October 3, 2007 / 4:36 PM / 11 years ago

Blockbuster's online DVD subscribers seen down

LOS ANGELES (Reuters) - Blockbuster Inc, whose management met with members of Wall Street last week, is expected to report a fall in subscribers to its online DVD rental service, some investors and analysts said.

Blockbuster Chief Executive James Keyes was in New York to introduce the new chief financial officer, Tom Casey, to analysts, a spokeswoman for the company said, but she declined to give any projections for subscriber growth.

Keyes said in July that Blockbuster would scale back spending on marketing its online DVD rental service, Total Access, after having spent more than $300 million in a costly three-year campaign to compete with Netflix Inc.

Some analysts and investors who attended last week’s meetings said they now believed the scale-back would likely cost Blockbuster some subscribers in the third quarter.

“They strongly suggested that they cut advertising spending, that churn was constant, and that new subscriber adds were much lower, leading us to the conclusion that subscriber growth was negative,” said Michael Pachter, an analyst with Wedbush Morgan Securities.

“Based on what I understand of the dynamics of the business, I could only conclude that they lost subscribers in the third quarter,” he said, adding that he did not hear Blockbuster confirm this directly.

Launched last November, Total Access allowed Blockbuster Online subscribers to swap DVDs at Blockbuster stores for an unlimited number of rentals. After posting a wider-than-expected loss in July, the company moved to limit free in-store rentals on some plans.

Speculation that Total Access subscribers could be contracting has helped boost the shares of Netflix, which have suffered a beating since July when it posted its first-ever loss of subscribers in the second quarter. Netflix ended the second quarter with 6.74 million subscribers, 55,000 fewer than the previous first quarter.

Netflix shares have risen more than 10 percent since early last week, whereas Blockbuster shares have risen about 6 percent.

“Part of the rise in Netflix’s stock is anticipation that Blockbuster will be less aggressive,” JP Morgan analyst Barton Crockett said. “I think people may be coming to the conclusion that (Total Access) subscribers will be lower for the quarter. If you don’t see the ads on TV and the Internet like you used to. It may or may not be right.”

Mario Cibelli, a fund manager for Marathon Partners, which invests in Netflix, said a member of his firm was at a meeting with Blockbuster management last week.

“The biggest thing that they said is that they’re focused on the entire business and don’t view Total Access as the be all end all,” he said. “I think they’ve taken their foot off the accelerator.

“I’m pretty confident that they will lower the growth of total gross subscriber additions on a quarterly basis. It seems almost for certain that the number will head down,” he said.

A Blockbuster spokeswoman said the company remains committed to all subscriber programs. “We remain very focused on subscribers and subscriber programs at Blockbuster, both online as well as across all of our business models, including subscriber programs we can offer to customers who rent in-store,” she said.

JP Morgan’s Crockett said while Netflix shares have risen, concerns still remain about whether a pullback by Blockbuster is enough to set Netflix back on a path of growth.

“The question is, if Blockbuster is quiet, is it good enough to make Netflix a meaningful growth story? There may be more to contend with, but the market has liked what its heard in terms of Blockbuster being less competitive,” he said.

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