- The Washington Times - Tuesday, February 10, 2004

Viacom Inc. announced plans yesterday to sell its majority stake in Blockbuster so the media conglomerate can focus on its other core entertainment brands.

Blockbuster, the video-rental giant, has been fighting a rash of competition as more consumers turn to cheaper and more convenient movie-viewing alternatives.

Blockbuster is up against the low-priced DVDs at major retailers, online-movie-rental services that don’t charge late fees and on-demand movies delivered via high-speed digital cable.

Worldwide sales at Blockbuster stores open at least a year fell about 7 percent in the fourth quarter because of the softness in the movie-rental industry, Viacom said. In the third quarter of 2003, Blockbuster reported its first sales decline in about five years.

Blockbuster has adapted to the shift to DVD from videotape by adding DVDs to its retail and rental inventories, but it has been challenged by increasing sales of inexpensive DVDs through other retailers such as price-slashing Wal-Mart.

“Consumers are going out and buying DVDs, which means less rentals,” said Dennis McAlpine, managing partner at McAlpine Associates LLC.

Used DVDs, which are of a better quality than used videotapes, are becoming attractive to consumers who wait until they go on sale at even less-expensive prices, Mr. McAlpine said.

Blockbuster also has lost customers to online-movie-rental services such as Netflix Inc. as consumers turn to the Internet rather than trek to a local Blockbuster or Hollywood Video.

Netflix, which has 1.5 million subscribers, reported $272.2 million in revenue for fiscal 2003 —a 78 percent increase from a year earlier. The Los Gatos, Calif., company, which started in 1999, gives members access to 15,000 DVD titles for a $19.95-a-month fee. Subscribers rent as many DVDs as they want and keep them as long as they want, with three movies out at a time.

“A good percentage of their members used to rent from Blockbuster or Hollywood Video,” Mr. McAlpine said.

To remain a major player in the $8 billion movie-rental industry, Blockbuster began putting a major emphasis on retail expanding its in-store selection of movies, games and gaming equipment. The company also has introduced an on-line store and a flat-rate membership program for movies and games.

“The whole rental and sell-through market has been going through dramatic changes,” said Craig Nedbalski, managing director at Cleveland firm Victory Capital Management, which owns about 3.7 million Viacom shares. “It’s still going to be a challenging environment to grow the business.”

Viacom long has been considering a disposal of its roughly 81 percent stake in Blockbuster and was thought to be looking for a buyer in recent weeks. The company didn’t disclose details of what it planned to do and saidthe plan was not final.

Sumner Redstone, Viacom’s chairman and chief executive officer, told investors in a conference call that although the company continued to believe in Blockbuster’s long-term pros-pects, “the business is evolving and moving away from our core areas of focus” and that the company would be “far better off” independent.

Viacom, which bought Blockbuster in 1994, will take a $1.3 billion charge to write down the value of the business.

The company expects the divestiture to be structured as a “tax-free split-off,” though it said it is considering other alternatives.

This article is based in part on wire-service reports.

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