Blockbuster Inc. Financial Analyst

Introduction

Blockbuster Inc. was founded in 1985 and is headquartered in Dallas, Texas. They are a leading provider of in-home movie and video game entertainment; heir retail stores rent and sell DVD’s and video games. Blockbuster has locations all over the world including the Americas, Europe, Asia, and Australia. Blockbuster has over 5,000 stores across the United States and an additional 3,000 stores worldwide. It is estimated that 43 million U.S. households have a Blockbuster membership.

Industry History

The introduction of the VCR to the market in 1975 was the first step to the video rental and retail industry. Movie studios soon began to release video cassettes of classic movies to boost revenues. This allowed customers to be able to get away from the confines of the movie theaters and cable station’s set schedules. However, few consumers were willing to pay full price much to buy a movie. In 1977 George Atkinson, “the inventor of video rental,” placed an ad in the local paper saying that he was renting videos for $10 per day. After threats of lawsuits from the film production industry, a U.S. copyright law was passed allowing the rental of videos. Rental shops began to emerge to serve those who wanted the convenience of home videos without having to purchase the movies themselves. As the prices of VCR’s fell, the number of people renting movies increased. Renting movies also became much cheaper for families. Instead of having to buy each family member a movie ticket, they could pay just one fee to rent a movie that the entire family could enjoy. As technology has improved, such as with the advent of DVDs, the movie rental industry improved with it.

Blockbuster History

In 1982 David Cook founded Cook Data Services, a software and computing business to service oil and gas industries, in Dallas. Shortly after the industry went under, however, he was left searching for another source of revenue and decided to enter into the video rental business. With his background in software he figured he could develop a computerized system of checkout to streamline operations. In October 1985, Cook opened the first Blockbuster Video. With his 8,000 tapes, he had an inventory much larger than any competitor in the area. With his barcodes and laser scanning system, he simplified and reduced the time to conduct transactions. In February 1987 Cook sold 1/3 of Blockbuster to three investors- Wayne Huizenga, John Melk, and Donald Flynn invested $18.6 million in Blockbuster stock.

Cook gave the future of the company over to Huizenga. Huizenga’s idea for the company’s future was to aggressively expand it through ownership of stores rather than franchising it, like Cook had wanted to do. The company began to buy back franchised operations and also it looked to buy out other movie rental companies such as Southern Video Partnership and Movies to Go, Inc. Blockbuster continued its aggressive buyouts on a number of other companies. After Huizenga’s takeover, the company owned 700 stores and profits had nearly quadrupled. In order to keep growing and expanding, Blockbuster looked to embark on the international market. Blockbuster was able to expand to the U.K. Japan, Australia, Latin American, and other areas in Europe. Video games also became available at many Blockbusters as a way to diversify the company. Blockbuster created a strong market presence by the rapid expansion of stores and through the acquirement of competitors. In 1990 alone, through the acquirement of Erol's Video and Major Video, Blockbuster increased their amount of stores from 130 to 1,500. Blockbuster has since then increased its number of stores to over 5,000 in the United States and over 8000 worldwide. Blockbuster’s name has thus become synonymous with “video store”.

Recent Performance/Trends

In 2005, 32.5% of Blockbuster’s revenue was generated outside the United States. In 2006, this number rose to 34.5%. Blockbuster attributed this increase to continued growth in international sales, overseas expansion and favorable foreign exchange rates. In their overseas stores, Blockbuster has been more focused on retail sales and even more specifically on the retail game industry. The retail home video industry generated revenue of $21.4 billion in 2006. This was comprised of $16.9 billion from sales and $7.2 billion in retail and online rentals. In 2005, sales totaled $16.4 billion and $7.8 billion in retail and online rentals. Overall the industry increased sales by $500 million but lost rental revenue of $400 million. The factors that were assumed to have created this loss in rentals and increase in revenue are the cheaper availability of DVDs by discount stores which compete with rental pricing and the