Case
Teaching Notes
Supplementary Resources
Abstract
Jim Keyes, CEO of Dallas-based Blockbuster Inc., was facing the biggest challenge of his career. In March 2010 Keyes was meeting with Hollywood studios in an effort to negotiate better terms for the $1 billion worth of merchandise Blockbuster had purchased the year before. In recent years, Blockbuster's share of the video rental market had been sharply decreasing in the face of competitors such as the low-cost, convenient Redbox vending machines and mail-order and video-on-demand service Netflix. While Blockbuster's market capitalization had dropped 47 percent to $62 million in 2009, Netflix's had shot up 55 percent to $3.9 billion that year. The only hope for Blockbuster, as Keyes saw it, was to shift its business model from primarily brick-and-mortar physical DVD rentals to increased digital and mail-order video delivery. In Keyes's favor, the studios were more than willing to provide him with that help. Hollywood wanted to see Blockbuster win the video-rental wars. Consumers still made frequent purchases of DVDs at its store—purchases which were much more profitable for studios than the rentals that remained Blockbuster's primary business. Blockbuster had made efforts at making its business model more nimble, but the results had been disappointing, and its debt continued to skyrocket. By the end of 2009, the company's debt had climbed to $856 million, its share of the $6.5 billion video rental business had fallen to 27 percent, and its revenues had tumbled 23 percent to $4.1 billion.
This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.
2024 Sage Publications, Inc. All Rights Reserved
Resources
Exhibit 1: Blockbuster vs. Netflix
Comparison of Stock Growth
Comparison of Number of Subscribers and Number of Retail Stores
Exhibit 2: Studio Windows of Exhibition
Exhibit 3: Movie Industry Revenue Distribution
Exhibit 4: Movie Rental Industry Shift, 2005–2014
Begun in the early 2000s, shifts in the film rental industry were continuing and, in some areas, were beginning to accelerate.
Exhibit 5: Evolving Customer Preferences
Exhibit 6: DVD Retail Sales Decline
Purchase and rental of DVDs, January–May 2005, January–June 2007, November 2008–June 2009 | |||
---|---|---|---|
Spring 2005 | Spring 2007 | Spring 2009 | |
Number of survey respondents | 11,774 | 12,503 | 13,030 |
In the last 12 months, have you: | |||
Bought or rented a DVD or Blu-ray? | 81% | 79% | 69% |
Bought DVDs? | 75% | 71% | 62% |
Rented DVDs? | 76% | 71% | 65% |
Mean a : | |||
DVDs purchased | 3.5 | 3.1 | 1.8 |
DVDs rented | 5.3 | 5.0 | 3.4 |
Base: Adults (18+); see columns.
a. Includes those who did not rent any. Data are for DVDs only; they do not include Blu-ray sales or rentals.
Source: Mintel/Experian Simmons NCS: Spring 2005 Adult 6 Month—POP; Experian Simmons NCS/NHCS: Spring 2007 Adult 6 Month—POP; Experian Simmons NCS/NHCS: Spring 2009 Adult 6 Month—POP.
Exhibit 7A: Blockbuster Income Statement (US$ in millions)
Period Ending: | |||||
FY2009 | FY2008 | FY2007 | FY2006 | FY2005 | |
Revenue | 4,062 | 5,288 | 5,542 | 5,524 | 5,864 |
Cost of revenue | 1,884 | 2,565 | 2,678 | 2,476 | 2,647 |
Gross profit | 2,178 | 2,722 | 2,865 | 3,048 | 3,217 |
Operating expenses | |||||
Sales, general, and administrative | 2,020 | 2,429 | 2,719 | 2,755 | 3,056 |
Other operating expenses | 513 | 587 | 106 | 214 | 588 |
Total operating expenses | 2,533 | 3,016 | 2,826 | 2,969 | 3,644 |
Operating income | (355) | (293) | 39 | 79 | (426) |
Interest expense | 112 | 73 | 89 | 102 | 99 |
Other income (expense) | (39) | 18 | 5 | 14 | 2 |
Pretax income | (506) | (348) | (45) | (8) | (524) |
Income taxes | 12 | 26 | 30 | (76) | 65 |
Net income from continuing operations | (518) | (374) | (74) | 68 | (588) |
Net income from discontinuing operations | (41) | — | — | (13) | |
Net income | (558) | (374) | (74) | 55 | (588) |
Source: Morningstar—Blockbuster Annual Financial Reports (edited).
Exhibit 7B: Blockbuster Balance Sheet (US$ in millions, except per share data)
FY2009 | FY2008 | FY2007 | |
ASSETS | |||
Current assets | |||
Cash | 189 | 155 | 185 |
Receivables | 79 | 117 | 113 |
Inventories | 639 | 789 | 344 |
Total current assets | 1,060 | 1,259 | 1,319 |
Non-current assets | |||
Property, plant, and equipment | |||
Land | 155 | 184 | 17 |
Buildings and Improvements | — | — | 1,310 |
Fixtures and equipment | 1,219 | 1,345 | 1,364 |
Other properties | 1,001 | 1,052 | — |
Property and equipment at cost | 2,374 | 2,582 | 2,691 |
Accumulated depreciation | (2,125) | (2,176) | (2,228) |
Net property, plant, and equipment | 249 | 406 | 463 |
Goodwill | — | 338 | 773 |
Total non-current assets | 478 | 896 | 1,414 |
Total assets | 1,538 | 2,155 | 2,734 |
LIABILITIES AND STOCKHOLDER'S EQUITY | |||
Liabilities | |||
Current liabilities | |||
Short-term debt | 102 | 198 | 55 |
Accounts payable | 301 | 427 | 473 |
Accrued liabilities | 408 | 494 | 530 |
Total current liability | 935 | 1,253 | 1,289 |
Non-current liabilities | |||
Long-term debt | 836 | 583 | 666 |
Capital leases | 20 | 28 | 37 |
Other long-term liabilities | 62 | 76 | 86 |
Total non-current liability | 918 | 687 | 789 |
Total liabilities | 1,853 | 1,940 | 2,078 |
Total stockholder's equity | (314) | 214 | 656 |
Total liabilities and stockholder's equity | 1,538 | 2,155 | 2,734 |
Source: Morningstar—Blockbuster Annual Financial Reports (edited).
Exhibit 8A: Netflix Income Statement (US$ in millions)
FY2009 | FY2008 | FY2007 | FY2006 | FY2005 | |
Revenue | 1,670 | 1,365 | 1,205 | 997 | 682 |
Cost of revenue | 1,079 | 910 | 786 | 627 | 465 |
Gross profit | 591 | 454 | 419 | 370 | 218 |
Operating expenses | |||||
Sales, general, and administrative | 289 | 249 | 271 | 262 | 186 |
Other operating expenses | 110 | 84 | 57 | 44 | 29 |
Total operating expenses | 399 | 333 | 328 | 305 | 215 |
Operating income | 192 | 122 | 91 | 64 | 3 |
Interest expense | 6 | 2 | — | ||
Other income (expense) | 7 | 12 | 20 | 16 | 6 |
Pretax income | 192 | 132 | 112 | 80 | 8 |
Income taxes | 76 | 48 | 45 | 31 | (34) |
Net income from continuing operations | 116 | 83 | 67 | 49 | 42 |
Net income | 116 | 83 | 67 | 49 | 42 |
Source: Morningstar—Netflix Annual Financial Reports (edited).
Exhibit 8B: Netflix Balance Sheet (US$ in millions, except per share data)
FY2009 | FY2008 | FY2007 | |
ASSETS | |||
Current assets | |||
Cash | 320 | 297 | 385 |
Receivables | — | — | — |
Inventories | 37 | — | — |
Total current assets | 411 | 361 | 417 |
Non-current assets | |||
Property, plant, and equipment | |||
Land | — | — | — |
Buildings and improvements | 41 | 33 | 18 |
Fixtures and equipment | 175 | 124 | 85 |
Other properties | 50 | 67 | 41 |
Property and equipment at cost | 266 | 224 | 144 |
Accumulated depreciation | (134) | (99) | (66) |
Net property, plant, and equipment | 132 | 125 | 77 |
Goodwill | — | — | — |
Total non-current assets | 269 | 256 | 230 |
Total assets | 680 | 618 | 647 |
LIABILITIES AND STOCKHOLDER'S EQUITY | |||
Liabilities | |||
Current liabilities | |||
Short-term debt | — | 1 | — |
Accounts payable | 91 | 100 | 104 |
Accrued liabilities | 33 | 31 | 36 |
Total current liability | 226 | 216 | 213 |
Non-current liabilities | |||
Long-term debt | 200 | — | — |
Capital leases | 37 | 38 | — |
Other long-term liabilities | 18 | 17 | 4 |
Total non-current liability | 254 | 55 | 4 |
Total liabilities | 481 | 271 | 216 |
Total stockholder's equity | 199 | 347 | 431 |
Total liabilities and stockholder's equity | 680 | 618 | 647 |
Source: Morningstar—Netflix Annual Financial Reports (edited).
Exhibit 9A: Coinstar Income Statement (US$ in millions)
FY2009 | FY2008 | FY2007 | FY2006 | FY2005 | |
Revenue | 1,145 | 912 | 546 | 534 | 460 |
Cost of revenue | 793 | 634 | 359 | 355 | 309 |
Gross profit | 351 | 278 | 188 | 179 | 151 |
Operating expenses | |||||
Research and development | 5 | 5 | 5 | 5 | 6 |
Sales, general, and administrative | 150 | 115 | 67 | 70 | 47 |
Other operating expenses | 112 | 89 | 129 | 59 | 50 |
Total operating expenses | 267 | 208 | 201 | 134 | 103 |
Operating income | 84 | 69 | (13) | 45 | 48 |
Interest expense | 34 | 22 | 17 | 16 | 13 |
Other income (expense) | (2) | (17) | 2 | 1 | 2 |
Pretax income | 48 | 30 | (29) | 31 | 36 |
Income taxes | 19 | 16 | (6) | 12 | 14 |
Net income from continuing operations | 29 | 14 | (22) | 19 | 22 |
Net income from discontinuing operations | 28 | ||||
Other | (4) | ||||
Net income | 54 | 14 | (22) | 19 | 22 |
Source: Morningstar—Coinstar Annual Financial Reports (edited).
Exhibit 9B: Coinstar Balance Sheet (US$ in millions, except per share data)
FY2009 | FY2008 | FY2007 | |
ASSETS | |||
Current assets | |||
Cash | 192 | 192 | 197 |
Receivables | 61 | 52 | 50 |
Inventories | 104 | 92 | 33 |
Total current assets | 391 | 368 | 302 |
Non-current assets | |||
Property, plant, and equipment | |||
Gross property, plant, and equipment | 759 | 683 | 417 |
Accumulated depreciation | (358) | (331) | (271) |
Net property, plant, and equipment | 400 | 353 | 146 |
Goodwill | 285 | 290 | 221 |
Total non-current assets | 832 | 699 | 467 |
Total assets | 1,223 | 1,067 | 769 |
LIABILITIES AND STOCKHOLDER'S EQUITY | |||
Liabilities | |||
Current liabilities | |||
Short-term debt | 7 | — | 7 |
Accounts payable | 119 | 136 | 50 |
Accrued liabilities | 223 | 216 | 141 |
Total current liability | 375 | 384 | 197 |
Non-current liabilities | |||
Long-term debt | 409 | 319 | 266 |
Capital leases | 26 | — | — |
Other long-term liabilities | — | — | — |
Total non-current liability | 436 | 363 | 266 |
Total liabilities | 810 | 747 | 463 |
Total stockholder's equity | 412 | 320 | 305 |
Total liabilities and stockholder's equity | 1,223 | 1,067 | 769 |
Source: Morningstar—Coinstar Annual Financial Reports (edited).
This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.
2024 Sage Publications, Inc. All Rights Reserved