Video-on-demand was going to change the way people watch movies at home, but as Blockbuster's ( BBI) latest earnings report shows, consumers haven't cancelled their store memberships yet.
In the fourth quarter of 2001, Blockbuster, a unit of media conglomerate Viacom , said pro forma EBITDA, a key metric for the industry, was $175 million, excluding charges, a 15% increase over $152.2 million in the same period a year ago. According to generally accepted accounting principles, Blockbuster posted a loss of $4.5 million, or 3 cents a share, including $40 million in noncash charges for scaling back on VHS tapes to make room for DVDs. In the year-ago period, the company lost $24.6 million, or 14 cents a share. Blockbuster said revenue was up 1.3% to $1.36 billion in the quarter. Sales were up 4% to $5.16 billion for the year, boosted by a 160% jump in DVD rentals. Blockbuster closed down 23 cents, or 1.1%, to $20.78, after it said profits would be flat next quarter, as a result of a light new release schedule and expected high viewership of the Winter Olympics. But Blockbuster said nothing about video-on-demand, which has been considered a threat for years. Video-on-demand allows users select a movie or TV show from an onscreen menu. They can then view it as if it were a tape in their VCR, with fast-forward or rewind. So, when will video-on-demand, or "video-on delay," as it has been called, hurt Blockbuster? "We don't see it as a threat," said Karen Raskopf, a spokeswoman at Blockbuster. "We're keeping an eye on it, since it's clear people want it. And if it gains wide-scale viability, it will be easy for us to be a provider." Currently, Adams Media Research, an entertainment industry research and consulting firm, estimates that 30 million homes have subscription video-on-demand, a product offered by cable operators such as Cox Communications ( COX), AOL Time Warner ( AOL), and Comcast ( CMCSK) for people who have pay-TV. "In early testing, video-on-demand has been a success for cable operators," said Tom Adams, president of Adams Media Research. "But it hasn't affected the video rental market." One of the major hurdles for video-on-demand providers is dealing with the movie studios, which have a $20 billion business in the video rental and retail market, according to Raskopf of Blockbuster. To her knowledge, none of the studios have entered into long-term contracts for video-on-demand. "The studios have to think about how much of the $20 billion business they'd give up," she said. In a report last fall, Jeffrey Logsdon, an analyst at Gerard Klauer Mattison, said: "The economics of video-on-demand are not compelling enough to believe studios will jeopardize profits for DVD at this time." According to Logsdon, Blockbuster management estimates that it takes roughly four to five video-on-demand transactions to generate the same profit to studio as the sale of one DVD at retail. Analysts expect that Blockbuster will continue to feel the growth punch of DVDs. "Approximately 80% to 90% of all homes will have DVD players within the next 10 years," said Adams. "People are likely to rent and buy more of them as they go through the excitement of owning a new player."