Huh?

In January of 2007, John Antioco, 57, then Chairman and Chief Executive Officer of Blockbuster, was interviewed by the New York Times about Blockbuster's plans to roll out its own digital distribution service, and about their new Total Access program, which gave customers the option of returning DVDs through the mail or exchanging them at a store. "[We'll launch digital downloading] this year. While we don't see digital downloading as becoming a big business in the next year or two, our mission is to provide customers with completely convenient access to movies. We launched Total Access on November 1, and in the last two months of the year we added 700,000 subscribers. [Seventy to seventy-five percent of customers are staying on and paying for the service after a two-week trial.] That's a much higher conversion rate than any of our previous programs. The program takes the best of Blockbuster Online, which is a very large selection of movies--65,000 titles--and convenience, and adds the ability to take the movie to your local Blockbuster store and exchange it for any movie in the store that is available free. So it meets the spontaneous need of customers. When a customer exchanges a DVD at the store, it [also] immediately signals our online service to ship another movie from the subscriber's pre-selected list of films. [However, we haven't added the Total Access program to our European and Asian operations, and] we are going to focus on the US, Canada and Mexico. And if the right opportunity came, we would probably divest some of our international businesses and take that money and spend it toward initiatives here at home or buy back shares. I wouldn't use the word restructuring. I would say that we are continuing to dissolve our old business model. And we are adding a third leg to our business this year: digital distribution. So, we have taken Blockbuster from an in-store only rental business to in-store rental, online and mail-delivery rental and now digital download."

Antioco worried at the time that while Blockbuster's share price had doubled since early 2006, the company had been losing money essentially since the beginning of his tenure (he joined in 1997 ) (see Exhibit 1.) The only of those years that Blockbuster had produced a positive net income was the last one (2006)--and then only at 1%! (See Exhibit 1.) Netflix, on the other hand, had been making money since 2003 (see Exhibit 2.) Netflix had 35 distribution centers and no shops throughout the US, and 99% of its revenue came from subscriptions. Netflix had also already debuted a streaming video service, making streamed films and TV shows available to a random subset of its customers, and was planning to extend the service over the next six months to all of its 6 million subscribers (in 250,000 increments so they could be sure to meet demand)--and planned eventually to be able to offer video on mobile phones and TV. Apple, Amazon.com, CinemaNow, Movielink, and Wal-Mart were also offering films and TV shows online--and Apple currently owned the market with ITunes accounting for 76%. However, Cynthia Brumfield, president of media research consulting firm Emerging Media Dynamics continued to say, "It's going to be a big business, but it's still going to be very small in comparison to the DVD business and ... the worldwide theatrical distribution business." Emerging Media Dynamics' estimates suggested that the rental and sale of movies over the Net would skyrocket by 2010, with nearly 60 million in unit sales and more than half a billion dollars in revenue--but those numbers were only 2% of revenue from home video rentals and sales for the movie industry in 2005. Emerging Media Dynamics also projected that Apple's dominance would decline as their competitors gained steam. Netflix, for example, was planning to initially offer 1,000 of its 70,000 titles for viewing on Internet-connected PCs--already four times the number on iTunes. And the $40 million Netflix was spending on the venture included money for additional content. Blockbuster had spent $30M in 2005 to develop Blockbuster Online. They also spent $60M in 2005 marketing their "no late fees" program for traditional in-store rentals, and lost $500M in those late fees.

While he worried about Netflix and some of the other competitors in on-line distribution, Antioco didn't think he was too worried about Movie Gallery, which had become the second largest company after Blockbuster in the video rental market following its acquisition of Hollywood Entertainment in 2005 (see Exhibit 3.) But he hadn't forgotten that Hollywood Entertainment had actually escaped a hostile takeover attempt by Blockbuster in order to be acquired by Movie Gallery (Blockbuster had offered $1.3B but Hollywood's directors convinced shareholders to take smaller rival Movie Gallery's $1.2B offer instead.) Movie Gallery now owned or franchised about 4,800 rental stores in mainly rural and secondary markets in the US, Canada, and Mexico, and rented or sold about 15,000 movie titles and 1,500 video games.

In July of 2007, Antioco resigned over a dispute about his compensation (Carl C. Icahn had begun a fight to reduce it from an annual $51.6 million). Antioco was replaced by James W. Keyes, chief executive at 7-Eleven from 2000-2005, and generally attributed with helping that company achieve 36 consecutive quarters of same-store sales gains. Keyes signed a 3-year contract with Blockbuster for approximately $750K annually, with opportunities for a bonus of at least $500K as well as option grants. One of his first announcements as Blockbuster's CEO was the acquisition of Internet movie provider, Movielink. The purchase enables Blockbuster to send films directly to TVs and computers. Blockbuster also acquired the rights to show the films of Movielink's previous owners, which included Warner Brothers Studios, Metro-Goldwyn-Mayer, Paramount Pictures, Sony Entertainment and Universal Studios, amounting to approximately 3,300 titles. Financial terms for were not disclosed for the deal. Observers