Blockbuster reaps profits from strategy

'THEY'RE TALKING WE'RE DOING'

November 04, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- Movies that you can order on your television with the push of a button may be fine and dandy someday, but for now Blockbuster Entertainment Corp. is happy to make money the old-fashioned way -- by renting out videos to bored couch potatoes.

"There's a lot of talk about what is going to happen [with interactive telecommunications]. While they're talking and planning, we're doing," Chief Executive Officer H. Wayne Huizenga told a group of executives at the Asia Society yesterday.

Mr. Huizenga said he doubted that video-on-demand would be available before the year 2000, and then to only a quarter of households. Meanwhile, Blockbuster is turning record profits. It made $142 million last year and has made $162 million in the first nine months of this year.

That growth of video sales, however, belies an aggressive strategy to diversify out of renting video cassettes. The company's goal, Mr. Huizenga conceded, is to be the company that consumers tap into when they call up favorite movies or television shows on their television.

Over the past year, Blockbuster has jumped into several new businesses. It has bought two music retail chains; bought two leading television studios and their film libraries; bought a company that runs children's playgrounds; and invested $600 million in a bid to buy Paramount Communications.

The flurry of activity has impressed Wall Street, which has bid up the company's stock to near-record levels. It closed yesterday at $29, up 25 cents.

Some analysts, however, worry that the company is so busy finding new ways to diversify that it may stumble.

"The information highway is going to create a lot of winners, but not everyone is going to win. You have to wonder if all their investments are going to work as well as they hope," said Richard Moroney, an analyst with Dow Theory Forecasts.

The information highway would see homes linked with cables that carry regular television stations and interactive signals. This would allow viewers to use television to play games, shop or call up movies, which could be backed up, forwarded or stopped like a videocassette.

For Blockbuster, which has 3,316 stores worldwide, including 81 under its name or the name Erol's in Maryland, the risk is that, if call-up movies catch on, consumers won't bother trekking to the neighborhood video store.

But Mr. Huizenga tossed cold water on this happening in the near future. He pointed out that the average family spends $150 a year on videos, but a family using the information highway would have to spend at least $500 on products for a company to make a profit.

The market for home videos is also far from saturated, Mr. Huizenga said. Although Blockbuster is larger than its next 175 competitors combined, it has captured just 15 percent of the U.S. market, he said.

Overseas, the company has even stronger prospects. It has 1,000 stores overseas but only 19 in Japan and none in the rest of Asia. Its presence in Japan is to grow to 30 next year, and the company is exploring other markets, he said, although a lack of copyright protection is holding back expansion.

Similar growth can be had by retailing music, Mr. Huizenga said. He cited studies showing that 40 percent of music store customers who know what they want do not make a purchase because of stocking or service problems.

Blockbuster now owns 237 music retail stores since buying Sound Warehouse and Music Plus last year. And last month it agreed to buy 470 Super Club video and music stores from Philips N.V.

While analysts agree that these deals make sense, they are less sure about Blockbuster's plans to become a programming force.

Earlier this year, Blockbuster bought 35 percent of Republic Pictures Corp. and 70.5 percent of Spelling Entertainment Corp. Inc. and is merging the two television studios. This will provide a stake in current television shows such as "Beverly Hills, 90210" and "Melrose Place" as well as classics like "Bonanza," "Twin Peaks" and "Dallas," and a film library with works like "Platoon," "Rambo" and "High Noon."

"You could have a Blockbuster network at some point, so even if the stores go out of business, it could be a very viable company," said Nandita Agarwal Parker, an analyst with Gerard Klauer Mattison & Co. Inc.

But a hitch to this strategy, Mr. Moroney said, is that every communications company is vying to build a fifth, sixth or seventh network. Blockbuster is expected to have money to compete -- it claims it can generate $1 billion in cash over the next three years -- but has felt enough of a pinch to have announced a $350 million stock offering to help pay off some of its debts.

"For now they're making a lot of money, but they haven't hit a home run with all these acquisitions," Mr. Moroney said. "The risk is that they never do."

ON THE MOVE

Here are some deals made by Blockbuster Entertainment Corp. over the past year:

November 1993 -- teamed with Sony and Pace Entertainment, a major producer of theatrical entertainment, to build amphitheaters around the world.

October 1993 -- acquired 470 music and video stores from Super Club, a division of Philips N.V., for $150 million.

September 1993 -- invested $600 million into Viacom Inc. to bolster Viacom's bid for Paramount.

September 1993 -- financed $100 million merger of Spelling Entertainment Group and Republic Pictures Corp.

April 1993 -- acquired 21.3% of the Discovery Zone, an operator of children's playgrounds.

March 1993 -- acquired 70.5% interest in Spelling Entertainment Group.

January 1993 -- acquired 35% of Republic Pictures Corp.

December 1992 -- acquired 237 Sound Warehouse and Music Plus stores in 40 metropolitan areas.

December 1992 -- joint venture with London-based Virgin Retail Group to develop music "megastores."

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