Blockbuster Entertainment Group

views updated

Blockbuster EntertainmentGroup

founded: 1985

Contact Information:

headquarters: 1201 elm st. dallas, tx 75270 phone: (214)854-3000 fax: (214)854-3241 url: http://www.blockbuster.com

OVERVIEW

Blockbuster Entertainment Group is predominantly known for its operations as a video rental and sales outlet. In 1997 the company operated 6,470 video and music stores in the United States and abroad. The company also has interest in other ventures, including Spelling Entertainment, a television and film production company; and The Discovery Zone, a commercial playground firm. The company purportedly has 25 percent of the U.S. market for rentals of home videos and video game cartridges, however, the U.S. market during the late 1990s favored purchasing video tapes rather than renting.

COMPANY FINANCES

Blockbuster's revenues have continuously increased over the years. In 1993 revenue was $2.22 billion, and it jumped in 1994 to $3.30 billion. In 1995 and 1996 total revenue rose slightly to $3.33 and $3.54 billion, respectively. Blockbuster's 1997 revenues were $3.91 billion, showing 10.5-percent growth over 1996 revenues. For the first time since the second quarter of 1996, same store sales within U.S. stores increased by 2 percent. In the first quarter of 1998 total video revenues were $930 million, an increase of 13 percent over the first quarter of 1997.

HISTORY

Blockbuster's founder, David Cook, first started a company called Cook Data Services in Dallas, Texas. The company sold software and computer services to the oil and gas industries until Cook decided to parlay his computer expertise into video rental. The first store was opened in 1985, and in 1986 the name was changed to Blockbuster Video. By 1987 Cook was bought out by Wayne Huizenga.

Huizenga, according to Fortune, was worth an estimated $700 million and single-handedly helped professional sports grow in southern Florida. He had healthy interests in the Florida Marlins and Florida Panthers and purchased the Miami Dolphins for $128 million, making him the only owner of teams in three major sports. As the head of another company, Waste Management Inc., Huizenga was known for his aptitude at deal making. He and his cronies, according to one profile of the man, were adept at starting businesses and subsequently bringing friends into these deals. One such pal, John Melk, invested in a Blockbuster store in Chicago. Huizenga purportedly "took one look at the books" in 1987 and "bought control of the whole company—which then was known as Blockbuster Video and owned only 8 stores, with 11 more franchised—for $18 million. And he just kept building," stated the Fortune profile. Blockbuster stock grew by more than 3,500 percent in a seven-year period.

Huizenga built the chain by voraciously purchasing smaller video rental companies. First to be gobbled were Southern Video Partnership and Movies to Go; later purchases included Video Library, Major Video, and a franchise owner, Video Superstar MLP. These purchases of regional multi-store video rental companies continued through the 1990s. This strategy even gained a toehold for Blockbuster in Europe, with the purchase of holdings in the United Kingdom beginning in 1992. Acquisitions made in the United Kingdom included the Cityvision, Sound Warehouse, and Music Plus chains.

Huizenga has been credited with making this form of business respectable. "He also did a lot to clean up the image of the video store industry: No more dirty middle-aged men in raincoats. Blockbuster banned X-rated movies and opened big, brightly lit stores with large selections and small prices: three bucks for three nights, while competitors offered just one-night stands." Under his direction, Blockbuster grew to an international chain of 4,300 stores with 1993 revenues of $2.2 billion. Reportedly, Huizenga's aim was to open a new store every day while investing about $150 million each year in advertising.

In 1994 Huizenga reportedly wanted to buy Viacom Inc., a cable provider, which then owned 70 percent of Spelling Entertainment. In January of that year, he attempted to strike a merger deal with Viacom but dropped it due to falling stock prices. Despite that, Blockbuster had purchased $1.85 billion or about 15 percent of Viacom stocks. Later that year the tables were turned. Entertainment conglomerate Viacom purchased both Paramount Communications and Blockbuster Entertainment for $17 billion. The Blockbuster acquisition helped Viacom win over other suitors in the Paramount purchase, which would enable it to compete with the big boys—Time Warner, Disney, and News Corp.

According to a Newsweek analysis shortly after the deal, Blockbuster faced, "a couple of headaches. There's too much competition in the video business. The chain has been cutting prices—and thus profits—trying to fend off everyone from mass market retailers to grocery chains that have jumped into the business. . . . Blockbuster, also one of the nation's largest recorded-music retailers, is under attack from rivals in that business, too."

By February 20, 1995, Newsweek estimated Blockbuster had captured 20 percent of the video rental market and was growing at the rate of 600 video stores per year. "The chain's 50 million members rent one out of every five of the estimated 4.6 billion videos rented each year." That same article pointed out that the company was having its share of legal problems. Parent Viacom filed suit against Hollywood Video, alleging that it illegally hired Blockbuster employees. Additional suits were pending, one of which resulted in a $124-million judgment. Berrard, company president, was subsequently placed under investigation for perjury in one of those cases.

FAST FACTS: About Blockbuster Entertainment Group

Ownership: Blockbuster Entertainment Group is a wholly owned subsidiary of Viacom, Inc., a publicly owned company traded on The American Stock Exchange.

Officers: John Antioco, Chmn. & CEO, 47; Thomas Byrne, VChmn., Int'l Operations & Strategic Dev.; Lynn J. Lyall, CFO, 43

Employees: 85,000 (1997)

Chief Competitors: As a retailer of movies and music, Blockbuster's major competitors include: Borders; Camelot Music; Circuit City; Hollywood Entertainment; Barnes & Noble; MTS; and Wherehouse Entertainment.

In 1996 Blockbuster's operating revenues were down 11 percent or $730 million. Part of the decline was attributed to the drying up of the video rental market, thanks to the various flavors of satellite broadcasting and pay-per-view.

The company's next CEO was Bill Fields. He resigned his a position as CEO of Wal-Mart to do so, leaving a company 30 times the size of Blockbuster. According to Fortune, Fields led "a full-fledged 'Wal-Martization' of Blockbuster, turning the video-rental outfit into an operator of entertainment variety stores. He's opening Blockbuster outlets in small towns and rural markets. And he's cutting costs the way any good Wal-Mart executive would: by sacking middlemen and by strong-arming suppliers."

In 1996 Blockbuster announced that the company planned to open more than 1,200 new stores in Europe by the year 2000. Also in 1996, parent company Viacom announced it was filing bankruptcy for Discovery Zone, and lost $105-million of pretax income as a result of closing 50 music outlets and moving Blockbuster's headquarters. In 1997 Viacom pulled back on expansion plans for Blockbuster and began to rework the revitalization efforts made by Fields, who resigned as CEO. Viacom hired John Antioco away from Taco Bell in June 1997, and Antioco began his term with Viacom, taking in another $300 million. Under Antioco's lead, Blockbuster's rental sales increased significantly by early 1998, partially due to efforts to stock more copies of hit movies. The company was also able to reduce its debt by $2 billion. Now that the company was once again on solid ground, it was rumored that Viacom CEO Sumner Redstone planned to sell off the company by 2000.

STRATEGY

According to a 1997 press release, parent company Viacom believed that Blockbuster, under the management of John Antioco, would improve its performance by "refocusing on and growing market share in the video rental category through improved marketing and promotion, better store site selection, more targeted tape purchases and a renewed emphasis on operational efficiency and customer service."

Blockbuster was also pursuing a strategy of improved customer satisfaction, hoping to better Blockbuster's performance. Viacom was implementing various programs with major video suppliers to improve selection, convenience, price, and availability of videos, as well as designing new advertising campaigns to highlight these improvements.

An example of Blockbuster's new campaigns for 1998 was a new line of "edgy, innovative television commercials," created by Young and Rubicam. According to Blockbuster, the company's goal was for its commercials to be as captivating as the movies Blockbuster members rent, while also promoting the fact that Blockbuster customers "get your movie . . . and go home happy." Different versions were made of the new commercials to convey various messages, including promotion of Blockbuster's guaranteed new release program, the fact that Blockbuster stores stock more copies of new releases, and Blockbuster's wide variety of movie genres.

INFLUENCES

The standardization of the video recording technology certainly helped propel the growth of the video tape rental market. Too expensive to purchase at one time, video rentals were a welcome alternative to standing in long lines at the movie theatre and braving sticky floors. Trend-watcher Faith Popcorn said the "cocooning" trend—that is in essence staying home rather than going out of the nest for entertainment—was partially predicted by the high number of VCR sales and tape rentals. "By 1988, 60 percent of American homes had a VCR, home-pop microwave popcorn sales were a $300 million business, and restaurant sales were woefully down while take-out restaurant sales were up to an astonishing 15 percent of total food expenditure."

CHRONOLOGY: Key Dates for Blockbuster Entertainment Group

1985:: The first Blockbuster opens in Dallas, Texas
1987:: Wayne Huizenga buys out Blockbuster
1989:: Blockbuster opens its 1,000th store and first in London
1991:: Philips Electronics invests $66 million in Blockbuster in exchange for marketing Philips products within the stores
1993:: Acquires a majority interest in Spelling Entertainment Group
1994:: Viacom acquires Blockbuster
1996:: Sears and Blockbuster announce a deal for Blockbuster Music sites in Sears Brand Central locations
1998:: Citibank and Blockbuster announce agreement to install Citibank banking machines in 3,000 Blockbuster locations

In the mid-1990s the advent of mega-channel cable television, pay-per-view television, and various forms of satellite entertainment took a huge bite out of the video rental market. Viacom believes Blockbuster's slow down in performance during the late 1990s may also have been affected by factors such as general economic trends in the movie and home video industries, the quality of new titles available, competition, marketing programs, special events, and new technology. The company saw a seasonal pattern to the home video business, with peak rental times mirroring school vacation patterns.

CORPORATE CITIZENSHIP

In June 1998, Blockbuster announced it had entered into an agreement with the American Film Institute (AFI). Blockbuster pledged its support for the Institute's 18-month celebration of the one-hundredth anniversary of American movies. Blockbuster agreed to provide sponsorship of "AFI's 100 Years . . . 100 Movies" celebration with a financial commitment of $2 million. "Blockbuster recognizes the invaluable role of the American Film Institute in preserving and promoting the rich history of American film that is now available on home video," said chairman and CEO John Antioco. "By joining in a long-term relationship with the AFI, and supporting the '100 Years' celebration, we are helping to boost public interest in the timeless films that are the core of Blockbuster's rental library." Blockbuster also agreed to sponsor a related 10-part series of one-hour programs on TNT.

IF THEY DON'T CARRY IT, YOU DON'T NEED TO SEE IT?

Blockbuster is known for having multiple copies of all the latest hit movies, but they tend to shy away from carrying films that potential customers might find objectionable. This means that you will easily find 50 copies of Titanic (1997), but you will search in vain for even one copy of director Martin Scorsese's The Last Temptation of Christ (1988). If a film is released with an NC-17 rating, such as Showgirls (1995), you can expect Blockbuster to carry the R-version of the film; that is, an edited and censored version (although you'll need to check out the fine print to discover this). Blockbuster does what it has to in an effort to maintain their "family" image.

GLOBAL PRESENCE

Blockbuster has franchise and/or development agreements in place in more than 28 international markets. As of December 31, 1997, the company had 2,011 stores operating in foreign countries.

SOURCES OF INFORMATION

Bibliography

"blockbuster, american film institute launch new alliance with 'afi's 100 years . . . 100 movies' celebration." blockbuster news release, 15 june 1998.

"blockbuster entertainment group." hoover's online, 6 july 1998. available at http://www.hoovers.com.

loeb, marshal. "there's no business like show business." fortune, 8 august 1994.

"now this is entertainment . . . blockbuster launches new ad campaign." pr newswire, 10 june 1998.

popcorn, faith. "the popcorn report." harperbusiness, 1992.

roberts, johnnie l. "chips off the block." newsweek, 20 february 1995.

——. "doing it his way; viacom's sumner redstone is tough. but sacking his no. 2 won't solve his problems." newsweek, 29 january 1996.

sellars, patricia. "wal-mart's big man puts blockbuster on fast forward." fortune, 25 november 1996.

"viacom expects blockbuster second quarter revenue and ebitda below analyst estimates; company to take charges at blockbuster." viacom press release, 1 july 1997.