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Blockbuster Head: VOD’s Not a Threat

As its video-rental business continues to decline, Blockbuster Inc. chairman John Antioco downplayed the impact of video-on-demand offerings from cable operators, adding that with only 1.7 million paying customers out of 7 million homes passed, VOD hasn’t proved to be a significant threat.

"Clearly, VOD, we don’t think, is getting a lot of traction, in spite of a lot of efforts on the part of a number of the cable companies to do so," Antioco said during Blockbuster’s third-quarter earnings call.

"We continue to believe that VOD, as it relates to overall home-movie consumption, will be a very small part," he added. "Although we believe it will grow over the next three or four years, the greater growth in package media, both retail and rental, will be far greater than VOD on an absolute-dollar basis. That’s the business we’re focused on."

Video-rental revenue declined by 2.4% to $1.1 billion in the quarter, and same-store sales dropped 7.5%, primarily due to weak new movie releases in the period.

For the quarter, total revenue was down slightly to $1.38 billion compared with $1.39 billion last year. Net income rose 25% to $63.7 million, or 35 cents per share, primarily due to Blockbuster’s focus on high-margin sales.

Antioco said the company has been shifting away from VHS-video rentals and toward DVD rentals and sales. According to its financial results, DVD rentals accounted for 59.5% of total video-rental revenue for the quarter, up from 41.8% last year. VHS rentals made up 30% of total video rentals in the most recent quarter, down from 48% last year.

Driving that DVD growth was Blockbuster’s strategy to sell DVD players in its stores last year, boosting DVD-player penetration among its customers to nearly 70%.

While Antioco said on the call that Blockbuster is essentially out of the DVD-equipment business, it could re-enter it once high-definition DVD players become available, "for strategic purposes probably more than margin growth."

Blockbuster stock dropped 10.6% ($2.28 per share) Tuesday to $19.22, mainly because the company cut its 2003 revenue-growth estimate from high-single digits to mid-single-digits.