Is a Brash Management Style Behind Blockbuster's $65.4M Quarterly Loss?

Why Blockbuster's 28-day advantage, "additional daily rates" (don't call 'em late fees), and stay-the-course CEO may not be enough to save the video rental giant.

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A few years ago, Netflix founder Reed Hastings told analysts in an earnings call, "In the last six months, Blockbuster has thrown everything but the kitchen sink at us." The following day, Hastings received a large box in the mail from Blockbuster. Inside, he found a kitchen sink.

Today, Blockbuster's brash style continues with its CEO Jim Keyes. The outspoken Blockbuster chief made headlines recently for his pointed jabs at Netflix, arguing the popular subscription-movie service is only good for "older titles and television," and joking that its library is chock-full of B-flicks like Herbie Goes to Cancun. This isn't the first time he's knocked Blockbuster's online competitor--Keyes has made a habit of deriding the service publicly for years. For example, in a 2008 interview, he cracked, "I've been frankly confused by this fascination that everybody has with Netflix...Netflix doesn't really have or do anything that we can't or don't already do ourselves." Keyes's attacks are certainly bold, but are they justified? Is his Blockbuster boasting more bravado or business strategy?

"Between the time Keyes took on the reins as CEO of Blockbuster and today, the price of Netflix stock is up 500% and the price of Blockbuster stock is down about 90%," says Greg Meyer, one of the company's largest shareholders, who is currently battling to gain a seat on the board of directors. Meyer, the former owner of kiosk company DVDXpress, drew a line in the sand Tuesday, threatening that if he's not voluntarily named to the board, he will launch an election campaign for a seat. "Investors in Blockbuster have been the victims of a massive destructive of shareholder value while Netflix shareholders have been beneficiaries of a very smart, focused, and visionary management team," Meyer tells FastCompany.com. "I think it would be more productive for Keyes to try to learn from the success of Netflix rather than criticizing this company which has executed consistently and managed to gain millions of highly loyal subscribers."

Meyer isn't the only one voicing concern about the CEO.

"Given that Netflix is dramatically outperforming Blockbuster, our belief is that [his] public criticisms are oriented to driving attention away from Blockbuster's poor performance relative to Netflix's accomplishments," wrote professors Duane Ireland, Michael Hitt, and Robert Hoskisson to me in an email, co-authors of Strategic Management: Competitiveness and Globalization. "These criticisms are quite unlikely to benefit Mr. Keyes or Blockbuster. If anything, we think these criticisms will prove to be counterproductive."

"I think Blockbuster is teetering on the brink," added professor Hitt, who guesses Keyes's vocalness derives from internal power politics. "This company could soon possibly be another Polaroid."

Meyer notes that Blockbuster "does indeed" have reasons to boast these days, especially with their 28-day exclusive window to offer new releases ahead of Netflix and Redbox. But he believes the CEO's brash style is unnecessary. "Bravado should be replaced with clear and humble corporate communication," Meyer says.

In an earnings call Thursday, Blockbuster posted a net loss of $65.4 million for its first quarter of 2010, a period Blockbuster EVP and CFO Tom Casey called its "peak season." This follows a $558 million loss for 2009. During the call, investors questioned Blockbuster's 28-day window advantage, asking whether it has helped gain any traction at all among customers. Casey waffled, saying that Blockbuster has not had the liquidity for an aggressive advertisement campaign yet, and that traction with consumers will remain "choppy" for some time. When pressed on the issue, Casey explained that "it'll take a while to get [our] message across."

However, this did not stop him from talking up the advantage, boasting that Netflix wouldn't have Avatar available for streaming for "some years," whereas Blockbuster has had it since the first day of release. "I haven't seen any advertising from Netflix bragging about the fact that their customers are going to have to wait 30 days -- I doubt they'll do that," he told analysts. "[Redbox] is not announcing the fact that [they won't] have Avatar for 28 days, which is an eternity for a new release."

Casey also would not provide any data about the company's number of by-mail subscribers, only saying that Blockbuster is in the process of "re-tooling" that part of their business.

The highlight of the earnings call was when Casey explained Blockbuster's new policy on late fees, a term the company has euphemistically dubbed an "additional daily rate." "We're very careful not to call it a late fee," Casey said. Now, if you have a movie out longer than the typical 5-day rental period, Blockbuster charges an "additional rate" of $1 for each extra day; however, you can keep the rental for "as many days as [you] want to keep it," the Blockbuster CFO explained. By "as many days as [you] want," Casey actually meant 10 days, which is when Blockbuster will then charge the customer the retail price for the movie, as a follow-up question helped point out. "It's exactly the same thing the competition has been doing with their daily rates, and we think our customers will be fine with it," Casey added.

In an email from Meyer, the Blockbuster shareholder said he's eagerly awaiting Blockbuster to leverage its advantages but says that it's only possible if the company can escape its "culture of complacency."

Remember, Meyer is fighting to earn a seat on the board of directors--a fight which he calls "unnecessary," positing that Keyes's decision to wage the war shows how he is "definitely exercising poor business judgment and acting in a way that is damaging to the company."

Meyer did have a few nice things to say.

"Keyes has done some good things over the past few years," he says, "but it has not been enough...He needs to be more realistic about the lingering negative perceptions that plague the Blockbuster brand and exercise more leadership to address these issues head on."

While CEO Jim Keyes was unavailable for comment, he ended the earnings call Thursday by acknowledging the company's "near-term challenges," but said that Blockbuster still has "every reason to stay the course."

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1 Comments

  • Kathy Foster-Patton

    Last summer when the local Blockbuster manager told me that they had changed their pricing for about the 3rd time in 3 months, I had had enough and went right out and registered for Netflix. The numbers in the story are all that are necessary to tell the reader that Blockbuster is clueless.