Blockbuster and Enron hope to capitalize on broadband technology

Thursday, July 20th 2000, 12:00 am
By: News On 6

Blockbuster Inc., which boasts of being within a 10-minute drive of 70 percent of the U.S. population, said Wednesday that it plans to get even closer.

The Dallas-based video store chain and the broadband services subsidiary of Enron Corp. have formed an exclusive 20-year agreement to deliver movies on demand to consumers' televisions or computers in selected cities by year's end.

"We said a year ago that we would transition Blockbuster from a retail powerhouse to a multichannel powerhouse in the delivery of home entertainment. This is the deal that will make it happen," said John Antioco, Blockbuster chairman and chief executive officer.

Analysts said the deal makes good on a promise that Blockbuster has been making for more than a year – that it will be a player as options for delivering entertainment on demand are offered to consumers through Internet, satellite and cable technology, making a trip to the neighborhood Blockbuster unnecessary.

"It covers Blockbuster's rear end in case video-on-demand is the bad thing that everybody says it will be for home video," Dennis McAlpine, an analyst at Ryan Beck & Co., told Bloomberg News. "It gives Blockbuster a piece of the business it could potentially lose."

Large library

It also will be the first extensive library of movies offered on demand to consumers. DirecTV, one of the biggest providers of pay-per-view movies, now offers about a 55 current hits. They are shown every 30 minutes, rather than whenever customers want them.

Blockbuster and Enron said they expect to have about 500 movies available in each city. They will be selected based on regional preferences.

They would not say how much they would charge for the service. DirecTV now charges $2.99 per selection.

The agreement with Houston-based Enron Broadband Services will allow consumers in several U.S. cities to pick a movie from home and watch it on a television or personal computer as they would a videotape or DVD. To complete the system, consumers need a set-top box that can be bought or rented and a high-speed Internet connection, such as a digital subscriber line, also known as DSL.

Blockbuster and Enron have brought in DSL service providers to supply the critical link with customers at home, Mr. Antioco said. Several companies have committed to provide DSL service, including San Antonio-based SBC Communications Inc. and Verizon Communications, which was formed by the recent merger of GTE Corp. and Bell Atlantic Corp.

Which cities get the service first hasn't been decided, Mr. Antioco said. He wouldn't say if Dallas or any other Texas city was likely to be among the first.

"We're looking at a number of factors, and obviously DSL penetration is a significant one. We want to target groups of customers that are most likely to avail themselves of this service."

Through its network of 7,200 stores in the United States, Blockbuster knows where those pockets are, he said.

Consumer demand for DSL service has been strong, and providers have been hard-pressed to keep up in many cities.

Jason Few, vice president of broadband communications at SBC, said that the company will release new penetration numbers on Thursday that will show "exciting improvements."

SBC's initial commitment to Blockbuster and Enron is to sign up 5,000 homes each in two to three markets initially. Other DSL providers have made similar offers.

Games, music on horizon

Enron's broadband system has the capacity to add the games and music that Blockbuster is interested in providing in the future, said David Cox, managing director of Enron.

Enron launched its broadband business in April 1999 for the purpose of setting up an online trading system that could handle energy and other products that the company trades daily throughout the world. It now owns 14,000 miles of fiber optic cable in the United States.

"The Internet is this big wild West just lumbering along," Mr. Cox said. "Just the entertainment portion can be huge."

But the companies are still working out details of what to charge customers and how Blockbuster, Enron and the DSL providers will each share in the revenue, Mr. Antioco said. Consumers will probably be offered a pay-per-view option as well as a monthly charge for a set number of movies.

The pay-per-view business currently generates about $1 billion in annual sales, a fraction of the $20 billion annual home video movie business, which includes pay per view as well as the rental and sale of movies.

"We think the video-on-demand portion can become a $3 billion to $4 billion a year business in seven to eight years," Mr. Antioco said. In 1999, Blockbuster's total revenue was $4.5 billion.

There wasn't much of a reaction from Wall Street on Wednesday.

Enron rose 6 cents to close Wednesday at $72.56 a share on the New York Stock Exchange. Shares of Blockbuster, a publicly traded subsidiary of Viacom Inc., were down 6 cents to close at $9.94 on the exchange.

Investors have held a wait-and-see attitude toward video rental chain stocks, saying future business is threatened by entertainment on demand offered through Internet, cable and satellite systems.

Mr. Antioco has said his strategy is to make the Blockbuster brand part of every consumer option. Additional relationships with satellite and cable companies are also being negotiated, Mr. Antioco said.

In August, Blockbuster expects to begin selling DirecTV satellite television systems in its stores. In January, Blockbuster formed an alliance with TiVo Inc., a Sunnyvale, Calif., company that markets an advanced TV recorder that allows viewers to pause, rewind or play back live broadcasts. Early next year, the two companies expect to offer TiVo subscribers the option of obtaining movie rentals directly through their TiVo recorders.