Blockbuster has been taking lots of flack for the company’s poor earnings, shareholder in-fighting, and inability to combat the success of Netflix and Redbox. Blockbuster CEO Jim Keyes, whose brash style we recently analyzed, spoke with us about what he is doing to turn the struggling video-rental giant around. Part I of our interview focused on Keyes's views on the board of directors battle with Greg Meyer. In part II, Keyes speaks candidly on Netflix, Nintendo, and Blockbuster’s chances of success.
Fast Company: What do you admire about Netflix?
Jim Keyes: I admire what they’ve built. It was a brilliant idea to do DVDs by mail. We emulated that and created a comparable system. They also have a world-class search engine that is bar-none better than any search engine out there. We have a good search engine, but it’s not as good as theirs.
Another thing I admire is that they are true to their core. They could’ve tried to offer new releases, but they recognize that 80% of their business is long-tail content. They’ll do better by trading off new releases for better cost of goods. Our business is just different--our subscription service is a convenience for our customers, but it’s not the core.
One of the big advantages that Blockbuster has is its 28-day exclusive window over new releases, but in the company's recent earnings call, analysts were told that this has failed to pick up any traction among customers, partly because Blockbuster does not have enough money for an aggressive ad-campaign. Is this why you've been so vocal in the press?
PR is free. Why wouldn't we? How often does a company get a material, tangible point of differentiation? If 60% of the demand for movies is in the first 28 days, and we now are the only national chain able to offer this advantage by mail, online, and in-store--look, it's a very compelling advantage for mainstream customers. Not for Netflix's customer, who is that longer-tail customer. If you want Avatar, you are not going to get it on Netflix in a timely basis. I don't at all mean to poke any negatives at Netflix. I think they do a terrific job--at what they do.
All we're saying is that we do something different, we do it really well, and that we have a really unique advantage. Netflix has never hesitated to reference their strengths versus ours, or against anybody else. What would you recommend? Should we just sit and be quiet about this 28-day advantage?
Blockbuster has managed to set up multichannel support, from subscriptions to on-demand services to to kiosks to in-store rentals. But what happens if this system doesn’t work? What does Blockbuster do next?
How does it not work? Look, we are completely rebuilding house from scratch, and we’re living in the house! You might think, This looks terrible! Well, yes, no kidding! We’re in the middle of remodeling. But what we’re modeling is a house with a garden, and a studio, and a media room--and I’m out there saying, Listen, wait until we finish, but this is going to be really unique. It’s different than the other house--why wouldn’t you want to live here?
Call me brash, but we’re building a world-class cross-channel distribution platform. Netflix can’t deliver content the way we can. Redbox can’t do what we do in their vending machines.
What I want to do is punch a button on my remote, and have access to 10,000 movies. You can get it all here. I’m going to be brash for a moment, but I don’t have to figure out how to get it from my Nintendo machine to the screen. I know I can do it, but I don’t want to--it makes my head hurt to think about it!
But that is the pay service, correct? If you want access to those movies, it will cost you several dollars per rental. Doesn’t that price hurt your head more than figuring out how to put the Netflix DVD into the Wii? It’s not that difficult.
Well, here is what hurts my head: It is waiting five years for the movie.
It’s not just putting it into the Wii, it’s waiting until the movie is available in subscription format, which could be as much as five years. In all seriousness—I was just poking fun—Netflix has some great content, but they won’t have Avatar for a number of years--not months, years. We have a subscription service, but we have many customers that prefer the all-you-can-eat buffet. Listen, Paul Blart: Mall Cop? Yes, you can see it on Netflix--it's only a year old.
But aren't many of these new titles also available on iTunes and through Comast On-Demand?
First of all, we have more titles in our library than iTunes. There are many movies that are in certain windows, Avatar for example, when it goes to the HBO window, you won't be able to get it through iTunes or anywhere electronically, but we'll still be able to give you the DVD.
What is the easiest way for you to rent a movie, personally?
Here is how my family uses it. I have a Blockbuster by-mail subscription. If I want a unique movie, I put it in my queue, and two days, it’s here.
If a friend came over with his kids, I stop at a convenience store, and I go to Blockbuster Express, rent a movie, and bring it home.
Friday night, I don’t know what’s out. I go to the store and I see Crazy Heart. I wouldn’t have thought to search for it online--I forgot it was released. It’s fun to browse in store sometimes.
And then it’s Sunday night, and I don’t feel like leaving my couch. I pull up my Samsung Blu-ray player, and Blockbuster On Demand is a button on the remote control: 10,000 movies at my fingertips. Yes, it's $3.99, but it's still a heck of a lot cheaper than a movie ticket, and it's no different than what you pay on Apple or Amazon. It’s the ultimate video on-demand service. Blockbuster On-Demand is similar to your Netflix experience: You get on and can search by title, actor, or whatever. It is a lot easier than trying to route movies through my Xbox or Nintendo!
That is the second time you’ve brought up Nintendo. Does Blockbuster have no interest in connecting through the Wii or other consoles? What about other platforms? An iPad app?
Look, when I say it’s confusing, I’m talking about how confusing it can be for parents, our consumers. That is our core--for example, that family-oriented mom who is not as willing to figure out how to go to a console or a computer and load a movie into the queue. The mainstream consumer wants simplicity. But we could be on consoles tomorrow morning for subscriptions if we wanted to. The problem we see is that game consoles would just as soon sell their own movies. Keep in mind that the Blockbuster customer wants new releases, which is very inconsistent for the subscription-digital streaming offer.
Do you ever see a way that Netflix could overtake Blockbuster as the global market leader?
I don’t even—we have such different business models. What is your favorite all-you-can-eat restaurant? That's what this is. One price, all you can eat. There is a wonderful role for Netflix service in the market place, but it’s very different from ours. In our service, you get what you want, when you want it.
So you never see an instance where Blockbuster will fail?
Not if we’re able to respond to the changing needs of the customer. The customer used to get their content in physical stores, and then it changed to by-mail and kiosks. We’re building out all those platforms, and it doesn’t happen overnight. Like I said, it’s remodeling a house: it’s not easy, it’s not cheap, and it’s not fast.
To get this straight, Blockbuster will not go bankrupt?
It is not our intention. Our objective is to manage a very challenging liquidity environment. We’re doing a lot of things at the same time, and we have to spend a lot of money to build our future. What we couldn’t have anticipated was a complete financial meltdown in 2009. If you had to refinance a home last year, imagine what would’ve happened to you? The bank might’ve said that they’ll give you a mortgage, but the bad news is that you have to pay it back in five years instead of 20 years. Ouch.
You’re saying Blockbuster’s financial troubles were entirely from the financial crisis. Wasn’t it due in part because of Netflix’s success?
No, I don’t know where that comes from.
You didn’t lose a significant amount of customers to Netflix?
Yes, of course we did. We lost some to Redbox too. We were sitting on 45% of the market. Anyone with that much market share is vulnerable to new competitors. But people forget we’re still sitting on a base of 50 to 60 million customers.
In Blockbuster's recent earnings call, the numbers for by-mail subscribers were not released. Could you give me some sense of how many customers subscribe with Blockbuster by-mail?
We don't release it because it is not relevant. Our customers are still half subscriber and half in-store.
Look, I think we co-exist quite well with Netflix, but let's face it: Avatar comes out, and you want to stream it, you come to me.