Former Retail Giant Blockbuster Struggles With What's Next

In a Dallas strip mall, in the neighborhood George W. Bush now calls home, sits a bright and fluorescent Blockbuster that, on this cold Thursday night in December, is populated by maybe a handful of customers — high schoolers grabbing a game, a middle-aged mom checking to see if Julie & Julia's out yet. The manager has time enough to show off the monolith perched near the front door: a newfangled kiosk that allows renters to upload a movie to a memory card — the kind you might find in your camera, computer, or older smart phone. This location, in Blockbuster's home town, is one of only a few in the country to receive these machines, which are still in testing. The manager says "maybe a couple" of customers have kicked the tires — not quite ready for the future, it seems.

The kiosk — which was manufactured by NCR, maker of automatic teller machines — sits on a shelf filled with items once unheard-of in a store most often visited on slow Friday nights. Blockbuster, in addition to renting movies and games, now peddles home electronics and tchotchkes: netbooks, Samsung Blu-ray players armed with Blockbuster On Demand capabilities, Snuggies. Blockbuster is attempting to become a corner-store Best Buy.

Exactly 2.6 miles east on this same street, beneath a busy highway, it's a different scene: The miniature marquee mounted outside this Blockbuster reads, "THIS STORE CLOSING LAST 10 DAYS." Reminiscent of Tower Records' sad goodbye three years ago, there are "Everything Must Go!" signs everywhere, deep discounts on DVDs (five used for $19.99 — many of them brand-new titles), and even deeper discounts on books, games, candy, posters, and the other assorted whatnots Blockbuster started carrying when the brick-and-mortars stopped attracting, you know... whatyacallem... people.

This thrift-store Blockbuster is located precisely 10.1 miles from Blockbuster's downtown Dallas headquarters, which is where Blockbuster's chairman of the board and chief executive officer, Jim Keyes, sits as he discusses a Blockbuster "in transition."

"People see a store close, and they go, 'Oh, bad,' " says Keyes, whose company will shutter about 300 stores by year's end and another 600-plus in 2010. "But retail chains are like trees. They get dead limbs, and you have to prune them. And sometimes you have to aggressively take off the lower limbs for the three to grow high. When we cut off a limb, there's a perception we're going out of business, when, in fact, we're keeping up with the changing needs of the customers."

It wasn't always this way for Blockbuster. When Dallas businessman John Melk founded the company in 1985, he brought in a big-money investor in Fort Lauderdale's H. Wayne Huizenga. Soon, they were opening a new store every 17 hours. But Huizenga, smartly fearing that new technology would make video rental obsolete, sold the company to Viacom in 1994 for $10 billion. Viacom unloaded the company four years later, and the chain has since changed hands among owners who likely figured out what Huizenga learned in the mid-'90s.

Keyes left his job as CEO of 7-Eleven in July 2007 to come to Blockbuster, after the war with Netflix had already been lost in the mailboxes of Americans grown weary of schlepping down to Ye Olde Video Rental Shoppe to see if a copy of their Saturday-night special was in. (Matter of fact, Keyes went in to work just as the ink was drying on a patent-suit settlement with Netflix.) At the same time, Redbox, those blood-red video-rental kiosks, were invading grocery stores and convenience-store parking lots. Blockbuster, once the video-rental giant, was assaulted on all fronts.

Blockbuster had made a myriad of blunders before Keyes' arrival, chief among them the refusal in 1998 to cut a deal with Warner Bros. to distribute DVDs exclusively for the same cut the studio made off video cassettes and the lack of foresight to buy Netflix for a paltry $50 million when it had the chance, instead partnering with Enron on a video-on-demand deal called Project Braveheart that died with much finger-pointing in 2001.

Then came the steady plunge: profits down by millions every quarter for the last two years, debt restructuring, store closings, and a Bloomberg story in March that said bankruptcy restructuring was "possible." That last bit of rumor-mongering cost Blockbuster 77 percent of its value in a single afternoon; by closing bell of March 3, 2009, the stock was worth 22 cents a share, down from its 52-week high of $3.68.

"If there's one thing that caught me by surprise this year, it was the strength of the perception that Blockbuster is going away and that if it has a chance of success, it has to catch up to Redbox and Netflix," Keyes says. "The interesting thing about that premise is, these are single-channel operators. With Netflix, if your mom put Julie & Julia in her queue and [then] decides to buy it from Amazon, she now has a movie she doesn't want to see. If she's a Blockbuster customer, all she has to do is go to the store and exchange it for something she wants. And Netflix doesn't offer immediate gratification — I have to wait for the movie. The store has immediate gratification. "

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