BLOCKBUSTER ADJUSTS TO NEW ERA; COMPANY PUTS DATABASES TO WORK AS IT ADAPTS TO SOME FRESH ARENAS

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When Blockbuster Entertainment executives describe their company, one word keeps cropping up in the conversations: evolution.

A year after shareholders agreed to merge the video rental, music retailing and entertainment company with Viacom, Blockbuster is certainly evolving.

"We've been known as Blockbuster Video for a long time," said Rich Gabe, senior VP-strategic marketing for the Fort Lauderdale, Fla.-based company that controls 25% of the U.S. video-rental market. "We're evolving to a point where when you think of Blockbuster, it's going to go way beyond video."

For months following the acquisition, Blockbuster executives were uncommonly quiet, refusing to speak directly to reporters, and instead referring all calls to the in-house PR department. Their ultimate boss had changed from Chairman H. Wayne Huizenga and onetime Vice Chairman-Chief Operating Officer Steven Berrard on the 11th floor of One Blockbuster Plaza, to the Manhattan offices of Viacom. Gone, too, are top executives, including Mr. Huizenga, President George D. Johnson, Chief Financial Officer Gregory Fairbanks and nine other senior executives. Mr. Berrard has taken the reins as CEO of Blockbuster Entertainment, Showtime Networks and Paramount Theme Parks, and reports directly to Viacom President Frank Biondi Jr.

Meanwhile, Blockbuster continues to grow its core business, video rentals, providing Viacom a revenue stream that in the last full quarter before the September 1994 merger was generating $63 million in income, or 31% over the same quarter the year before, on revenues of $841 million, up 29%. This is important for Viacom, which needs to pay down the debt accumulated from its $10 billion acquisition of Paramount Communications earlier in 1994.

"Blockbuster didn't have an overburden of debt before the merger, and they're being viewed as the cash cow part of the pie," said Phelps Hoyt, a high-yield analyst with Duff & Phelps, a Montpelier, Vt.-based market analysis firm. "Their main strategic direction hasn't changed as a result of this merger."

What's likely to change is Blockbuster's history of spending sprees to tackle new markets-like music or interactive technology-or to bolster its market position in existing industries.

Soon after the merger, the companies began realizing the cross-marketing potentials. This past February, Blockbuster Video and Simon & Schuster's Pocket Books teamed up to give away a copy of "Gumpisms, the Wit & Wisdom of Forrest Gump" for every copy of the Paramount Pictures video pre-ordered at a Blockbuster Video store.

A Blockbuster Video store in suburban Fort Lauderdale has a section devoted to Nickelodeon merchandise. Stores are now carrying the MTV: Music Television and VH-1: Video Hits One top 50 CDs, Simon & Schuster books and Paramount Pictures merchandise.

Getting the message out will be key, and that's where Blockbuster, which spends $175 million a year on marketing, is searching for a cogent path. The company in July named Foote, Cone & Belding, Chicago, as the agency for its $35 million Blockbuster Music account, a review in which incumbent D'Arcy Masius Benton & Bowles, St. Louis, declined to participate. Rumors have circulated that the agency could be in trouble with the video portion, which Mr. Berrard denies.

"We're very happy with the people we have doing the video side, but that's a big job in itself," he said. "From an advertising perspective, we want to broaden our horizons, and keep the ideas fresh."

In some 20 international markets, an array of agencies oversee Blockbuster's account, from J. Walter Thompson, Sydney, in Australia, to Leo Burnett & Co., Mexico City, and W/Brasil, Sao Paulo. In fact, it was in Sao Paulo that Blockbuster enjoyed its best first-month opening figures, topping more than $300,000 in one store with only print and outdoor to drive the message, said Mr. Berrard.

Before being enveloped by Viacom, Blockbuster had enjoyed a history of double-digit revenue and income growth. One stumbling point since Viacom has been Discovery Zone, the children's indoor play centers, which Blockbuster bought into in 1993, and acquired a majority stake in last year. Viacom this April decided to move the company's operations from Chicago to Fort Lauderdale, with Mr. Berrard taking on the title of CEO from chairman and founder Donald Flynn. In late June, Discovery Zone named Donna Moore as president-chief operating offi cer from president-CEO of clothing retailer Motherhood Maternity. The advertising account, handled nationally by Griffin Bacal, New York, and regionally by four agencies, could be headed for review, said Mr. Berrard. In fact, one of the best spots for the brand came this spring during the network TV premiere of "Jurassic Park," when Discovery Zone got some much-needed exposure during a Visa commercial.

"It turned out to be a pretty good ad for Discovery Zone," said Brian Woods, senior VP-marketing with Blockbuster Entertainment.

From rumors that its agency relationship was on the rocks, to warnings that technology would put movie rentals out of business, company executives quickly thwart any talk of demise. The company, which will open 600 new video stores in 1995 and bring its total to more than 5,000 worldwide, is larger than its next 1,000 competitors combined, Mr. Berrard insists. The company logs more than 1 billion transactions a year, amassing a wealth of demographic and preference information with each scan of a member's Blockbuster Entertainment card. It even fielded the Blockbuster Entertainment Awards on CBS, using customer voting in-store to determine winners in an array of categories regarding movie videos.

The company also has used database information to guide subsidiary Spelling Entertainment on how to write and cast its made-for-video movie, "Texas." Similar data on customers' game-rental habits fueled the company's expansion into the games market in 1992. Executives dug into the database to target existing game renters and mailed a promotion to every person who had rented a video game in the previous 90 days. The draw was a 30% redemption, said Mr. Berrard.

That acceptance led two unidentified software marketers to beckon Blockbuster to sell them shelf space in its stores, he said. They were willing to pay five times what the footage generates in revenue-plus let Blockbuster keep the sales margin or rental fee, he said. Mr. Berrard later recalled a conversation with Mr. Biondi about Blockbuster's ability to rent and sell CD-ROM products from Viacom New Media. When asked how many titles Blockbuster would purchase to put in its video and games stores, Mr. Berrard responded 15,000.

"He looked at me and said, `That's break even,"' recalled Mr. Berrard, who also oversees a Blockbuster division called NewLeaf, which can create CD-ROM, game cartridges and audio cassettes on demand in-store. "That collective strength is what we're now using in the marketplace."

All told, the dynamics of the video rental industry leave Blockbuster in an unnatural position, Mr. Berrard said.

"There's no way we should have the market share that we have. There should be a Burger King and a McDonald's in this business," he said. "The reason there's not is we kept building. We open up more stores in six weeks than [the competition] opens up in a year."

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