Images.

Paramount fills long-empty home entertainment slot

After five months without a president of worldwide home entertainment, Paramount has promoted Dennis Maguire, who previously oversaw DVD sales overseas, to the post.

Maguire became president of Paramount Home Entertainment International in 2006 after holding the same post at Walt Disney Studios, where he worked for 23 years.

He replaces Kelley Avery, who unexpectedly left the job in May. Avery had previously overseen home entertainment for DreamWorks and took the job at Paramount when it acquired her former employer in 2006.

Maguire takes the job at a time when DVD sales, which have been a cash cow for movie studios for the last decade, are rapidly declining and studios are determining how to handle fast-growing but less profitable rental businesses such as Redbox and Netflix, as well as attempting to boost sales of high-definition Blu-ray discs.

"There are a lot of challenges in home entertainment, and it's good to have someone in the job I'm comfortable with and know well," said Paramount vice chairman Rob Moore, to whom Maguire reports. "He feels ready to take on bigger challenges."

Maguire worked with Moore to negotiate the studio's unique deal with controversial DVD kiosk company Redbox, under which the studio is studying its effect on sales this fall before potentially triggering a five-year, $575-million deal at the end of the year.

Moore has been directly overseeing Paramount's domestic DVD business since Avery's departure in May.

--Ben Fritz

Photo: Dennis Maguire. Credit: Paramount Pictures.