No-late-fee policy hurt Blockbuster
Some investors say video-rental chain should restore source of revenue
By Karen Richardson
The Wall Street Journal
Originally published January 9, 2006
Some investors say Blockbuster Inc. should bring back the fees it charged customers for returning videos late, noting that those penalties generated a sizable and steady stream of revenue.

But is it too late for late fees to turn around the struggling video chain's financials?



Blockbuster last year ditched the late fees in a concession to competition from video-by-mail chains such as Netflix Inc. that allow customers to keep movies for as long as they like after paying a flat monthly rate.

While a number of Blockbuster's franchise stores opted to keep the fees in place, the company-owned stores in the U.S. didn't, taking a big bite out of what Bear Stearns analyst R. Glen Reid says was a contribution of $250 million to $300 million a year for the Dallas-based company -- about 15 percent of annual revenue when the fees were still in place.

"It was a good chunk of change," says Reid, who has a "neutral" rating on the stock. He doesn't own any shares, and Bear Stearns doesn't do any business with Blockbuster.

Now, with the company's finances in tatters and its stock price down more than 60 percent last year, some investors and analysts are arguing for a companywide return of the fees for tardy customers.

"If they could get even half of those late fees back, it would be a good start," says Stacey Widlitz, an independent analyst. She says that could help the battered stock rise to the $5 to $6 level.

It may be a start, but the question is whether it is enough to repair a balance sheet saddled with debt, including bank lines that have been renegotiated several times.

Up until its "no-late-fee" policy, introduced last Jan. 1, Blockbuster proved itself to be a relatively robust and innovative company amid a rapidly changing industry. Blockbuster's management, led by Chief Executive John Antioco, helped pioneer the idea of revenue-sharing with the Hollywood movie studios, which increased the number of film titles on offer for rentals and boosted profit margins for the company. Under Antioco, the company successfully adapted to the shift from videocassette rentals to DVDs and games and beat gloomy predictions in the early days of cable pay-per-view and satellite television.

But Blockbuster's decision to cut late fees, together with other costly initiatives, worried some investors. Financier and activist shareholder Carl Icahn opposed the ending of late fees, as well as spending $50 million to promote the policy. Last May, he and two allies won seats on Blockbuster's board.

Blockbuster's 4,400 company-owned stores in the U.S. and about 200 in Canada stopped levying the penalty. About 400 of the company's 1,060 franchisees also abandoned the fees, down from about 550 franchisees at the start. Blockbuster officials acknowledge that giving up the fees is costly for franchisees, some of which don't have enough resources to forgo the late-fee revenue while increasing the number of movies on their shelves.

"There's no denying it's an expensive program," says Karen Raskopf, a Blockbuster spokeswoman. "People keep the product out a little longer, so you've got to bring in more movies and games, and that's an additional cost." She adds, however, that the difficulties Blockbuster's franchisees might be experiencing aren't reflective of the conditions of the parent company, which she says already has benefited from the program.

"We believe we accomplished what we did in the third quarter because of the no-late-fee program, not in spite of it," she says. In the third quarter, Blockbuster's domestic same-store sales -- a key retail revenue measure -- were down, but beat the industry average, according to Bear Stearns' Reid. Its same-store sales were down 1 percent, while those at rival Movie Gallery Inc. were down 9 percent in the period, he said.

But some analysts remain wary of the program's ability to stem the loss of market share and generate cash with more traffic.

"Blockbuster has not yet proved that the no-late-fee policy can generate a level of operating income and free cash flow sufficient to cover its current debt burden," Moody's Investors Service said last month, when it upgraded Blockbuster's speculative-grade liquidity rating after the company secured new debt covenants, while reaffirming its negative outlook on the company's debt ratings.

Blockbuster's shares have fallen about 47 percent since the start of 2001, with the sharpest decline over the past two years. The company's market capitalization has fallen to about $715 million, compared with nearly $2 billion in April, when the shares hit a 52-week high of $10.65.

The stock currently trades at 15.4 times analysts' 2006 consensus earnings estimate of 23 cents a share, according to Thomson Financial. That puts the stock almost in line with the broader market, which carries a price-to-earnings multiple of about 16.

While some analysts agree that bringing back late fees could help recoup lost revenue, they say that such a strategy could be difficult to execute. Franchisees that recently have restored the fees have had to phase them in with grace periods to accommodate confused customers.

"Reinstating late fees would initially add to Blockbuster's revenue stream, but from a public-relations standpoint, it would be a very difficult thing to do," Reid says.

Widlitz, the independent research analyst, says the company could "find a happy medium" by extending rental periods before late fees kick in, like video-rental chain Movie Gallery does. Under the current no-late-fee system, customers are able to hold DVDs for three to seven days, after which they are automatically charged for the cost of the product. If they decide they don't want to own the product within the next 30 days and return it, the customers are reimbursed the cost minus a nominal restocking fee.

Many investors haven't stuck around to see whether the no-late-fee program will bear fruit. Pioneer Mid-Cap Value Fund, a mutual fund managed by Pioneer Global Asset Management, has sold its Blockbuster position since July 31, when it reported holdings of 3 million shares, or about 2.5 percent of shares outstanding. At that time, it was Blockbuster's largest mutual-fund owner. A Pioneer spokeswoman declined to comment.

I stopped using Blockbuster Video last year. The didn't carry enough catalogue movies. I still rent, but I won't be returning to blockbuster for my rentals.

i hope so...they are too damn expensive.

almost $6 for a movie rental!!?? forget it. i can get 2 new releases at the corner store for $4 on Mondays, Tuesdays or Wednesdays. as for older movies...i just buy them.

I only go to Videobusters, $2

£3.50-£4.50 per rental in blockbuster here.

99p at the shop up the road.

They don't keep enough older films in stock. Got 50 thousand copies of all the shit I don't wanna see though

So I am NOT as I previously suspected keeping them afloat?

I am vaugely relieved to know this.

it doesn't cost 6 dollars to rent at blockbuster just 3.49 for a new rental and like 2.99 for old movies...

i like the no late fees, i get to turn the movies when i get ready...

missfee said:

I think it's different all over. I think it's like $3.99 here. And it cost $7.99 to rent a video game...Plus, most video games now of days (I just got a new system, so I shoud know) take forever to get into unless you really devote one or two weeks into it.

I haven't gone to Blockbuster in the longest time. They don't carry nearly enough older movies or kid's movies, have barely any VHS, (lots of us still own and use our VCR's, dammit!) have spookily conservative rules about what movies they carry and what they won't. No backroom, no gay movies, nothing with explicit sex scenes. Violence however seems to be wholeheartedly endorsed by Blockbuster. On top of all that it's too fucking expensive to rent from them regularly anyway. Even the snacks they try to sell you at the counter are pricey. I mean -$3 for a bag of microwave ppcorn? What the hell is this crap?

meow85 said:

That's true. There's a lot of titles I'll inquire about that they just don't carry. I'm like, "bitch, why not? It's a MOVIE!"

Crappallonia said:

Mm hmm. I have no idea if this is a chain-wide decison, but the Blockbuster near my house won't carry Disney's Little Mermaid b/c there's "implied cartoon nudity in 3 scenes". Once of human Ariel nude in silhouette, the second time she's shown from the ribs up because she's human and only wearing the seashells, and the third time I guess is the scene where she's taking a bath.

I paid a grip for movies there recently... can't say I would support them further...

meow85 said:

I own the cover with the phalic symbol on in it too!

Interestingly, not all of the stores opted out of the fee rule. A number of Nashville-area stores still charge fees. ... Unfortunately.

i never liked blockbuster. it's all about netflix for me these days. once in a while when i have company over and we want to rent something specific, i'll go to the corner indie video shop, but even then that's rare...their rental fee has gone up to four bucks a movie for new releases. that's just lame.

Anxiety said:

Same here.The blockbuster near my house ticks me off.
When I dont have cash the swipe machines dont work,when I have cash...the cash register wont open
Stupid blockbuster. And they NEVER have anything I want. I always walk out empty handed

I hardly ever rent movies. The last time I rented one was about a year ago, and it was probably a year before that for the one before it.

Never a fan of blockbuster. I go to Hollywood Video

BlackBuddy said:

me too. and netflix.

madartista said:

I joined the MVP thing @ Hollywood and as long as I renew the movies by the 5th day I can keep 'em for as long as I want LOVE IT! It's on my way home so it's super convinient too.

EskomoKisses said:

When I'm in the mood to watch movies, I'm in the MVP club but I cancelled it because I moved back home but haven't felt the need to join it here yet. I haven't felt the need to rejoin.

As for Blockbuster, the worst thing about them is their weak back catalog. After getting rid of videos, forget it! They've got barely anything old worth watching. I joined their yearly program where you get a free old rental every month but frankly I haven't even rented anything lately or I'll rent something and not even watch it because their back movies are that lousy! I'm done with Blockbuster unless they have an occassional good deal. When it comes to new releases, they are wiped out!

missfee said:

maybe in the US...its $5 plus tax here in Canada.

I love Netflix, but I do sometimes have to go to Blockbuster when my Netflix doesn't arrive when I want a movie.

I don't miss going to the video store, but I don't mind going every other month or so.

The real problem with Blockbuster is that they edit their movie and they don't even tell you!