CASE 5 Blockbuster Acquires Movielink: A Growth Strategy?

CASE 5 Blockbuster Acquires Movielink: A Growth Strategy? Florence Nightingale, Vara Vasanthi ICFAI Business School Blockbuster is committed to keeping pace with the changing needs of customers by offering them an expanding array of convenient ways to access entertainment content. 1 James W. Keyes, Chairman and CEO of Blockbuster Blockbuster Inc. is a leading global provider of in-home movie and game entertainment, with approximately 8,000 stores located throughout America, Europe, Asia, and Australia. The video rental market has undergone many changes and continues to constantly change with new product offerings from companies. The biggest change in the video rental market is the transition from store-based video rental to online video rental. To tackle the changes taking place in the industry, Blockbuster wanted to identify and implement initiatives designed to regenerate the company s activities and enhance its organizational structure to improve profitability. As part of these initiatives, in August 2007 Blockbuster acquired Movielink, a movie download service provider. This acquisition enabled Blockbuster to offer video downloading services to its customers. Blockbuster acknowledged that this acquisition was its next logical step in the planned transformation of the company. 2 It, however, remains to be seen if the acquisition will generate the expected synergies. The Video Rental Market In-home filmed entertainment includes video rentals and purchases of various video products such as DVDs with rentals being the most significant portion of this market.a key driver of this market is the affordability and improvement of high-quality DVD technology. Consumer spending on video rentals is nearly three times greater than the theatrical box office. 3 The home video market was the largest segment of consumer movie spending in 2007, generating just over $24 billion in revenue. 4 The breakdown for the revenue in the home video market was approximately $15.9 billion in sales and $8.2 billion in rentals. 5 Customer preferences are changing daily, making an exclusively bricks-and- mortar 6 approach to video sales and rentals unprofitable. 7 In-home filmed entertainment is offered through various distribution channels such as the retail home video industry, the online video industry, movie downloads, the cable industry, and the satellite industry. Of these distribution channels, the retail home video industry includes the sale and rental of movies on DVD (including in the Blue-Ray format) and VHS by traditional video store retailers such as Blockbuster and other businesses. Online video retailers include Blockbuster Online, Movie Gallery, Netflix, Amazon.com, CinemaNow, and other retailers (Exhibit 1). As home-viewing technology improves and becomes cheaper, downloading movies over the Internet and watching on wide-screen televisions at home is an emerging trend. By using a computer and a broadband link, movies can be downloaded from online video retailers for as low as $2 to $5 and watched by customers on their computers. 8 Online DVD rental services are convenient and allow customers to find, rent, and watch movies whenever they wish. Online video retailers such as Movielink and CinemaNow provide various methods of This case was written by Florence Nightingale, ICFAI Business School, Chennai and Vara Vasanthi, ICFAI Business School Case Development Centre, under the direction of Doris Rajakumari John, ICFAI Business School, Chennai. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. 2008, ICFAI Business School, Chennai. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. 71 CHE-HITT-09-0102-Case-005.indd 71 11/14/09 2:20:05 AM

72 Exhibit 1 Online Video Rental Companies Source: Blockbuster s new paradigm and its impact on competitors, http://finance.paidcontent.org/paidcontent?page=quote&ticket=bbl, November 15, 2007. access to customers for watching movies. Movielink, for example, offers two options to either buy or rent a movie. It provides a license to watch a movie and also allows for unlimited viewing. The movie can be stored on a hard disc. 9 The price to purchase a movie ranges between $8.99 and $19.99, and a movie rental from $0.99 to $4.99. As technology advances, it is likely to be easier to send a movie from a computer to a television. The major players in movie downloads are Sony, Universal, and Warner Bros., which embarked on a major endeavor to have movies transferred into digital designs. These companies also provide access to movies, similar to online video retailers. CinemaNow.com also provides free movie downloads and allows users to choose from a wide array of movies, ranging from major studio blockbusters to hard-to-find classics. Despite the emergence of new technologies such as movie downloads and online movie purchases, the online rental business remains popular. The United States (the world s largest market for video rentals) and Europe generated more than $1 billion in consumer spending in this area in 2005. 10 By the end of 2005, there were about 6.3 million online DVD rental subscribers in the United States and Europe. 11 The United Kingdom dominates the European market, followed by Germany and thriving markets in France and Scandinavia. The online sector already accounts for more than 1 in 10 video rentals in the United Kingdom. 12 According to recent research, 70 percent of Americans prefer watching movies at home, and Americans rented about 10 million movies in September 2007. 13 It is expected that by the end of 2009, more than half of the United Kingdom s rental transactions and rental spending will be online. 14 The growth in the sector is further aided by customerfriendly strategies adopted by retailers. The retailers no longer insist on return dates or charge late fees for DVD rentals, thereby giving customers more freedom to keep the DVDs as long as they desire. The online rental companies allow customers to pay a monthly fee for access to unlimited rentals, which arrive and are returned by mail. In this fast-growing video rental market, Blockbuster Inc. was one of the early players and was the largest video rental chain in the United States. The Blockbuster Business Model Headquartered in Dallas, Texas, Blockbuster Inc. was founded by David Cook in 1982. In October 1985, Cook opened the first Blockbuster Video outlet in Dallas, with 8,000 tapes covering 6,500 titles. At the start of 1987, Blockbuster owned 15 stores and franchised 20 other stores. By the end of 1987, Blockbuster was operating 133 stores and had become the fifth-largest video chain in terms of revenue in the United States. 15 The company s CHE-HITT-09-0102-Case-005.indd 72 11/14/09 2:20:07 AM

73 basic revenues were from their stores and from late fees charged for rentals. In August 2004, Blockbuster introduced an online DVD rental service to compete with the established market leader, Netflix. Blockbuster offers services primarily through traditional retail outlets, online retailers, and cable and satellite providers. The company owns various trademarks such as Blockbuster, Blockbuster Video, torn ticket Logos, Blockbuster. com, Blockbuster Online, Blockbuster Night, Blockbuster GiftCards, Blockbuster Game Pass, Blockbuster Movie Pass word marks and logos, Blockbuster Rewards, related Blockbuster Family of Marks, Game Rush word mark and logo, and Life After Late Fees. 16 Blockbuster s business model features a state-ofthe-art distribution network and 41 distribution centers in the United States, which can reach most customers with one-day delivery, and an online recommendation system that lets customers select from 65,000 video titles. Blockbuster introduced a package that could travel as first-class mail, making it easy for customers to return DVDs at no charge to them. Blockbuster later launched a new online movie rental program to provide customers both Internet convenience and in-store benefits (see Exhibit 2). Blockbuster projects itself as a home entertainment enterprise with a diversified set of products and services, which includes an expanded games selection, DVD sales, online rentals, game trading, and various other businesses. Later, the company introduced Blockbuster Total Access, a movie rental program that gives online customers the option of exchanging their DVDs through the mail or returning them to a nearby Blockbuster store in exchange for free in-store movie rentals, which was different from the existing model (Appendix I). In addition, most of Blockbuster s online subscribers had the option of exchanging their online movies for discounted in-store game rentals as well as free in-store movie rentals at more than 5,000 Blockbuster stores. Blockbuster reported, We want to give consumers the most convenient access to media entertainment, whether that s through our stores or by mail, and are dedicated to doing that with flexible plans and pricing. 17 With more than 65,000 titles to choose from online, Blockbuster delivers DVDs to the subscribers mailboxes in prepaid postage return envelopes. To increase its business, Blockbuster launched advertising campaigns and also undertook joint promotions with fast food outlets such as Domino s Pizza and McDonald s. Blockbuster designed marketing and advertising campaigns to maximize opportunities in the marketplace, working closely with customers to connect and drive business. Blockbuster customized its stores merchandise selection, quantity, and formats to meet the needs and preferences of local customers. As the new business was gaining ground, Blockbuster underwent several changes in its business-level strategy, focusing mainly on costcutting programs and selling products such as DVDs. This strategy made an impact, and the sales of DVDs increased as compared to DVD rentals. The popularity of online video rentals, however, was increasing with Exhibit 2 Blockbuster Online Movie Rental Plan Source: Blockbuster Online, http://dvd-rental-review.toptenreviews.com/blockbuster-online-review.html. CHE-HITT-09-0102-Case-005.indd 73 11/14/09 2:20:08 AM

74 video-on-demand (VoD) services gaining prominence. VoD services, in which video is streamed over the Internet, deviated from the firm s existing business model, which depended heavily on store ownership and increasing sales per store. Both VoD and online videorental services diverted focus from the sale of DVDs. 18 Blockbuster developed a good understanding of how the online rental channel worked and what online customers were doing in their stores. In 2005, as part of a comprehensive business transformation initiative, Blockbuster engaged Accenture, a global management consulting and technology services company, to develop the systems and processes and to launch the online business. 19 Both companies jointly built a network of distribution centers fully dedicated to service online customers. Blockbuster wanted to offer a one-day delivery to as many customers as possible. Working with Accenture, Blockbuster also identified sites for distribution centers that enhanced its customer service. The company s online rental program was unique and encouraged former customers to return to Blockbuster s stores. Blockbuster reported worldwide revenues of more than $5.5 billion and a profit of $54.7 million in 2006. 20 In the same year, Blockbuster Online had about 1.4 million online subscribers. 21 To concentrate more on its online subscriber business, Blockbuster closed nearly 300 stores in the United States in 2006. Blockbuster continued to invest in its Total Access program and added more than 700,000 online subscribers 22 and more than 4 million total subscribers 23 in 2006. This action facilitated Blockbuster s efforts to compete with Netflix. Blockbuster reported, We have invested heavily in Total Access during the first half of 2007 to capture market share in the overall video rental market and to set the stage for the expected future profitability of our online rental business. 24 Blockbuster s Total Access had a positive impact on its online movie rental revenue. In the first quarter of 2007, revenues reached about $108.9 million. 25 Total Access also helped Blockbuster generate more cross-channel sales and traffic. The average store had about 4,800 shoppers and 45,000 rentals per month. Blockbuster reported, Growing the revenue of Total Access had helped to offset the in-store revenue decline. 26 Michael Pachter, an analyst at Wedbush Morgan Securities, 27 said, Under Keyes, Blockbuster will likely be looking for ways to maximize its customer base and leverage its chain of stores the main differentiator with Netflix all while also preparing for the fact that physical DVD rentals may not be its core business in just a few years. 28 Blockbuster focused on protecting its core rental business, developing new retail opportunities, and becoming the preferred provider of digital entertainment. 29 In 2007, Blockbuster had 27 percent of the U.S. video rental market and served more than 87 million customers in the United States, its territories, and 25 other nations. 30 While Blockbuster tried to make its mark in the online movie rental business, the firm encountered stiff competitions from Apple, Amazon.com, and Wal- Mart, as well as market leader Netflix. In 2007, Netflix was already an established player with 75 percent 31 of the market. Netflix s success was attributed to the firm s business model. Netflix s innovative subscription service, for example, allowed customers to keep videos as long as they wished. There are no due dates or late fees nor does the customer incur any shipping charges. Netflix s success inspired a number of other DVD rental companies both in the United States and abroad (see Exhibit 3). Both Blockbuster and Netflix offer three movie rentals for a monthly fee of $17.99 (the price of this service changes in response to competitive challenges) and allow customers to return their rentals by mail. However, as part of the Total Access program, Blockbuster accepts returns at its stores and rewards subscribers with a free rental for each store return. Consumers were willing to pay a premium for convenience, and Blockbuster capitalized on that. As a result, Blockbuster gained subscribers from Netflix, which had no bricks-and-mortar presence and could not match with Blockbuster s Total Access plan. Netflix, for its part, still posted a 36 percent increase in revenue to $305.3 million for the year 2007. Netflix was also investing more than $40 million in new digital download technology. 32 Blockbuster responded to these competitive actions by aggressively trying to take customers away from Netflix. 33 Reducing its prices and enhancing the layouts of its retail stores are examples of the competitive actions Blockbuster decided to initiate while competing against Netflix. Blockbuster also provides printable e-coupons for two free in-store movie or game rentals, and other special offers. Both companies were organized to focus on the key considerations such as selection, price, and customer satisfaction (see Exhibit 4). Pachter said, Netflix has tried to grab the lead in the digital distribution channel, but Blockbuster is signaling it s not going to give that up easily. 34 Blockbuster and Netflix offer similar plans and have repeatedly lowered prices or modified services in an effort to win customers. Blockbuster, in addition to the entertainment content provided through its stores and by mail, had taken an important step towards making movie downloading available to computers, portable devices, and directly to televisions in homes. In 2007, Blockbuster introduced a wider range of subscription plans, including Blockbuster Total Access CHE-HITT-09-0102-Case-005.indd 74 11/14/09 2:20:09 AM

75 Exhibit 3 Netflix How it Works Source: Netflix How it works, http://www.netflix.com/howitworks. Exhibit 4 Comparison of Blockbuster Online DVD Rentals and NetFlix.com No Late Fees Keep the DVDs as long as you want No Late Fees Netflix Keep the DVDs as long as you want No Late Fees Selections Over 40,000 titles Over 40,000 titles Turn-around Time 1 Day 1 Day Unlimited DVD Rentals YES YES Delivered to Your Mailbox YES YES Free Shipping & Postage Free first-class postage both ways Free first-class postage both ways No Return Dates YES YES Distribution Centers Free In-Store Coupons 23 across the United States Will start using their 4,500 stores in coming year YES Two e-coupons for FREE in-store movie or game rentals. Print coupons yourself. 35 across the United States. NO Gift Subscriptions YES YES Special Offers $9.99 for First Month 2-week free trial $$ Cost $$ $17.99 3 titles out $29.99 5 titles out $37.49 8 titles out $11.99, 4 DVDs a month, 2 titles out $17.99 3 titles out $29.99 5 titles out $47.99 8 titles out Eight subscription plans offered Source: DVD Rental Services Comparison, http://www.acmetech.com/shopping/movies/dvd_rental.php. CHE-HITT-09-0102-Case-005.indd 75 11/14/09 2:20:09 AM

76 Premium, Blockbuster Total Access, and Blockbuster by Mail. The new subscription plans were available to all current and new subscribers to Blockbuster s online rental service with pricing as low as $4.99 a month 35 (see Appendix 2). Blockbuster s online movie rentals increased by 121.3 percent from $174.2 million in 2006 to $385.5 million in 2007. 36 Despite the increase in the online movie rentals, Blockbuster reported losses in 2007 (see Appendix 3). According to the projected figures for 2008 in the Online DVD rental report published by Online DVD Rental Reviews 2008, Netflix ranked first, with Blockbuster second (see Appendix 4). To survive in the market, Blockbuster needed to increase its market share and establish its reputation in the online download business. According to PricewaterhouseCoopers, by 2010, annual revenue for the online video download business is expected to increase by $3.7 billion and DVD rentals and sales are expected to increase to about $29.5 billion. 37 For these reasons, Blockbuster decided to acquire Movielink. Movielink Acquisition: The Strategic Rationale When Blockbuster released its financial results for the year 2007, the firm s shareholders questioned the longterm sustainability of the company s current business model. In response to these concerns, company officials said, Our goal is to continue to increase our membership base by providing even more ways for customers to get the entertainment they want through our stores, through the mail, and through new technologies. 38 As part of this goal, in August 2007, Blockbuster acquired Movielink, a leading movie downloading service. Movielink offers movies for download through its video-on-demand Internet distribution service. Movielink was founded as a joint venture among five studios Paramount Pictures, Sony Pictures Entertainment, MGM, Universal Studios, and Warner Bros. who were responding to consumers adoption of high-speed Internet access. 39 Movielink offers about 400 movies, which take 30 to 90 minutes to download, but the customers have the option of watching the movie after 10 minutes of downloading. 40 The Movielink Web site has two stores, a purchase store and a rental store, with a common home page. At the rental store, customers can browse the site and view trailers of movies without any charge. The customer can register with Movielink and pay for the rental by credit card. Bruce Anderson, Movielink s vice president of engineering and operations, said, As Movielink s business continues to grow, it is vital that our content delivery infrastructure continues to provide the quality of service our customers have come to expect. 41 Movielink has distribution agreements with the five studios that founded it, as well as Lionsgate and 20th Century FOX. Blockbuster s chief executive, James W. Keyes, said, The acquisition immediately puts us in the digital download business. Clearly, our customers have responded favorably to having other convenient ways to access movies and entertainment. 42 The acquisition provided Blockbuster with a way to send movies straight to televisions and computers, complementing its store and movie-by-mail operations. Pachter stated, The acquisition is a defensive move by Blockbuster to keep up with Netflix. 43 Movielink CEO Jim Ramo said, The studios goal with the Movielink service has always been to make digital entertainment content more conveniently, more widely, and more securely available to consumers. This acquisition should further that goal. 44 He added, With Blockbuster s ability to leverage its store network, online assets, and marketing expertise, Blockbuster should be able to grow the market for digitally-delivered entertainment content, and we believe that s good news for consumers and content providers alike. 45 Blockbuster believed that the 1,400 movie titles in the Movielink catalog gave it a strong presence among firms offering movies for digital download via online capabilities. Customers are allowed to rent movies for $0.99, and they can store the movie for 30 days on their computers. Movielink announced that it was working on a plan that would allow customers to copy films to DVD. Movielink s services, however, failed to catch on because the only way to watch films from Movielink on a television was to buy a set-top box. The company offered a network between a PC and television. Analysts felt the issue was that Movielink downloads could not be burned to discs. 46 Movielink did not provide a download-andburn 47 service because of a misunderstanding between Movielink and the five studios. 48 In contrast, Blockbuster s competitor Netflix s movie download service was favorably received by customers. Movielink ended up failing to reach a wide audience and posted a net loss of $10.16 million in 2007. Blockbuster s acquisition of Movielink failed to immediately expand the firm s business beyond the store-based movie-rental market. Competition from cable providers offering video-on-demand and DVD-rental services such as Netflix also posed problems for Blockbuster. Whether Blockbuster can use the Movielink acquisition to increase its market share and profitability in the video rental market and whether this acquisition offers Blockbuster an increased online presence remains to be seen. CHE-HITT-09-0102-Case-005.indd 76 11/14/09 2:20:09 AM

77 NOTES 1. C. Metz, 2007, Blockbuster reels in MovieLink, http://www.theregister.co.uk/2007/08/09/blockbuster_buys_netflix, August 9. 2. K. Regan, 2007, Blockbuster chases online box office with movielink buy, http://www.ecommercetimes.com/story/58751.html, August 9. 3. EMA s 2007 Annual Report is now available, http://www.entmerch.org/annual_reports.html. 4. Ibid. 5. The Entertainment Merchant Association, http://www.entmerch.org/ annual_reports.html. 6. Companies that have a physical presence can offer face-to-face consumer experiences. 7. G. Millman, 2005, Blockbuster s bricks and clicks, http:// www.accenture.com/global/research_and_insights/outlook/ BlockbustersClicks.htm, June. 8. Blockbuster s bricks and clicks, op.cit. 9. D. Gynn, 2006, Download movies with Movielink/Optaros and reduce risk, http://opensource.syscon. com/read/256611.htm, August 8. 10. A. Wood & H. J. Davis, 2005, The outlook for online DVD rental: A strategic analysis of the U.S. and European markets, http://www.screendigest.com/reports/05onlinedvdrental/readmore/view.html, November. 11. Ibid. 12. The outlook for online DVD rental: A strategic analysis of the U.S. and European markets, op.cit. 13. 2007, Frost & Sullivan Commends DVDPlays Innovative Services in the Automated DVD Rental Machine Market, http://www.frost.com/ prod/servlet/press-release.pag?docid=110114449, October 23. 14. Ibid. 15. Blockbuster Inc., http://www.fundinguniverse.com/companyhistories/blockbuster-inc-company-history.html. 16. Blockbuster Inc., 2007, http://custom.marketwatch.com/custom/ nyt-com/htmlcompanyprofile. asp?mw=http://marketwatch. nytimes.com/custom/nyt-com/htmlcompanyprofile. asp&symb=bbi &sid=153477#compinfo, August 11. 17. 2007, Blockbuster announces expanded online subscription offerings, http://goliath.ecnext.com/coms2/summary_0199-6786323_itm, July 26. 18. Diversity, http://www.blockbuster.com/corporate/diversity 19. Blockbuster s bricks and clicks, op.cit. 20. 2006, Blockbuster profit, 1.4 million online subscribers, http://www.hackingnetflix.com/2006/07/blockbuster_pro.html, July 27. 21. Ibid. 22. C. Spielvogel, 2007, Blockbuster Q4 income down, revenue up, http://www.videobusiness.com/article/ca6419949.html, February 27. 23. 2007, Blockbuster emphasizes its online program over stores, http://www.internetretailer.com/dailynews.asp?id=22946, June 29. 24. Blockbuster profit, 1.4 million online subscribers, op.cit. 25. Ibid. 26. 2007, Blockbuster Q1 2007 Earnings Call Transcript, http://www.seekingalpha.com/article/34304-blockbuster-q1-2007-earningscall-transcript, May 2. 27. It is recognized among securities professionals as a leading investment banking and brokerage firm. 28. Blockbuster chases online box office with movielink buy, op.cit. 29. 2007, Blockbuster reports third quarter 2007 results, new strategic initiatives and decisive actions taken to improve near-term profitability, http://www.b2i.us/profiles/investor/ ResLibraryView.asp?BzID=553&ResLibraryID=22067&Category=1 027, November 1. 30. Blockbuster Inc., op.cit. 31. J. M. Spool, 2006, Innovation is the new black, http://www.uie.com/ articles/innovation_from_experience_design/, June 1. 32. Blockbuster emphasizes its online program over stores, op.cit. 33. J. Love, 2006. E-retailing`s brightest stars at IRCE 2007, http: //www.internetretailer.com/internet/marketing-conference/89902- e-retailings-brightest-stars-at-irce-2007.html, December. 34. Blockbuster chases online box office with movielink buy, op.cit. 35. Blockbuster announces expanded online subscription offerings, op.cit. 36. 2007, Blockbuster turns in a weaker third quarter performance, http://www.internetretailer.com/dailynews.asp?id=24278, November 1. 37. Video download service, http://videodownloadservice.net. 38. A. Chowdhry, 2007, Blockbuster revenue drops 5.7 percent; focusing on membership gain, http://pulse2.com/category/ blockbuster, November 3. 39. Movielink, LLC Company Profile, http://biz.yahoo.com/ ic/106/106424.html. 40. Movielink, http://dvd-rental-review.toptenreviews.com/movielink-details.html 41. 2005, Equinix to provide connectivity infrastructure for Movielink video-on-demand service, http://findarticles.com/p/articles/mi_ m0ein/is_2005_jan_17/ai_n8694997, January 17. 42. 2007, Blockbuster acquires Movielink, http://www.nytimes. com/2007/08/09/business/09movie.html?_r=1&n= Toppercent2f Newspercent2f Businesspercent 2fCompanies percent2fblockbu ste rpercent20incpercent2e&oref=slogin, August 9. 43. Ibid. 44. Blockbuster reels in Movielink, op.cit. 45. Ibid. 46. G. Sandoval, 2007, Blockbuster acquires Movielink, http://www.news.com/2100-1026_3-6201609.html, August 8. 47. The service allows the consumers to purchase, download, and burn a complete DVD for instant gratification. 48. E. Bangeman, 2007, Is action better than inaction? Blockbuster buys Movielink for a song, http://arstechnica.com/news.ars/ post/20070809-is-action-better-than-inaction-blockbusterbuys-movielink-for-asong.html?rel, August 9. CHE-HITT-09-0102-Case-005.indd 77 11/14/09 2:20:09 AM

78 Appendix 1 Blockbuster Business Rent Online Return by Mail Or In-Store with Blockbuster Total Access Only Blockbuster Total Access gives the convenience of renting movies online and the choice of how to return them: by mail or bringing them to participating Blockbuster store, where customers can exchange them for new movies or discounted game rentals on the spot (up to monthly plan limits on exchanges).* In-Store Exchanges For only $17.99 a month (plus taxes) customers can receive up to 3 DVDs at a time with up to 5 in-store exchanges for free movie rentals or discounted game rentals. When customers finish watching a DVD, they can send it back in the provided postage-paid envelope or return it to a participating Blockbuster store. Special In-Store Monthly Offers As a Blockbuster Online member, customers are eligible for exclusive deals and discounts each month at participating Blockbuster stores. More than 75,000 Titles, Including New Releases Online DVD library has more than 75,000 titles, and it is growing every week. Customers can find classic cinema, modern favorites, television shows, children s programming, health and fitness workouts, and of course, the hottest new releases from Blockbuster. Delivered Right to the Mailbox Renting DVDs is as easy as picking up the mail. DVDs usually arrive within 1 2 business days**. Return the DVD by placing the DVD in the provided postage paid envelope and send it back through the mail or return it to a participating store. Then, the next DVD will be on its way. Free Shipping and Postage Shipping is always free. Both ways. There are no postage charges. No Return Dates on Online Rentals Blockbuster online rental members can keep online rentals out as long as they want. There are never any due dates*. Watch the DVD when it is convenient for you, and send it back only when you are ready for a new selection. No Extended Viewing Fees or Late Fees on Online Rentals As a Blockbuster Online rental member, customers pay a flat monthly rate. There are no extended viewing fees or late fees on DVDs rented online. * Separate, complimentary in-store membership required for in-store rentals. In-store movie rentals are subject to store rental terms and conditions, including due dates and charges which may apply to rentals not returned by the due date. See store for complete in-store rental terms and conditions. Free in-store rentals must be returned to the store where they were originally rented. ** One business day delivery for Blockbuster based on more than 90 percent of our subscribers being within one-day postal delivery zone. Certain subscribers may experience longer delivery times. Source: Blockbuster Movies, https://www.blockbuster.com/signup/rp/howitworks. CHE-HITT-09-0102-Case-005.indd 78 11/14/09 2:20:09 AM

79 Appendix 2 Blockbuster Membership Plans Blockbuster Online offers the following membership plans: $4.99 per month offers 2 DVD rentals per month and allows 1 movie rental at a time. $8.99 per month offers unlimited DVD rentals per month and allows 1 movie rental at a time. $13.99 per month offers unlimited DVD rentals per month and allows for 2 movie rentals at a time. $16.99 per month offers unlimited DVD rentals per month and allows for 3 movie rentals at a time. Blockbuster Total Access offers the following membership plans: $7.99 per month 2 DVD rentals per month, allowing 1 movie rental at a time or 2 in-store exchanges 1 movie at a time. $9.99 per month offers unlimited DVD rentals per month, allows 1 movie rental at a time and up to 2 in-store exchanges per month. $14.99 per month offers unlimited DVD rentals per month, allows 2 movie rentals at a time and up to 3 in-store exchanges per month. $17.99 per month offers unlimited DVD rentals per month, allows 3 movie rentals at a time and up to 5 in-store exchanges per month. Blockbuster Total Access Premium plans include: $16.99 per month offers unlimited DVD rentals per month, unlimited in-store exchanges, 1 movie at a time. $21.99 per month offers unlimited DVD rentals per month, unlimited in-store exchanges, 2 movies at a time. $24.99 per month offers unlimited DVD rentals per month, unlimited in-store exchanges, 3 movies at a time. Source: Blockbuster Online, http://dvd-rental-review.toptenreviews.com/blockbuster-online-review.html. Appendix 3 Blockbuster Income Statement 2007 All amounts in millions except per-share amounts Q3 2007 09/2007 Q2 2007 06/2007 Q1 2007 03/2007 Q4 2006 12/2006 Operating Revenue 1,238.20 1,263.20 1,473.00 1,463.10 Total Revenue 1,238.20 1,263.20 1,473.00 1,463.10 Adjustment to Revenue Cost of Sales 396.30 441.00 531.60 536.90 Cost of Sales with Depreciation 570.40 627.70 711.00 699.90 Gross Margin 667.80 635.50 762.00 763.20 Gross Operating Profit 841.90 822.20 941.40 926.20 R&D SG&A 603.20 624.30 654.50 610.70 Advertising 27.50 54.80 76.60 47.50 Operating Profit 5.60 13.70 18.40 50.10 Operating Profit before Depreciation (EBITDA) 211.20 143.10 210.30 268.00 Depreciation 217.00 234.50 228.70 212.80 Depreciation Unreconciled 42.90 47.80 49.30 49.80 Amortization Amortization of Intangibles Operating Income After Depreciation 5.80 91.40 18.40 55.20 (Continued) CHE-HITT-09-0102-Case-005.indd 79 11/14/09 2:20:10 AM

80 Appendix 3 Blockbuster Income Statement 2007 (Continued) All amounts in millions except per-share amounts Q3 2007 09/2007 Q2 2007 06/2007 Q1 2007 03/2007 Q4 2006 12/2006 Interest Income 1.30 1.90 1.90 2.60 Earnings from Equity Interest Other Income, Net 1.10 1.70 0.40 1.60 Income Acquired in Process R&D Interest Restructuring and M&A 0.20 77.70 0.00 0.00 Other Special Charges 0.00 0.00 0.00 5.10 Total Income Available for Interest Expense (EBIT) 5.40 10.10 16.90 54.30 Interest Expense 20.70 21.10 23.60 24.40 Income Before Tax (EBT) 26.10 31.20 40.50 29.90 Income Taxes 8.70 3.00 8.50 10.30 Minority Interest Preferred Securities of Subsidiary Trust Net Income from Continuing Net Income from Discontinued Net Income from Total 34.80 34.20 49.00 19.60 0.20 1.10 2.60 6.70 35.00 35.30 46.40 12.90 Extraordinary Income/Losses Income from Cumulative Effect of Accounting Change Income from Tax Loss Carryforward Other Gains (Losses) Total Net Income 35.00 35.30 46.40 12.90 Normalized Income 35.00 111.90 49.00 24.70 Net Income Available for Common 37.60 37.00 51.80 16.70 Preferred Dividends 2.80 2.80 2.80 2.90 Excise Taxes Per-Share Data CHE-HITT-09-0102-Case-005.indd 80 11/14/09 2:20:10 AM

81 Appendix 3 Blockbuster Income Statement 2007 (Continued) All amounts in millions except per-share amounts Basic Earnings Per Share (EPS) from Continuing Basic EPS from Discontinued Basic EPS from Total Basic EPS from Extraordinary Income Basic EPS from Cumulative Effect of Accounting Change Basic EPS from Other Gains (Losses) Q3 2007 09/2007 Q2 2007 06/2007 Q1 2007 03/2007 Q4 2006 12/2006 0.20 0.19 0.27 0.09 0.00 0.01 0.01 0.04 0.20 0.20 0.26 0.05 Basic EPS Total 0.20 0.20 0.26 0.05 Basic Normalized Net Income/ Share Diluted EPS from Continuing Diluted EPS from Discontinued Diluted EPS from Total Diluted EPS from Extraordinary Income Diluted EPS from Cumulative Effect of Accounting Change Diluted EPS from Other Gains (Losses) 0.20 0.62 0.27 0.11 0.20 0.19 0.27 0.09 0.00 0.01 0.01 0.04 0.20 0.20 0.26 0.05 Diluted EPS Total 0.20 0.20 0.26 0.05 Diluted Normalized Net Income/ Share 0.20 0.62 0.27 0.11 Dividends Paid per Share Additional Data Basic Weighted Shares Outstanding Diluted Weighted Shares Outstanding 190.60 190.00 189.40 187.10 190.60 190.00 189.40 189.00 Source: Blockbuster Inc. Income Statement, http://finance.google.com/finance?fstype=ii&q=bbi. CHE-HITT-09-0102-Case-005.indd 81 11/14/09 2:20:10 AM

82 Appendix 4 Projected Figures 2008 Online DVD Rental Report CHE-HITT-09-0102-Case-005.indd 82 11/14/09 2:20:10 AM

83 Appendix 4 Projected Figures 2008 Online DVD Rental Report (Continued) Source: Top Ten Reviews, http://dvd-rental-review.toptenreviews.com/index.html#anchor, 2007. CHE-HITT-09-0102-Case-005.indd 83 11/14/09 2:20:14 AM