Netflix, Blockbuster hold dueling investor meetings

SAN FRANCISCO Wed May 28, 2008 2:23pm EDT

1 of 2. A Blockbuster store is seen in an undated handout photo.

Credit: Reuters/Handout

SAN FRANCISCO (Reuters) - Like two movies going head to head on opening weekend, Netflix Inc and Blockbuster Inc made rival presentations to investors on Wednesday, as each DVD rental company vies to stay competitive in a converging marketplace.

Both companies are repositioning themselves to address the challenges of a maturing video rental business and an evolving online sector with giants such as Apple Inc, Amazon.com Inc and Microsoft Corp moving into the market.

At the Netflix Investor Day in San Francisco, company executives talked broadly about the push to provide online streaming, noting they expected the by-mail business to peak sometime in the next five to 10 years.

"Our key challenge is growing earnings per share and subscribers while funding streaming (online video), which should give us years of subscriber and earnings expansion," said Reed Hastings, chief executive of the Los Gatos, California-based company.

He told investors the company's online investment in 2008 and 2009 is expected to be "fairly inefficient," but noted the reason for higher spending was to cultivate better partnerships and content.

Netflix last month warned that gross margins would remain flat for the next two quarters due to higher spending for content for its online streaming service, now offered free to subscribers.

Hastings and other company executives were bullish on the company's long-term position given its successful expansion into the streaming DVD market.

"Once we're in streaming ... we can attract well beyond 20 million subscribers worldwide," he said.

Netflix's chief rival, Blockbuster, held its annual shareholders meeting in New York City on Wednesday, where Chief Executive Jim Keyes said the company is succeeding with turnaround efforts that analysts said boosted profits last quarter.

However, Keyes offered little on the status of Blockbuster's controversial bid to buy Circuit City Stores Inc for up to $1.3 billion, and suggested that Blockbuster's turnaround does not depend on acquiring Circuit City.

"We are in due diligence ... (and) we do plan to be responsible with this approach," he said, regarding the Circuit City bid. "With or without the Circuit City acquisition, we think we have a terrific opportunity to transform these stores."

Dallas-based Blockbuster is the largest U.S. movie rental chain with about 20 million customers. Netflix is the leader in the movie-by-mail market with about 8 million subscribers.

Netflix shares rose as much as 30 percent in the first four months of this year on optimism over its subscriber growth and profitable execution, before the stock began to pull back in April on spending concerns. The shares are still up about 18 percent so far this year.

Blockbuster shares are down about 14 percent in the year to date after dropping in mid-April when the Circuit City bid was announced. Wall Street generally favors Netflix over Blockbuster, which had to hire a new CEO last summer to turn around losses and which is considered to be a brick-and-mortar dinosaur.

VIDEO STREAMING

Netflix last week unveiled a TV set-top box through a partnership with privately held Roku for streaming movies off the Internet, sending Netflix shares 10 percent higher.

With the Roku deal, Netflix was making good on its promise in April to announce three partnerships similar to a set-top box alliance with LG Electronics Inc, which will also let viewers watch films from the Web on TV sets.

Wedbush Morgan's Michael Pachter said Wall Street widely expects one of the partners to be Microsoft. Netflix said there would be no new partnership announcements on Wednesday.

At this point, the company's streaming video service has about 10 percent of the 100,000 movies and TV shows that Netflix has on DVD, with studios reluctant to provide top-tier titles for streaming or download due to fears of piracy and interfering with their other distribution.

Blockbuster has redesigned about 6 percent of its stores to emphasize games, electronics sales and DVD sales and is preparing to expand its Movielink Web movie service. At the New York meeting Keyes said the company is working on its own set-top box.

It recently turned a profit on its Total Access online subscription service, which competes against Netflix's movie- by-mail service and retained 3.1 million subscribers.

Blockbuster also unveiled a kiosk made in partnership with NCR Corp that allows in-store digital downloads, much like an ATM cash machine. Movies can be downloaded in about two minutes, said Keyes, who declined to detail the number of films and videos that would be available in the pilot program, or which Hollywood studios were on board.

Blockbuster has said the kiosks would start appearing in June -- first in a few Dallas stores -- and be rolled out to most stores during the next two to three years.

(Editing by Andre Grenon and Maureen Bavdek)

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