Businessweek Archives

The Script Doctor Is In At Blockbuster Again


Entertainment: VIDEO RENTALS

THE SCRIPT DOCTOR IS IN AT BLOCKBUSTER--AGAIN

Can yet another chief executive stop the meltdown at Viacom's video chain?

As corporate disasters go, this one's a beaut. Viacom Inc. paid $8.4 billion for Blockbuster Entertainment Corp. just three years ago. The video-rental chain was the cash cow that enabled Viacom to acquire Paramount Communications Inc. that same year. All went well for a time, but in recent months, Blockbuster's deterioration has shocked Wall Street, the entertainment industry, and, apparently, the top brass at Viacom. "Is it worth $2 billion? $4 billion? I don't know," says Furman, Selz LLC media analyst David B. Doft. "According to many on the Street, Blockbuster is worth zero." Viacom's stock now trades at half its 1993 value.

In little more than a year, Blockbuster has had three chief executives--Steven R. Berrard, Bill Fields, and now, John F. Antioco--and at least as many public declarations of a new strategic direction. In July, in what has become almost a quarterly exercise, Viacom announced that Blockbuster's second-quarter results will fall below analysts' expectations, with cash flow down a stunning 70%, to as little as $40 million. It also will take a $300 million charge chiefly for bad inventory--movies it mistakenly thought people wanted to see and merchandise, such as candy, it thought they would want to buy. Notes Phillip Foreman of Composite Growth & Income Fund, which owns more than 300,000 Viacom shares: "Clearly, Viacom doesn't have a handle on what's going on at Blockbuster." Viacom and Blockbuster executives declined to comment for this story.

DEADLY COMBINATION. Given their silence, it's difficult to know what exactly is going on inside Blockbuster. But based on interviews with former executives, suppliers, and competitors, an alarming, if incomplete, picture emerges. Blockbuster is suffering from a deadly combination of industry change and an operations meltdown. When the video-rental business was booming, Blockbuster's success was measured by fat margins and revenue growth. Now, the company has to be run well in a much tougher climate. Notes one entertainment industry source: "Blockbuster never had the controls. When there was a slowdown and a shift in the way business is done, it all came home to roost." While Fields and Berrard had free rein, industry sources say Antioco is being closely supervised by Viacom Chairman Sumner M. Redstone and Vice-Chairman Thomas E. Dooley.

The crisis comes as the video-rental business is in flux. The industry has suffered a general softness, and consulting firm Alexander & Associates says rentals will fall 4% this year, amid a dearth of hit releases, the growing popularity of movie-rich satellite services, and a flood of videos offered as loss-leaders by discount stores. Despite this, some rival video-rental companies are thriving. Analysts expect Hollywood Entertainment Corp. and Video Update Inc. to post about a 4% sales increase in the second quarter, while Blockbuster's sales may dip about 5%. "Blockbuster is a fairly rudderless ship at this point," says Curt Alexander, a partner at Media Group Research in Providence.

Then there's the revolving door--and not just in the executive suite. Blockbuster has lost so many key people that a good deal of the institutional memory about how the company runs appears to have been lost. A third of its senior executives and two-thirds of its overall staff left earlier this year, when Fields moved headquarters from Fort Lauderdale to Dallas. With so many people gone, the company is actually repeating mistakes it made years ago and stumbling in basic store operations, former executives say.

Blockbuster's plan to handle its own distribution has also backfired. The 818,000-square-foot distribution center that broke ground in January near Dallas has been plagued by everything from bad planning and floods to construction delays. To save money, the company fired its old distributor before it was ready to switch to its own automated system.

That, says analyst Tom Wolzien of Sanford C. Bernstein & Co., means Blockbuster is reduced to using manual laborers to hand-pack boxes bound for Blockbuster's 5,688 stores. That has led to even more problems, as "some of the tapes are just walking out the door" with the workers, Wolzien says. "It's a classic case of stuff falling off the truck." But the distribution fiasco runs a lot deeper than some purloined tapes: Anecdotal evidence suggests new releases aren't making it to neighborhood Blockbuster stores by their "street date"--the date when every other video store in town has it.

To make matters worse, it now looks as if consolidating distribution won't save Blockbuster much money anyway. Former CEO Fields thought that centralizing buying power would enable Blockbuster to pressure suppliers--Hollywood studios--to lower prices. That strategy worked well for Fields when he was a key executive at Wal-Mart Stores Inc. But while shoppers don't care much about which company makes a pack of tube socks, they do care about which movie they take home. "You can press Huggies to the wall and threaten to just go with Pampers," says PolyGram Video President Bill Sondheim. "You can't do that with Jerry Maguire and Independence Day." Fields declined to comment.

Even an appeal from Redstone didn't persuade the studios to give Blockbuster a break. In June, the mogul flew to Los Angeles to meet privately with the executives in charge of video sales at the studios. He asked them to voluntarily cut the prices of the tapes they sell to Blockbuster by as much as 15%. Redstone's request was ignored. "We just kind of stared him down on that one," says one top studio executive.

Under Fields, Blockbuster tried to goose sales by diversifying from video rentals into videos sales and T-shirts, toys, books, magazines, and CDs. The move proved disastrous. For one thing, those products had lower margins than video rentals. Bizarrely, Blockbuster had already learned that diversifying merchandise was a bad move when it tried --and abandoned--the strategy in the early 1990s. "It didn't work then, and it doesn't work now," a longtime franchisee says. "Why Viacom would try this again is a mystery to me."

Blockbuster's focus is now back on video rentals. It ditched its heavily promoted "One World. One Word: Blockbuster" tag line, re-adopted the old "Make It a Blockbuster Night," and put the brakes on store expansion. Piloting this latest strategic shift is Antioco, who was tapped in June to replace Fields. Most recently chief of PepsiCo Inc.'s Taco Bell unit, Antioco has spent most of his career at convenience stores. As Blockbuster's latest chief, Antioco made his first quasi-public appearance in mid-July at the industry's largest trade show in Las Vegas. Suppliers were impressed with his willingness to listen rather than quickly announce yet another new strategy.

It's too early to tell whether Viacom's latest strategy--and CEO--will fix what ails Blockbuster. But with its prime store locations and brand name, some think the company will indeed bounce back. "When I left, it was a great company," says former Blockbuster CEO Berrard, a protege of former Blockbuster Chairman H. Wayne Huizenga who departed to rejoin his mentor in early 1996. "I still believe it is." But analysts say that once the latest management team comes up with a new strategy, it will take a year or 18 months to have an impact on results. Given Blockbuster's recent history, the company could have changed course several times by then.By Stephanie Anderson Forest in Dallas, with Gail DeGeorge in Miami, Kathleen Morris in Las Vegas, and bureau reportsReturn to top


Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus