Interview: Blockbuster CEO: Dazed and Confused, Maybe, But Confident Of Physical's Digital Future

This story was written by Rafat Ali.

Rafat: How does the digital strategy sit with the retraction of advertising TotalAccess online, and the pullback in promoting it to make it more profitable?  How can you reconcile those two?

Jim Keyes:  I'm glad you asked because this has been an area of a lot of confusion and particularly in the press We've been really struggling with this message because I've been frankly confused by this fascination that everybody has with Netflix (NSDQ: NFLX).  They're in a small segment of our business and yet there's this perception that we've somehow pulled away or whatever, not at all true.  Let me describe it with this chart we presented with our Q2 earnings call:

We participate in virtually all these channels, but not yet the at home.  The at-home is dominated by VOD and Comcast (NSDQ: CMCSA).  Netflix, Amazon (NSDQ: AMZN) and Apple (NSDQ: AAPL) together are very, very tiny fraction of the $3 billion market right now.  Really, where all the money is, is in store.  There's a $25 billion industry in store.  There's an $8 billion industry by mail and we've got a healthy piece of that.  Vending, kiosk and online are nowhere yet.  They're just barely starting.  So, when we pull back on our by-mail, it's only because we realize we were driving all the growth in by-mail.  We said, 'You know what we're doing? We're taking people out of the $24 billion in store segment and we're forcing them into this smaller by mail segment. We're spending a ton to do that. Why don't we just stop trying to buy customers with advertising and banner ads and everything else and let's just show our customers the advantage of going cross channel,' because the big advantage versus Netflix. Tons more after the jump....

In DVDs by mail, 90 percent of the time I don't want to see the movie that was in my queue.  It's Saturday night.  I've got a drama, I want to see a comedy, so I take it down and I exchange it at the store. Or, I just got into the store and I rent a new one.  While physical distribution is around and it's going to be around a long time, we believe we've got a huge competitive advantage over Netflix and anybody else that wants to get into the space.  We are expanding on that competitive advantage by now making physical more convenient through our vending strategy.

Rafat: And that is you've just started rolling it out in a couple of stores.

Keyes: Right, exactly.  We piloted with NCR.  The imporant thing about NCR as our partner is instead of going out and partnering with Redbox or somebody else, we picked a technology partner so that when we deploy a vending machine, it's a vending machine that turns into a digital download kiosk.

Rafat: Right, but for now it's only a DVD machine for now.

Keyes: Correct, but it's intelligent.  It's wired.  It has a server on board and it has full capability to do digital download and that's critically important because as this transition occurs from vending to digital download, there are going to be many customers that want both.  I want a DVD for my kids to throw in their DVD player in their room, but I want to download a movie to take on the airplane with me on my Archos device or on my PC.  We'll be able to provide that flexibility of use occasion that our customers have.  Those who are only in one segment will only be able to satisfy one use occasion.

Rafat: Right, but for the kiosk are these kiosks to be in Blockbuster stores or other locations besides the stores?

Keyes: What they do for Blockbuster stores is they allow us to have greater title depth in smaller space.  Imagine in the future the ability to have the entire library captured on a kiosk.  Some of the stuff is very, very slow moving and it takes a lot of very expensive real estate. So, think of it as a satellite system for stores that extends the reach of Blockbuster and makes it more convenient for our customers to get DVDs.

Rafat: The interesting part in your industry and that is the challenge for you and everybody else is that every channel is competing against every other channel: VOD is competing against you and you are competing against the movie-delivery boxes that are being sold at like Vudu box and Netflix box and others.  How do you view these home boxes that haven't really caught on?  Do you see Blockbuster playing a role in that?

Keyes: Sure, but again I remind you it's perception.  There are two ways to look at this. If I'm at home in front of my 52-inch big screen TV, I will want the convenience of being able to call up VOD and HD, but if I'm on the run, I want the ability to stop at a kiosk and load up my portable device. These are very different user cases and they will continue to be different user cases.  This is the distinct difference that I think that I as a retailer bring to this industry, that I'm looking at the customer not as one or the other.  I'm looking at the customer to satisfy him across all of these channels.

Rafat: So, would it be fair to say that Blockbuster would in the future consider box that it could sell or it could partner with somebody to do that? 

Keyes: We do want to be at the at-home solution.  Now, candidly, of all the boxes that are in the market represents a minute share...the vast majority of VOD is Comcast today. Is there any real urgency for us to go out there and create a whizbang set-top box?  No.  Are we interested long-term in being in that space?  Sure.  The interesting thing is every time somebody announces a new set-top box, the street comes to the conclusion that this is an adverse impact on Blockbuster.  It's absolutely not true.  We have as much capability to compete since we have access to digital products.  In fact, ironically, we have a far more robust digital offering than Netflix today because Netflix digital offering is only subscription.  Subscription offering is at the back-end of the distribution pipeline, so that content is only available after theatrical, after retail and rent, after VOD.  Only then does it go into a subscription VOD window.  Our product is in the VOD window so it's much newer, much more robust title selection.

Rafat: What's the strategy there with the Movielinkre-launch?

Keyes: The idea is that as a customer, for example, I use in store, I use by mail, I'm going to jump on an airplane, I load a couple of movies on a PC and I can watch them on the plane.  I may be at home and I don't feel like going to the store to exchange the total access DVD. So, it really is just another use occasion, another point of access for our customers to have convenience and assortment in what they want to watch.  Now, if I'm a Netflix customer, I can watch-watch now, but it's a very different product assortment. I'm not going to have a convenience of seeing VOD titles in a subscription environment.

Rafat: Right, but in terms of the Movielink's catalog, it is still very small.

Keyes: This is a fascinating area for me.  I'm amazed at the metrics that the external world is using to measure success in this industry.  When was the last time you watched 10,000 movies, you know?  I don't care how many movies are available to me. As my personal taste as a customer, I want to watch the new stuff so whether we have 10,000 movies or 200 movies it doesn't matter if I don't want to see any of the movies that we have.  So, our assortment is heavily weighted toward newer releases and mainstream staple titles.  We can also supplement that if we wish with a longer tail so we could add another 10,000 movies if we choose to acquire subscription content to Movielink.com or Blockbuster.com, which we probably will over time, but realistically, today we believe that the bigger demand is for the newer titles.

Rafat: And you're satisfied with how the studios are opening up the new stuff for you to access?

Keyes: Oh absolutely. Today, there are discrete windows.  There's the theatrical window, there is the renter-buyer window, there's the VOD window.  That content in the VOD window is what we have in Blockbuster.com.  Later content, the stuff that you see on HBO or Showtime, that's the SVOD window.  These are older films that are available via Netflix or any other subscription VOD offering.  So, we believe that we have a much more rich content base in Blockbuster.com for digital download than a pure subscription offering. We could beef up our title count and add thousands and thousands of more titles, but we think the most important thing is the quality of the assortment versus the quantity.

Rafat: I was reading an interview with you recently about you said that you were worried about lack of innovation at the retail floor for your industry and there was some talk about testing in-store devices that you will give to your salespeople so that they can help consumers buy stuff that's not in store. 

Keyes: I'm looking at your earlier story you did on us, and it says, "Blockbuster, which recently abandoned its foolish quest to buy Circuit City" Here's what puzzles me.  In our industry, people are looking at retail through the rear-view mirror, so people think of consumer electronics as a place that you buy your washing machine, your vacuum cleaner and your big screen TV.  I'm a retailer.  I look at retail in the future, not in the past and when I think about how people want to buy consumer electronics or content, I think Apple versus Sears, and that's what we were trying to accomplish with Circuit City.  That's what we will try to accomplish as Blockbuster Media, not Blockbuster Video which is the old form of retail that we had, but Blockbuster Media is looking forward into the future saying: 'What I really want is a solution.  I would like to come to a place where I can get my hardware and my software and somebody to show me how it all works in an easy way. I want a place that will satisfy my desire for convenient acess to media any way I want.' That's Blockbuster.

Rafat: But do you think now that you've abandoned Circuit City, would the company be interested in looking at other similar players in the industry?

Keyes: We don't think it's necessary because we can do this ourselves.  Circuit City was a unique opportunity because, frankly, their valuation at the time given their balance sheet and given our need for transformation made very good sense.  It would have allowed a very rapid transformation of the stores to accomplish this convergence between hardware and software.  It would have allowed that very quickly and what people didn't know and we didn't know for sure subject to due diligence, we believe that could have been done with very little risk because of the strength in their balance sheet at the time.  Their condition has changed, the market condition has changed, we decided that the risk was greater than we wished to take on and so we decided we're better off doing it ourselves.  We already have the software.  What you'll see us doing is slowly expanding our assortment of consumer electronics opportunities to bring in the hardware and be able to sell solutions. 

A classic example of this, people don't think of usagain, if you look through the rear-view mirror, you say, "It's a video store, why would they sell a Blu-ray player?" but as Blu-ray discs become more popular, what better place to buy it, what better place to demonstrate it to our customers than the people that are in once or twice a week renting videos.  They keep seeing it and pretty soon it's an impulse item and they want to have one.  So, if they're going to buy their Blu-ray player, and get home and realize they don't have an 1080p television.  Without having an assortment of 50 TVs on the floor, could we sell them a 42-inch Bravia TV?  That's 1080p so their Blu-ray experience is more robust.  Sure, it becomes an impulse item, almost a convenience item.  Now, back to your original question, technology is the secret sauce in the transformation of Blockbuster. Imagine in the future someone walking up to you in the store and you're admiring that Blu-ray player.  They're able to sell you the PS3 player off the floor and then show you on a handheld tablet PC an assortment of 10 different TV sets that are all 1080p-enabled and bring up the transaction right there, swipe your credit card right on the spot like you would in an Apple store, and have that TV installed tomorrow. 

Rafat: Except a lot of the big ticket purchases you're mentioning are not impulse buys by any means.

Keyes: Well, you're right.  A lot of them aren't but I'm not trying to be Best Buy.  What we think the role is that impulse purchaser, the person who is less price sensitive, the person who sees that beautiful 42-inch display who says, "You know, I'm a busy person.  I'm just going to get it." Thankfully, that's a huge portion of the customer base.  Not everybody is a Wal-Mart shopper, yet ironically in the consumer electronics industry, virtually everybody in the industry tries to out price Wal-Mart (NYSE: WMT).  Again, if you're selling solutions, you look at what the price of an Apple product is versus a competing product in another consumer electronics environment, and you're not buying Apple products cheap.  You're buying solutions and you're paying a pretty good premium for the convenience of that product working and the solution being readily available.  As a retailer, that's where we're heading.

Rafat: This is a hypothetical one.  Would you be ever interested in buying Netflix?

Keyes: Not really. Netflix doesn't really have or do anything that we can't and don't already do ourselves.  So, there's really no advantage in buying.  We think we can compete and play effectively o our own because what they don't and couldn't have very easily anyway is the depth of physical presence that we have. This is the key question: is everybody going to buy everything electronically in the future or for quite some time into the future, is there going to be a good balance between physical and electronic?  If physical still has a role or any period of time into the future, we're far better positioned to leverage that advantage.

By Rafat Ali