blockbuster crisis management

BUSINESS LEADERSHIP IN CHANGING TIMES

BLOCKBUSTER INC.

MO 611 Team 4

• Andry Haryanto

• Haesang Song

• Ying Lu

• Yoanna Aybar

April 14, 2008

MO 611 Blockbuster Report – Team #4

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0. GENERAL OVERVIEW Blockbuster is the largest video rental chain with more 7,800 company‐owned or franchised stores in more than 20 countries. It generated revenue of 5.5 billion dollars in 2007. It provides video rental through Blockbuster Video stores and Blockbuster Online. In September 1999, Netflix launched online DVD rental subscription service and surpassed 1 million subscribers in February 2003. This new business model created a major shift in the industry. The lack of online distribution channel would isolate a company from one of the most popular places to interact with customers: the World Wide Web. While the movie renting market was changing drastically, Blockbuster’s late reaction (November 2006) compared to many competitors’ (i.e. Amazon Unbox in September 06) led to a disastrous aftermath (i.e. loss of $ 1.2 billion in 2004). This crisis involved a market shift originated by its competitor Netflix. Netflix not only created a new value proposition for the customers, but also offered competitive pricing model. In addition to Netflix, Blockbuster’s most dangerous competitor, other competitors such as Comcast Video on Demand and Amazon Unbox also reacted after the success of Netflix. Blockbuster had been forced to fix this situation by providing online rental service and then promoting its Total Access service that allowed customers to rent movies online and return them to a Blockbuster store for a free in‐store movie rental.


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1. SUDDEN MARKET SHIFT CRISIS Pre‐crisis: 1999‐2006 Texas‐based Blockbuster was the largest video rental chain in the world since late 1990s. With more than 5,000 stores operating in the US, Blockbuster had established its leadership position in the video rental business, followed by Hollywood Entertainment. As consumer technology progressed and movie studios adopted the DVD technology, in 2001, Blockbuster decreased it VHS inventory in store to make room for more DVD movies in hope to capture the new trend. Unfortunately, DVD technology also changed the movie rental business environment. During the internet boom, in September 1999, Netflix introduced the monthly online subscription of DVD movies in San Francisco bay area. Netflix’s new business model allowed subscribers to rent multiple movies at a time, and let its members keep the DVDs as long as they prefer, eliminating the notorious late fee in Blockbuster’s traditional movie rental business. After 3 years of operations, Netflix launched its IPO in May 2002 and dominated the online DVD rental business. It reached one million subscribers in February 2003, and doubled the number of subscribers to 2 million in slightly more than one year. As DVD renters took advantage of the convenience of Netflix’s online rental service, the brick‐and‐mortar rental business was severely declining. The growth of online DVD rental hurt the traditional movie rental business. Blockbuster’s stock price peaked at $30.25 on May 2. From that point on, its stock price slid as analyst questioned the sustainability of its traditional movie rental business model. In the rental stores, declining traffic severely hurt rental and retail sales. Being the market leader, Blockbuster saw significant drop in their income. It reached its bottom in 2004, when Blockbuster reported a record loss of $1.2 billion. In 2004, CEO Antioco finally acknowledged that the competitive environment had changed and bold action had to be taken. Several attempts were made to fight Netflix. In 2004, Blockbuster launched its own online rental service. Following in January 2005, it also launched the “No late fee” program in stores. Blockbuster also began to aggressively close down its unprofitable and less‐profitable stores to reduce operating cost.


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Crisis (Hot) The effort to stop the bleeding was too little too late. Profit remained negative and Blockbuster continued to report annual net loss in its business. The tide started to turn when Blockbuster rolled out its Total Access program in November 2006. Total Access program allowed Blockbuster online subscribers to bring the online DVD rental sleeves to the local stores in exchange for a free in‐store DVD. While this program leveraged Blockbuster’s 6,000‐store network and its online service, movie renters found this offer convenient and began signing up with Blockbuster online. In an effort to attract online movie subscribers, Blockbuster also enlisted AOR PainePR and hired Rocket XL, a multi‐media marketing firm, to help launch its Total Access program. The massive campaign tapped into the online community and aggressively marketed the new Blockbuster business model. In the subsequent 6 months, Total Access program attracted not only the attention of the analysts, but also business from online movie renters. In March 2007, Blockbuster’s online subscriber growth exceeded Netflix’s the first time. Blockbuster signed up 780,000 new subscribers while Netflix added 480,000 new subscribers in the first quarter of 2007. In the following months in 2007, Blockbuster worked very hard to change its pricing structure and tweak its programs to reduce costs of subsidizing the in‐store exchange. It triggered a price war between Blockbuster and Netflix. During this time period, Netflix also lowered its subscription fees twice to counter Blockbuster’s strategy. Post‐crisis Netflix suffered its first loss in total subscription during Q2 of 2007. The net loss of 55,000 subscribers was an obvious result of the aggressive Blockbuster Total Access program. Later in 2007, Netflix and Blockbuster began to split the growth of the online rental business Blockbuster did not stop here. It continued to strategically close down less‐profitable stores. In July 2007, Blockbuster aligned with the Blu‐ray consortium and expanded its high‐definition movie rental offerings to 1,450 stores across the U.S. In the following month, it acquired Movielink, an online movie‐downloading company, to create an additional channel of movie distribution in Blockbuster.


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Jim Keyes, former CEO of 7‐Eleven, was named chairman and CEO of Blockbuster in July 2007. He had tremendous record in leverage technology in 7‐Eleven stores to reduce inventory and speed up product offerings. His success in reducing store sizes in 7‐Eleven while growing same‐store profits made him one of the best new leaders in Blockbuster. Although his strategy in Blockbuster had not yet fully rolled out, in Q1 2008, Blockbuster finally projected net profit in 2008, after years of losses.


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2. MANAGEMENT SUCCESSION CRISIS Pre‐crisis: 2004‐2007 When John Antioco started his journey as Blockbuster CEO in 1997, he set the company up to succeed, but moved a bit too slowly in aligning costs and shedding nonstrategic assets for the board’s tastes. Antioco has held his position for a decade and had been pressured by board members to cut costs and boost profits instead of investing aggressively in its online business that competes with Netflix. In the latter years of his contract, Blockbuster kept losing money while Mr. Antioco's compensation kept rising. Antioco received $7 million in salary and bonus, five million stock options and nearly $27 million worth of restricted stock in 2004, a year in which Blockbuster lost $1.25 billion. The situation irked one of Blockbuster's largest shareholders, the notoriously loudmouthed Carl Icahn. The relationship between Icahn and Antioco turned hostile when Blockbuster’s failed to handle the merger with Hollywood Entertainment in 2005, and Icahn consistently questioned Antioco’s large pay despite the company's poor performance. In a 2005 earnings conference call, Icahn launched a public criticism on what he called a $50 million bonus to Antioco. The enraged Antioco went as far as warning, "Don’t step on me and I won’t step on you." Eventually the conference call operator cut off Icahn, saying, “This is not the appropriate forum for that dialogue.” Icahn also threatened to take over the company if it did not curb spending and pay more dividends. As a response to Icahn's move, Antioco threatened to resign if shareholders sided with Icahn's effort to unseat him from the board. In May 2005, Blockbuster shareholders ousted John Antioco as chairman, and replaced him with Carl Icahn. Even though the board was not happy with Antioco's performance and strategy, Blockbuster retains Antioco as CEO, partly to avoid paying his large severance package. The internal battle within Blockbuster moved its focus from the external battle with the competitors. The conflict in the boardroom distorted its focus from the business into politics, drawing away significant amount of time and resources. The battle marched on while Blockbuster's performance kept declining.


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Crisis (Hot) Antioco's persistence to stay at the top job was shown when he was re‐elected as a Chairman in 2006. However, when Blockbuster announced in February 2007 that 2006/Q4 earnings had dropped 28%, the Icahn‐led board pressed for the company to cut Antioco's 2006 bonus from $7.65m to $2.28m. They finally agreed on $3.05m, which further strained the relations between the CEO and the board. After two years into the proxy battle, Antioco finally waved the proverbial white flag in March 2007. He committed to step down by the end of year. The nine‐month time frame until December was a good effort by Blockbuster to prevent the crisis caused by CEO's abrupt resignation. Planned departure of the Antioco was a wise effort to limit the damage caused by a vacuum at the top. Post‐crisis The transition went faster than anyone had expected. In July 2007, only four months after Antioco's announcement in March, Blockbuster appointed the former CEO of 7‐Eleven Jim Keyes to take its top seat. Upon his announcement at the new CEO, Blockbuster shares were up 6.5 percent on the NYSE. He revived investor confidence by providing fresh strategic initiatives, as discussed in the post‐crisis section of sudden market shift section. The positive projection of $5M‐$25M net income is still to be proven in 2008.


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3. CONCLUSION

Blockbuster had been bleeding money and lost its leadership in the market due to sudden market shift crisis, intensifying competition, and missing the boat on capturing the value of new technologies. The proxy battle that distorted the company's focus on its business has finally ended with the departure of former CEO John Antioco. The new CEO, James Keyes is a proven leader as the previous CEO of 7‐Eleven. Under Keyes's leadership as president and CEO of 7‐Eleven from 2000 to 2005, the company experienced record sales and profits and implemented new retail systems technology that improved product assortment decisions. Like Antioco, who is also an alumnus of 7‐Eleven, Keyes will draw on his experience in technology initiatives at the convenience store chain to spur advances at Blockbuster. Keyes sees himself as a "stimulator of change" who will help Blockbuster "do a better job in the four walls" as well as use technology that fits the strategy in a transforming company like Blockbuster. After joining Blockbuster, Keyes was transitioning, reinventing, and repositioning the company. During the last six months of 2007, he established financial stability and took decisive steps to grow rental business, diversify revenue streams, and broaden channels of distribution. Keyes positioned the new Blockbuster to transition from rental to retail, an effort that is showing promise. Beginning the expansion of retail opportunities with hot new DVD releases, Blockbuster's strong presence on the new release wall, which has previously been utilized for rental product only, is bringing strong results. The significantly improved in‐stock availability and merchandising led to same‐store sales increases for the first time in a long time. James Keyes is a healer. Coming from outside of Blockbuster's walls, he is one of the best candidates to stop the bleeding and rejuvenate the company. He is results‐oriented, strategic and able to identify practical, yet highly creative solutions to complicated business problems. He also has the most important trait that a healer requires: he has a strong multi‐unit retailing background and an impressive record of introducing new customer‐focused technologies into a business that have driven financial results. With his extensive background in finance, operations and marketing, and as a former CEO of a Fortune 500 company, he is exactly the right person to become the next leader of Blockbuster during its transformation.


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4. ATTACHMENTS Exhibit 1. Timeline of Market Shift Crisis


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Exhibit 2. Crisis Management of Sudden Market Shift

Crisis Stage Unmanaged Managed

Pre-Crisis

Nonperformance • Stock price drop from $30.25

since May 2, 2002. Denial

• Lack of response when Netflix enters to the market with aggressive strategy and new value proposition (on-line rental).

Anger • Investors are concerned about the

growth estimation change from 2 digits number to a 1 digit number.

Acceptance Acknowledgement

• In late 2004, CEO Antioco said "the competitive landscape has changed" for the movie rental business, requiring "bold action."

Resolve to stop negative forces • On August 2004, Blockbuster

introduced an online DVD rental service.

Crisis

Failure • Losses of US$ 1.2 billion in 2004.

Panic Collapse

Controlled climax

Assessment of options Direction to limit damage

• In November, 2006 BB launched new Blockbuster Total Access plan - allowing online customers to return DVDs to BB store for a free in-store rental

• On 2005, BB aggressively closed unprofitable stores reducing their losses significantly.

Post-Crisis

Shock Uncertainty Radical Change

Rebuilding • In November 2006, BB enlisted

AOR PainePR to help launch its Total Access program, altered PR strategy, and hired multimedia marketing firm, Rocket XL to promote to the internet community and improve brand perception.

Recovery • BB expects 2008 net income of

$5M-25M Reform


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Exhibit 3. Product Crisis (Time vs. Pain)

Pre-crisis Crisis Post-crisis

2002 2003 2004 2005 2006 2007 2008

100 90 80 70 60 50 40 30 20 10


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Exhibit 4. Damage vs. Control (Sudden Market Shift Crisis)

O 20 40 60 80 100

100 90 80 70 60 50 40 30 20 10 0

A

NN

E

J

O

T

Y

DD

II


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Exhibit 5. Options vs. Time (Sudden Market Shift Crisis)

O 20 40 60 80 100

100 90 80 70 60 50 40 30 20 10 0

A

NN

E

J

O

T

Y

DD

II


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Exhibit 6. Timeline of Management Succession Crisis

Management Succession Year Month Event

Pre‐Crisis Crisis Post‐Crisis

A 4

Carl Icahn threatened Antioco to take control of the company at next year's annual meeting if management did not curb spending and pay larger dividends.

B 4 Antioco threatened to resign if shareholders sided with efforts by the financier Carl C. Icahn to unseat him from the board.

C 5 Blockbuster shareholders ousted John Antioco as chairman, replacing him with billionaire businessman Carl Icahn

D

2005

5 BBI retains Antioco as CEO, partly to avoid paying severance

E 2006 5 Antioco reelected as chairman

F 2

When Blockbuster announced in February that 2006/Q4 earnings had dropped 28%, Icahn pressed for the company to cut Antioco's 2006 bonus from $7.65m to $2.28m. They agreed on $3.05m.

G 3 Antioco agreed to leave by end of 2007 with a reduced compensation package

H 7 Blockbuster names Jim Keyes as CEO

I

2007

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In Q4 2007, they achieved worldwide revenue increase of 3.6% in the fourth quarter, with nearly 10% fewer stores, but had the first positive domestic same‐store sales comps in many years


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Exhibit 7. Crisis Management of Management Succession Crisis

Crisis Stage Unmanaged Managed

Pre-Crisis

Nonperformance • Blockbuster shareholders ousted

John Antioco as chairman, replacing him with billionaire businessman Carl Icahn

Denial • Antioco reelected as chairman

Anger • When Blockbuster announced in

February that 2006/Q4 earnings had dropped 28%, Icahn pressed for the company to cut Antioco's 2006 bonus from $7.65m to $2.28m. They agreed on $3.05m.

Acceptance Acknowledgement

• Blockbuster went the multiple directions

Resolve to stop negative forces •

Crisis

Failure • Multiple direction wastes the

resource and make company lose competitive advantages

Panic Collapse

Controlled climax

Assessment of options Direction to limit damage

• Antioco agreed to leave by end of 2007 with a reduced compensation package

•

Post-Crisis

Shock Uncertainty Radical Change Blockbuster names Jim Keyes as CEO

Rebuilding • Reinvention, and repositioning of

the business, and restructure of the management team in 2007 after new CEO Jame W. Keys joined.

Recovery • In Q4 2007, they achieved

worldwide revenue increase of 3.6% in the fourth quarter, with nearly 10% fewer stores, but had the first positive domestic same-store sales comps in many years.

Reform


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Exhibit 8. Time vs. Pain (Management Succession Crisis)

Pre-crisis Crisis Post-crisis

Q1, 06 Q2, 06 Q3, 06 Q4, 06 Q1, 07 Q2, 07 Q3, 07 Q4, 07 Q1, 08 Q2, 08

100 90 80 70 60 50 40 30 20 10


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Exhibit 9. Damage vs. Control (Management Succession Crisis)

O 20 40 60 80 100

100 90 80 70 60 50 40 30 20 10 0

A

E

G

B

C

D

F

H


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Exhibit 10. Options vs. Time (Management Succession Crisis)

O 20 40 60 80 100

100 90 80 70 60 50 40 30 20 10 0

A

H

B

C

D E

F

G

blockbuster crisis management

Documents

controlled climax assessment

management succession crisis

crisis management

options direction

crisis

antioco

options

damage