Blockbuster Entertainment Corporation

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Blockbuster Entertainment Corporation

One Blockbuster Plaza
Fort Lauderdale, Florida 33301
U.S.A.
(305) 832-3000
Fax: (305) 832-3901

Public Company
Incorporated: 1982 as Cook Data Services
Employees: 37,000
Sales: $2.1 billion
Stock Exchanges: New York, London
SICs: 7841 Video Tape Rental; 6794 Patent Owners and Lessors

Blockbuster Entertainment Corporation is the world’s largest movie video rental store chain, with over 3,000 outlets in 10 nations. Founded in Texas as an alternative to small, local operations with limited selection, the company branched out in the early 1990s to include other elements of the entertainment industry, including family entertainment centers and music retailing.

Cook Data Services, Inc., was founded in 1982 by David Cook to supply computer software services to Texas’s oil and gas industry. When the industry went bust, the company was left without a strong customer base. Cook was searching for another source of revenue when his wife, Sandy, a big movie fan, suggested the video rental business.

Looking into the industry, Cook learned that the video rental field was highly fragmented. Most stores were relatively modest family operations that carried a very small selection of former big hit movies. Providing a large selection of movies required a large investment of capital, since distributors typically charged approximately $70 per tape. In addition, tapes were generally not displayed, but kept behind the counter to discourage theft, and had to be fetched and laboriously signed out before the customer could leave. Cook saw that operations could be greatly streamlined by a computerized system for inventory control and check out, something his software background had prepared him to develop.

After Sandy Cook had conducted several months of research into the video rental industry, David Cook sold his oil and gas software business to its managers, and entered the movie rental business. In October 1985 Cook opened the first Blockbuster Video outlet in Dallas. With 8,000 tapes, covering 6,500 titles, it had an inventory many times larger than its nearest competitor. In addition, tapes were displayed on shelves throughout the store, like a bookstore, so that customers could pick them up and carry them to the front desk for check out. A magnetic strip on each video and sensors at the door discouraged theft. Computers were used to keep track of inventory, and a laser scanning system, which used barcodes on the tapes and on members’ cards, simplified and reduced the time involved in conducting transactions.

The first Blockbuster store was an immediate hit. The Cooks discovered that the public had a much greater appetite for renting video movies than they had previously suspected. People were interested not just in seeing hit movies they had missed in the theaters, but also in a broad variety of other features.

By summer 1986, Cook had expanded the Blockbuster concept to three additional stores. To reflect the different nature of the company, Cook Data Services became Blockbuster Entertainment Corporation in June 1986. In September, the company set out to raise money for further expansion with an initial stock offering. However, days before the sale was to take place, a financial columnist wrote a damaging article citing Cook’s background in the oil industry and questioning the company’s know-how in the video field. The article caused the equity offering to be cancelled, and without this infusion of cash Blockbuster began to run out of money. The company finished 1986 with a loss of $3.2 million.

In February 1987, however, Cook sold a third of Blockbuster to a group of three investors, who were all former associates at another company, Waste Management, Inc. Wayne Huizenga had co-founded Waste Management, which grew to be the largest garbage disposal business in the world, in 1972 and served as its president and chief operating officer until 1984, when he retired. John Melk, the president of Waste Management’s international division, was first to invest in a Blockbuster franchise. Joined by Donald Flynn, the chief financial officer of Waste Management, the group invested $18.6 million in Blockbuster stock.

With this move, Cook surrendered future control of Blockbuster, and Huizenga became the dominant voice in determining the company’s future. Where Cook had envisioned growth through franchising, selling Blockbuster’s name and computer system to individual entrepreneurs, Huizenga foresaw growth through company ownership of stores. In April 1987, two months after the men from Waste Management bought into Blockbuster, Cook left the company.

By June 1987 Blockbuster owned 15 stores and had franchised 20 others. With this base, Huizenga set out to transform Blockbuster into the industry’s dominant player. He kept most of Cook’s policies, such as store hours from 10 a.m. to midnight every day, a three-day rental policy, which encouraged customers to rent more than one tape at once, and a broad selection of titles. Despite conventional wisdom that the video tape rental business was heavily dependent on hits, 70 percent of Blockbuster’s rental revenues came from non-hit movies, which had the added benefit of being less expensive to purchase from distributors. In addition, Blockbuster’s management decided to eschew revenue from X-rated adult films, opting instead for a family environment.

With these policies in place, Blockbuster set out on a program of aggressive expansion. The company began to buy back franchised operations hoping to franchise stores only in areas where the population was too small to support several stores, with a goal of 60 percent company-owned Blockbuster outlets. In addition, Huizenga began to buy up chains of video stores that already dominated their local markets, using this as a shortcut to quick expansion. In March 1987 Blockbuster bought Southern Video Partnership as part of this policy. Two months later, it purchased Movies To Go, Inc., of St. Louis, for $14.5 million.

To support its expansion, Blockbuster established six regional offices, including a distribution center in Dallas that prepared tapes to be placed in stores. By the end of 1987, Blockbuster was operating 133 stores, and had become the country’s fifth-largest video chain in terms of revenue. Sales had risen from $7.4 million in 1986 to $43.2 million in 1987, despite the half-million dollar price tag for building new stores.

Blockbuster continued its ambitious expansion program in 1988. In March, the company purchased Video Library, Inc., for $6.4 million plus stock. The following month, Blockbuster made a deal with the United Cable Television Corporation (UCTC) to open 100 franchised stores over the next two and a half years. In addition, UCTC purchased 5 percent of Blockbuster’s stock for $12.25 million. By November, this stake had risen to 20 percent. With 200 stores, Blockbuster had become the largest video rental chain in the country. At the end of the year, the company’s number of stores had risen to 415.

In January 1989, Blockbuster finalized its purchase of Las Vegas-based Major Video, Inc., the country’s fourth-largest video rental chain, for $92.5 million. It also purchased Oklahoma Entertainment, Inc. The following month brought the purchase of Vector Video, Inc., and Video Superstores Master Limited Partnership, which, with 106 stores, had been Blockbuster’s largest franchisee. By June, 1989, two years after Huizenga’s takeover, the company ran 700 stores. Sales had tripled, profits nearly quadrupled, and the value of the company’s stock had risen sevenfold.

Despite these gains, in April 1989 Blockbuster’s efforts to buy up other chains with stock suffered a setback when an analyst at a large stock brokerage issued a report condemning what he considered to be the company’s misleading accounting practices. In calculating its earnings, Blockbuster spread out the costs of purchasing video store chains and building new stores over a forty-year period, and also spread out the cost of buying large numbers of hit tapes over three years, much longer than tapes retained their value. In addition, the company relied on one-time-only franchise fees for 28 percent of its revenue. Despite this criticism, Blockbuster declined to change its accounting practices, and the company’s stock price eventually regained its former level.

In November 1989, Blockbuster’s largest shareholder, the United Artists Entertainment Company, announced that it would sell its 12 percent holding in the company, having previously sold its 28 franchised Blockbuster stores, in an effort to streamline its business holdings. Worries that the video rental industry was reaching a saturation point cast doubts on Blockbuster’s ability to keep opening stores indefinitely.

One response to this concern was to look to markets outside the United States for growth. Accordingly, original investor Melk was dispatched to start up a British subsidiary, with the company’s first foreign store to be opened in South London. Blockbuster’s management continued to maintain that since the video “superstore” concept was open for anyone to copy, it needed to grab market share as fast as possible in order to exploit its ground-breaking concept. Carrying out this philosophy, the company opened its 1,000th store before the end of 1989.

To increase business, Blockbuster embarked on a $25 million ad campaign, and also undertook joint promotions with fast food outlets such as Domino’s Pizza and McDonald’s. In addition, the company accelerated foreign expansion, augmenting its operations in Britain, and planning for operations in Australia and the rest of Western Europe. In the United States, the chain had opened its 1,200th store by June 1990, and new outlets opened at a rate of one a day.

In October 1990, Blockbuster announced plans to cooperate with Den Fujita, the company that ran McDonald’s franchises in Japan, in the development and franchising of video rental stores in that country. The following month, Blockbuster made its largest acquisition to date, when it acquired Erol’s, a large video store chain with 200 outlets on the East Coast and in the Midwest, for $30 million, including cash, notes, and debt assumption.

Although Blockbuster continued its strong pace of new store openings in 1990, the slowing growth of the video rental industry was becoming more evident. Though the company’s earnings grew an astronomical 114 percent in 1988, they had shrunk to a still-impressive 93 percent rate of growth in 1989, followed by rate of 48 percent in 1990. In keeping with this trend, first quarter financial results for 1991 were disappointing. Huizenga blamed the Gulf War for keeping people interested in television news instead of rented videos. In early May, Cox Communications, one of the company’s franchisers, announced that it would sell all 82 of its Blockbuster stores.

Faced with a rapidly maturing industry, Blockbuster began to expand its offerings to maintain profitability. The company began to offer video game equipment and Sega Genesis video games at some of its stores. The company considered selling audiocassettes and compact disks. Further, Blockbuster also acquired the right to market tapes of the 1992 Olympic games.

In a further effort to encourage rentals, the company launched an advertising campaign themed “Win in a Flash,” and made an agreement with the Showtime cable network for a joint promotion. In August 1991, Blockbuster dropped its rental price for hit movies for the first three months after their release, and shortened the time they were taken out, as a further step to raise earnings. In an effort to insure that the company would be just as good at running video stores over the long haul as it was at opening them, Blockbuster hired more senior executives with long-term experience in the retail field.

In addition to these efforts to increase earnings in the United States, Blockbuster increased its foreign efforts. Along with its operations in the United Kingdom and Japan, the company found markets in Europe, Australia, and Latin America. With 30 stores already established in Britain, Blockbuster announced in November 1991 a large expansion in that country, designed to make it the nation’s number one video rental chain. Further foreign involvement came later that month, when Philips Electronics N.V., a Dutch firm, agreed to invest $66 million in the company. As a result of this partnership, Blockbuster said that it would market Philips’s newly introduced interactive compact disk systems and software in its stores. Five months later, Philips purchased an additional six million shares to raise its investment to $149 million.

To streamline its corporate management, Blockbuster bought a large office building in Florida and consolidated the company’s five regional offices. As Wall Street pundits continued to predict that Blockbuster’s success was short-lived, and that the video rental industry would be made obsolete by new technologies, Blockbuster’s system wide sales of $1.5 billion in 1991 earned $89 million. By the end of the year, the company had opened stores in Japan, Chile, Venezuela, Puerto Rico, Spain, Australia, New Zealand, and Guam.

In further overseas expansion, Blockbuster bought Citivision PLC, the largest video rental chain in Britain, for $135 million, in January 1992, anticipating that this property would provide valuable exposure in the United Kingdom, and a jumping-off point for further European growth. The company hoped that through joint ventures international operations would contribute a quarter of revenues by 1995. With 952 stores in 9 foreign countries, Blockbuster began to intensify its efforts to expand both in products and geographically.

In October 1992, Blockbuster embarked on a series of agreements that were designed to expand the company’s operations beyond its core movie rental business. Blockbuster bought Music Plus and Sound Warehouse from Shamrock Holdings, a California company, for $185 million. One month later, Blockbuster entered into an agreement with Virgin Retail, a British conglomerate that began as a record store, to set up “mega-stores” in the United States, Europe, and Australia. In December 1992, the first such store in the United States opened in Los Angeles, the precursor to a network of stores which Huizenga envisioned not only renting videos, but also selling and renting music, computer programs, and games, and containing high-tech “virtual reality” entertainment arcades. It also hoped to improve on the traditionally low profits of music retailing by adding other, more profitable products.

By 1993, the distinctive bright blue and yellow Blockbuster logo adorned more than 3,400 video stores worldwide, about one-third of them overseas. Late in January of that year, Blockbuster branched out further, paying $25 million for a one-third, controlling share in Republic Pictures, a movie and television production and distribution company based in Hollywood. Republic’s most valuable asset was its film library of television shows and films, including several John Wayne movies and the hit television series “Bonanza.”

In March 1993 Blockbuster purchased 48.2 percent of Spelling Entertainment, a producer of popular television shows with a large library of past programs.

In addition, Blockbuster began construction of a prototype family entertainment center in Florida, as the company explored ways to integrate Wayne Huizenga’s professional sports teams, the Florida Marlins and a hockey team, into its operations. With its ever-growing number of corporate activities, Blockbuster has pursued diversification to complement its success in the video movie rental business.

Principal Subsidiaries

Blockbuster Videos, Inc.; Movies to Go, Inc; Blockbuster Distribution Corporation; Blockbuster Management Corporation; Blockbuster Computer Systems, Inc.; Blockbuster Credit Corporation; Video Library, Inc.; Major Video Corporation; Vector Video Corporation; Video Superstores Venture, L.P.