Blockbuster Cash Crunch

Living up to its name, Blockbuster continues to generate negative news about its performance, this time with Variety covering studio concerns over Blockbusters working capital capabilities. Having ended its late fee policy in December 2004, the loss of these fees, estimated at $400 to $450 million in 2005 and accounting for approximately 10% of its revenue (according to the 2004 Annual Report), seems to have left Blockbuster scrambling to manage its payables.

According to Variety, one studio is demanding C.O.D. from Blockbuster and two others have "taken out third-party insurance for receivables to protect themselves from possible delays in payment by Blockbuster on upcoming titles." This is not an unexpected situation for the home entertainment supplier, but it has driven Blockbuster to cancel its third quarter dividend and is changing the way it has been acquiring new titles. Blockbuster "obtained about 70% of its rental DVDs via rev share in the second quarter, compared with its typical quarterly average of about 50%." This can't be too hard of a situation for the studios, who typically earn more revenue through revenue sharing arrangements. And given that this outlet "represent[s] approximately 12%-15% of revenue in most cases," for the studios, this is not a situation that will create dire circumstances for Blockbuster.

Of course, this news and prior warnings of a reduced rental and sales market doesn't look good compared to the valuation boost competitor Netflix has experienced on word that "it will hit 5 million subscribers sometime in 2006, a year ahead of its previously stated goal."

What should we take from all this? That the home entertainment market is in flux, in both slowing growth rates -- against a very large base -- and preferred delivery mechanisms. The dollars likely won't disappear, but the players may shift. Such is evolution.