Home Media Magazine - June 29 - July 5, 2008 - (Page 13)

www.homemediamagazine.com NEWS ray, when it comes to retail, gives us a big advantage. Now it’s a new reason for customers to buy as opposed to just rent in our store. On the rental life cycle, the opportunity is huge. When DVD came in, we missed the retail opportunity and ceded that to our mass merchandising competitors. We adhered rigidly to our rental model. And at a $20-$25 price point, that was a missed opportunity because many customers found they could buy versus rent, and it was a better use occasion, especially if you had small children. Blu-ray is a whole different proposition because $20 is still more or less an impulse purchase. But $30 crosses a consumer barrier, especially in today’s economy. Even though I can afford a $30-$34 disc, I’m going to think twice about buying versus renting. We think this gives new life to the rental model and can stimulate increased consumer adoption of the format. And the numbers bear that out. It surprised me with a title like National Treasure: Book of Secrets that we would have so much rental versus retail. Our challenges with Blu-ray are significant because the industry, in some cases, is clinging to the traditional wholesale price model. The challenge is that there’s a demand curve and there’s an inventory cost. We’re left managing that balance between having enough inventory to three opportunities: The cost synergies purely because you have oversatisfy increasing demand and having lapping retail organizations. Your too much inventory where we con- infrastructure synergies because as sume the profits just to stay in stock. we transform into a retailer ourselves, I HM: What’s wrong with the wholesale that chain would help us with logistics with retail point-of-sale systems they price and Blu-ray? Keyes: The wholesale cost is incon- have developed better than we have … sistent with the desires of the tradi- many of the things that are fundamentional consumer product approach tal to being a better retailer. The third part is an entertainment to a new product or format adopretail destination. With any intion doesn’t extroduction of new «WE ARE TREATING THE product, you have RETAILER AS THE ULTIMATE ist. There are to oversupply. You CUSTOMER, WHEN IT SHOULD people that sell boxes, and there have to put more BE THE CONSUMER.» are people who inventory in the JIM KEYES, BLOCKBUSTER sell content. But early days to meet in other countries, there are retailers a growing demand curve. We’ve introduced Blu-ray with a that bring these two together. The traditional wholesale price that puts closest we have come here to a true enmore burden on the retailer to have tertainment retail destination would that inventory risk. Therefore, the be Apple, who has brought together retailer holds back on inventory, and hardware, software and service. And customers don’t get what they want yet, it is a closed-loop system. (lower price) and they hesitate in their I HM: What role do CE stores play in enteradoption. tainment retail? The ideal store shelf would stock Keyes: When people think of retail, the same number of titles in standard they tend to look backward. CE prodDVD as Blu-ray. The current eco- ucts have traditionally been sold next nomic model from the supply chain to refrigerators and washing machines. does not facilitate that, and yet, the Best Buy still sells washing machines. physical cost to put that product on As a retailer, I have a forward look. the shelf is about $2. The intellectual In five or 10 years how, as consumers, property value brings it up to about are we going to consume our enter$24. The retail is $34. But if I don’t tainment? In 10 years, it will predomihave it for sale, it is worth nothing. nantly be digital and how will I buy that So I’m trying to get to that price, and digital content to get it into that device, if there was a way to recognize that which is an enabler for entertainment. revenue when the consumer wants it, Do I buy a box and put it on my wall and I would never be out of stock. then figure out how to get stuff in it? Some will say that at retail you have Or will I be buying a service more than the opportunity to return; well you a device? That’s where we’re looking can, but only up to a certain limit — at turning Blockbuster into a digitaland the cost of returns can consume content provider. Are we still going to the whole margin. I’m challenging be competing with Netflix with banner my suppliers to help me figure that ads or are we going to get to that conout. Right now, we are treating the re- sumer at the best possible place: when tailer as the ultimate customer, when they make that CE acquisition? it should be the consumer. I think that’s the appropriate place to sell. That’s what we’re building. Today I HM: Are you still pursuing Circuit City? Keyes: We’re still in our due diligence we sell a PlayStation 3; in the future process. I hope all of our stake hold- I want to sell it with a Blockbuster ers will recognize that this represents Online subscription. That’s consistent opportunity, and it is in everyone’s with our core mission to provide convenient access to entertainment. best interest to check the books. I HM: Are most analysts vocal in their disdain for the deal? Keyes Talks About Blockbuster’s Future Continued from page 1 That’s not the problem because we are both going to increase our gross dollars by avoiding opportunity costs. We can provide [the studios] a much better share of a much bigger pie. And in the next five years it will be much easier to mine that consumer opportunity than try to build a new one. We’re both going to miss opportunities if we push too hard on the VOD consumer who perhaps isn’t yet ready. We’re still going to go down the VOD path, and I’m not concerned in the long term for the VOD side of the equation because we’ll be there. I HM: How important is Blu-ray to Blockbuster? Keyes: It’s very important. There are very few opportunities to extend the life cycle of any product. Since physical DVDs have been such a huge portion of our product assortment, obviously an enhancement that extends the life cycle of that product is huge for us. So it’s important for us to jump on that bandwagon and increase adoption as quickly as possible. Blu-ray has two opportunities for Blockbuster. We’re trying to transform our business more into a retail model, and that’s for long term selfpreservation. The more we use what are excellent retail locations to sell things, as opposed to just rent things, [the more] there is life beyond physical distribution of content. So Blu- osks are popular, it’s the same reason why Blockbuster became popular. It’s about convenience. We had at one point 2,000 more stores than we do today. When we close a store, we open an opportunity for someone to come in and soak up that need for convenience. And vending has done that. We recognize we need to be more convenient, and we’re looking at vending ourselves. Our vending we want to build with an eye toward the future. Putting a credit card into a device and being able to access content will be ubiquitous. That’s where we are headed, toward a combo deal where you can do both physical and digital in the same device. We want to do it with partners. We want to do it right. We’re testing kiosks in Dallas. We just launched a few digital kiosks that we’ll begin testing in 30 days. We’ve partnered with [portable CE device manufacturer] Archos, which will allow for a 30-second download of a feature-length film onto an Archos device. We sell the devices next to the kiosks. You dock the device just like an iPod and either rent or buy the movie. It either will burn to an internal hard drive or you rent it for $3.99 over a 30-day period. I HM: Are you glad Movie Gallery is back? Lionsgate Future Bright, Execs Say By Thomas K. Arnold SUPPLIER Consumer spending on home video may be flat, but thanks largely to an influx of higher-profile theatrical features, Lionsgate has managed to boost its first-quarter share of consumer spending, sales and rentals combined, to a record $575 million, for its best-ever market share showing of 9%. Company president Steve Beeks made the announcement last week at the independent studio’s annual retailer summit on the eve of Home Media Expo 2008, the video retail trade show, in Las Vegas. Beeks noted that of Lionsgate’s total revenue of $1.36 billion in fiscal 2008, which ended March 31, nearly half, or $623.5 million, came from home entertainment, mostly DVD sales. That’s an increase of nearly $100 million from fiscal 2007. “It was a great year for us,” Beeks said. “Lionsgate has been growing dramatically, especially in the last Photo by: Eric Jamison Keyes: When Movie Gallery and Hollywood Video ran into problems, that was bad for the industry because it hurt consumer availability and it put a blanket over the investment community and their perception of the industry. I’m hopeful they will be successful, and I’m pulling for them because I think good competitors are a sign of a healthy industry. I HM: How does a 1980s brand keep itself relevant? Lionsgate president Steve Beeks poses with Dodgers legend Tommy Lasorda at the company’s event. Keyes: Citibank came out with an alternative opinion. It comes down to Keyes: Retailers often tend to use historical research rather than live testing. With focus groups and panels, customers will always tell you what they think, but they won’t always tell you what they will do. With 5,000 stores you have a unique opportunity. In a very low-cost way we can test everything from new pricing plans, Blu-ray adoption, inventory copy depth and breadth, etc. So what we are doing is trying to employ I HM: What are you doing about the a practice of letting customers tell us burgeoning DVD rental kiosk industry? Why what they want. How do they want to see us in terms of relevance to them? If isn’t there a Blockbuster kiosk? Keyes: If you think about why ki- we listen, then we’ll be successful. four or five y http://www.homemediamagazine.com

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Home Media Magazine - June 29 - July 5, 2008

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