Blockbuster CEO Keyes: ‘We’re Rocky 10’

Grilled on the rental chain’s bankruptcy threats, distribution innovations and why the brand still matters

Last Updated: July 29, 2010 @ 10:08 AM

Pity James Keyes. The Blockbuster chairman and CEO has been battling rumors of the struggling movie rental chain's impending bankruptcy since he took control of the company three years ago.

And the bad news keeps piling up. Struggling under the weight of some $975 million in debt, more than 1,000 underperforming stores have been shuttered over the past year.

Keyes, who previously was head of convenience store chain 7-Eleven, insists things aren't as bleak as the picture the media is painting.

He points out that the chain is transitioning into other distribution platforms by expanding its video-on-demand options, offering movie rentals on cellphones and breaking into the kiosk business long dominated by rival Redbox.

Further, he argues that the good relationships Blockbuster maintains with studios and the attractive price points it offers on DVD sales and rentals will be critical to its survival.

Giving credence to Blockbuster's status as Hollywood's preferred brand, Sony and 20th Century Fox announced on Wednesday that they would allow the chain to rent its movies the same day they go on sale.

Along with a similar pact with Warner Bros., this gives the chain a 28-day leg up on Redbox and Netflix in offering new releases such as "Avatar" and "The Blind Side."

Is this the longest funeral in history?
No, not at all. It's been an interesting experience to see this momentum build. There's been a lot of negative momentum built around the perception that Blockbuster is a video store, and as such is symbolic of a channel that is in severe decline. That's frustrating because we've spent the last several years building this brand into a multichannel provider of entertainment. In terms of our plans to compete in the digital space, we have nowhere to go but up.

What does the deal with Sony and Fox signal about your relationship with studios?
The deals with these two studios, in addition to the one we previously announced with Warner, happened because of what we offer studios. What's been missed in the focus on Netflix and Redbox is that these are single-channel services, and they're not consistent with the studios' goals.

Because of the subscription nature of the business, making 400 million copies of "Avatar" available in bulk doesn't make sense for studios because they're losing money on each transaction. It's like offering an all-you-can-eat buffet when you have the best steak available.

We provide a special link in the distribution chain of home entertainment by introducing our customers to hundreds of movies that aren't box office hits or never find their way to theaters, in addition to movies like "Precious" or "Avatar."

Through our new program Blockbuster Premieres, we're partnering with producers to launch new movies that are really good but may not have had a theatrical release. We're allowing them to share that wall space in our Blockbuster stores.

That's leveraging our strength, and that's good for studios because we are introducing customers to high-quality films.

Do you think that Blockbuster has been slow to respond to changes in the industry?
We don't intend to be on the cutting edge because we don't think it's necessary. We're following the economics, but there's a perception that we are falling behind. If you get ahead of customers, it can be a costly proposition. Look at MovieBeam. That was a terrific company, but where are they now? We are partnering with companies and letting them shoulder the cost of developing technologies.

Is the Blockbuster brand its most valuable asset?
That's the key. We have the broadest base of customers worldwide. Everyone talks about Netflix's 12 million customers, but they rarely talk about Blockbuster's 50 million.

Take our relationship with Samsung. They're partnering with us on our video-enabling brand, because we're more mainstream. Why would T-Mobile pick Blockbuster to help launch its video-enabled phones?

Well, think about the mainstream consumer, think about your mom. She knows our traditional sign on a pole signals a store where she can rent movies. She's not going to go to a Best Buy or a Home Depot for movies. So as she gets used to new technology, she knows that the Blockbuster button on her remote control is going to allow her to access content in the same way she's been doing for the past 20 years in our stores.

How will Blockbuster's liquidity difficulties impact its ability to compete?
You have to decide whether the winner of this battle is going to be the company that outspends all the others or the one that brings more to the table. Philips is making TVs and sets that are sold worldwide. They're putting our brand at their expense into those technologies, because we are relevant in the U.K. or Denmark. Netflix is only good in the United States.

Netflix is spending a lot of money and they're spending it because they're a new entry into the marketplace.

Is there a future for a bricks-and-mortar business? Do you plan to close more stores?
I can't answer that question. It depends on our ability to adapt to the changing needs of our customers.

I worked for many years in the convenience industry, where we only sold beer, soft drinks and cigarettes. Well, the tobacco industry is in steady decline, so these stores had to evolve to offer a range of services, like fresh produce.

The same is true with Blockbuster. There is less demand for rental of DVDs, but there is new demand for Beatles Rock Band or Nintendo Wii or connected devices such as HTC phones with our brand baked into it. Our rental store has to offer convenient access to these products. For instance, we plan to sell more "Avatar" DVDs than we will rent.

There was a lot of bad press regarding Carl Icahn's recent decision to sell his stake in Blockbuster. He's been one of your big champions. What does this mean for you and the company?
It's not a bad thing. Carl remains a good friend. He's been helpful to us during his tenure on the board and been a big supporter of our initiatives. He has other investments and boards, but we will stay in close contact. He could become even more helpful on the outside.

Is there truth to the rumors that Blockbuster will file for bankruptcy?
Going forward, there is a difference between risk and reality. There is always a risk in a company with tight liquidity of Chapter 11, but it is not always the preferred solution.

These reports happened about a year ago when we hired Kirkland & Ellis to recapitalize the company in an out-of-court fashion. This was a time when maturing and financial markets were closed, and they helped use secure financing and kept us out of bankruptcy. Unfortunately, Bloomberg reported that we hired Kirkland to help with bankruptcy, which caused our equity value to drop by 80 percent. It was an unnecessary destruction of shareholder value.

Recently in our annual 10K filing we had some language about bankruptcy, and that got built into headlines. With that frenzy of perception, our equity values went down again.

If one isn't careful, this becomes a self-fulfilling prophecy, but fortunately we did not have a run on the bank in terms of our supply side and they did not put our company on cash terms.

If this were a movie, what kind of movie would Blockbuster be starring in?
We're "Rocky 10." They had us on the ropes in "Rocky" 6 through "9," but we're coming back.

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