Blockbuster logs on to cyber café sector

Falling profits have forced Blockbuster to diversify. But it still has to square up to the real enemy – digital TV.

Blockbuster Video’s decision to test three cyber cafés within its retail sites has surprised, if not shocked, rivals in both the video rental and cyber café markets (MW August 14).

The intention is clear. Nigel Travis, Blockbuster’s senior vice president, Europe, confirms that if the test is successful, the company will roll out the “Internet B@r” concept to a significant number of its 730 UK stores.

“Until the test period is over, we can’t say how many sites this means,” adds Travis. “But if it is successful, it would be in the scores. We didn’t get into this without doing our research.”

Few would question the strategy of seeking new profit streams within the video retail sector. From its peak in 1989 – coincidentally the year Blockbuster arrived in the UK market, ahead of its acquisition of the 800-strong Ritz retail chain in 1992 – the sector has been to hell and back.

Derek Mann, director general of the Entertainment Software Retailers’ Association (ESRA), estimates the number of UK retail outlets offering video rental has fallen from 7,000 to 4,500.

“We hit an economic brick wall in 1989,” says Mann. ESRA represents all the major video rental chains apart from Blockbuster, which is now estimated to control 25 per cent of the market.

Estimates of the annual value of the video rental market in 1989 ranged from 500m to 550m. A decline – fuelled by both recession and the growth in pay-TV movie channels – was only reversed in 1995. In 1996, the market grew by about ten per cent, with growth so far this year estimated at a respect-able four per cent.

ESRA now values the market at 400m, although the British Video Association puts it higher, at 491m. Yet even if conditions are improving, UK video rental companies still face the huge threat posed by video-on-demand. “No one is relaxed about cable and satellite,” says Mann.

Small wonder, then, that until recently Blockbuster made diversification from its core video rental market a cornerstone of corporate strategy on both sides of the Atlantic. But in the US, this has been dramatically reversed as mounting losses at the Blockbuster chain have dented the financial performance of its parent, US media giant Viacom.

Last month, Viacom appointed John Antioco – formerly with fast-food chain Taco Bell – as worldwide chairman and chief executive of Blockbuster, apparently to refocus the video rental giant on its core market. The appointment followed a second quarter fall in profits of more than 60 per cent to $46m (28.7m) precipitating a $323m (201m) write-off by Blockbuster.

The change in both management and policy came 18 months after the appointment of former chief executive Bill Fields, brought in after Viacom had paid $8.4bn (5.7bn) for the video chain in 1995.

Fields tried to establish Blockbuster outlets as “whole entertainment” stores, serving up not just videos but games, software and books. But the US chain is now attempting to boost turnover by going back to its core business. It is investing in a computerised inventory system to improve turnover of hit movies in stores and beefing up a direct mail operation to boost demand for video rental among its customers.

Yet Blockbuster still appears set on developing non-video markets on this side of the Atlantic. In July, the company opened two experimental “Games Zones” sites in Denmark aimed at market testing in-store interactive video gaming.

In the UK, the notion of placing an Internet or cyber café within another retail site is not new. Debenhams is experimenting with the format, while next month bookseller Waterstone’s opens a franchise operation in its new central Glasgow site.

Cyberia Café, Britain’s first public access Internet café, claims to be Britain’s leading chain with only four UK locations, plus further café sites in Dublin, Tokyo and Bangkok.

The company estimates there are 25 cyber cafés in London, with another 200 independents outside. Rival Internet café operators agree that Blockbuster has spotted a rapidly growing market – it would become market leader overnight – but privately question whether its customer base will react enthusiastically to Internet access. “When you go into a video shop, most people just want to get hold of their video quickly and go,” says one.

Yet Travis insists that Blockbuster businesses in the UK and mainland Europe can develop a profitable new business without being distracted from the improvement of its core performance.

“We see it as a strategic move to boost revenues,” says Travis. “The cyber café business fits in nicely between the video and games business. We are open all day, but most people come in the evening. Setting up Internet B@rs is a way of exploiting our business properties, which also fits in with our core business.”

A nice little sideline. But however well the push into the Internet access market goes, it can offer only a fig leaf of protection against the longer term threats to the rental market posed by digital technology.

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