Blockbuster ( BBI) won its freedom Tuesday, but the only people cheering were the Viacom ( VIA.B) investors bidding the troubled movie-rental chain adieu. Viacom ended weeks of speculation by saying it would spin Blockbuster off to shareholders. The New York media conglomerate, which owns 81% of the Dallas movie company, made the move after it wasn't able to sell the chain to private investors. Now the spotlight turns to Blockbuster, which faces rising pressure to remake itself in a shifting movie-industry landscape. The company, under competitive fire from DVD sellers and rival rental services alike, rolled out a plan to spend $70 million to $90 million preparing to offer new services. Blockbuster said it would spend the money to develop an online DVD subscription business, a movie-and-game-trading service, and game stations in its stores. "We believe Blockbuster will compete very effectively as an independent company and that separation from Viacom will enable us to better pursue our unique strategic vision and significant avenues for expansion," CEO John Antioco said. "With our brand, our cash flow, and our growth opportunities, we are convinced that the prospects for our business are exceptionally strong." Not everyone was equally convinced, however. For one thing, Blockbuster said the new plans would reduce 2004 earnings by 10% to $1.48 a share. Analysts had been expecting $1.61 a share, according to consensus estimates from Thomson First Call. And that's not even the biggest worry. "We believe Blockbuster's core, profitable rental business may be vulnerable over the next 12 months, as mass market consumers with recently purchased DVD players are encouraged to build DVD libraries by heavy discounting," said Jill Krutick, an analyst at Smith Barney, in a research note Tuesday. Viacom shares, which slipped last week on news the spinoff plan was moving ahead, rose 1% Tuesday. Blockbuster fell 23 cents to $16.40.
In the fourth quarter, Blockbuster posted a loss of $1.19 billion, or $6.57 a share, vs. a profit of $30.7 million, or 17 cents a share, a year ago. Results included an impairment charge of $1.3 billion, or $6.89 a share. Excluding the charge, the movie renter earned $58 million, or 32 cents a share. Although fourth-quarter revenue increased to $1.62 billion from $1.58 billion in the year-ago period, same-store sales were down 6.8% and core rental sales were lower by 1.3% from a year ago. "It might be difficult for Blockbuster to compete on price with retailers," added Krutick. Meanwhile, Blockbuster is late to the online DVD subscription business, following Netflix ( NFLX) and Wal-Mart ( WMT). Shares of Netflix were lately falling $2.66, or 3.5%, to $73.90, as investors continue to be wary of hefty Blockbuster's ability to make trouble for its rivals. Other concerns for Blockbuster include video-on-demand and other technologies. "They will continually pose potential risks to Blockbuster's existing business," said Krutick. Finally, the spinoff may be somewhat of a worry. "While an independent Blockbuster could pursue its own initiatives
potentially with a more leveraged balance sheet, we believe the loss of a deep-pocketed parent is a risk," said Krutick.