Blockbuster story still flowing forth like a good movie

The Outlook

IPO offers investors a bet on a market leader

August 08, 1999|By Rachel Sams

BLOCKBUSTER INC., the No. 1 chain of video stores with about 6,500 outlets, will sell 18 percent of its shares in an initial public offering next month. The Dallas-based company has filed to sell 31 million shares to the public at $16 to $18 each while its parent, Viacom Inc., will retain 144 million shares, giving it a market capitalization of roughly $3 billion.

Is Blockbuster worth that much? Is the video rental business likely to continue to grow? What are Blockbuster's prospects?

Stephen Tekirian

Initial public offering analyst, S&P Equity Group, New York

Blockbuster is a nice break from Internet IPOs for the more conservative investor. It's the kind of name that you can put your money into it, come back in a couple of years and be pretty happy with it. You've got to watch those Internet things -- they change from hour to hour.

The IPO is pretty fair for far and away the market leader in the video industry. Blockbuster has a 30 percent share of the market, and its goal is to get to 40 percent. Video rental was a $17 billion industry in 1998, and experts call for it to be about $22 billion by 2002. That's 30 percent growth in three years. It's definitely a steady business. The video rental industry is certainly somewhat entrenched in society. I don't think it's going away.

Blockbuster has a good strategy of increasing its already strong market share and expanding overseas. It has a lot of market potential. It is the largest player in the industry, and it can take advantage of that by having nationwide marketing programs. It can achieve certain savings from that that smaller players just can't achieve.

Larry C. Petrella

Senior media and entertainment analyst, Lehman Brothers, New York

I think they priced Blockbuster very attractively with a bigger goal -- not to maximize the valuation at the time of the IPO, but to make sure the deal gets done. I think they've set it up to facilitate getting Blockbuster completely spun off from Viacom.

I think the video rental industry probably has a little more growth in it. I think video-on-demand will be rolled out and, within a reasonable amount of time, growth [in the video rental industry] will slow down. However, Blockbuster could increase its market share even if the industry stops growing. It could keep growing to a 40 percent market share and maybe grow a little longer than the industry.

I think Blockbuster will do very well for a while, with high growth for the next year or so. However, I think it will begin to feel the effects of technology. Ultimately it will face a very competitive environment with the advent of video-on-demand coming online.

Tom Adams

President, Adams Media Research, Carmel Valley, Calif.

The video rental business has a couple of short-term years of growth in it. You can now find a copy of the movie you want when you go in, which has had a positive effect -- Blockbuster has reported huge same-store revenue gains. At that point, competition from cable and DBS [direct broadcast satellite] will have reached enough homes that it will put a cap on that growth.

We expect video in total to grow right through that competition because of "sell-through," the industry buzzword for selling videocassettes. Blockbuster has not really been big in that area, but I think they will pursue that. Too much is made of the electronic threat.

If you look at the big picture -- both rental and sell-through -- I think they could have huge growth.

Barbara McNamara

Video market consultant, Alexander & Associates, New York.

My guess would be that Blockbuster will continue to grow and increase its market share. In the next few years, I wouldn't be surprised if Blockbuster was at 40 percent [market share], given some of the consolidations in the market and some of the smaller chains having financial difficulties.

You're looking at a transition shifting from VHS to DVD. Experts project that there will be 4 million DVD players in the market by the end of the year. I really do think DVD is going to reinvigorate the video business. Outtakes, director's cuts and interviews with actors give DVD a unique selling point -- it's something you wouldn't necessarily get on cable. Those added features are more specific to DVD.

Right now, only a small percentage of stores offer DVD. Once Blockbuster rolls that out to be in all of their stores, it will definitely boost their revenues.

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