Wayne’s World : Blockbuster’s Huizenga Dominates Video Rentals, but Technology Threatens to Erase His Lead

FORT LAUDERDALE, Fla. —  Former 20th Century Fox chief Joe Roth a few weeks back was praising Blockbuster Entertainment Corp.’s drive to diversify beyond the video retailing business.

“They have to,” Roth explained in a speech to Los Angeles entertainment lawyers. “Because most of those video stores are going to be pizza places soon.”

Roth’s suggestion that Blockbuster soon would be better off making its dough in pizzas than videos was more than enough to give executives here heartburn when they read it. Although made somewhat in jest, the remark cut to the heart of the company’s uncertain place in Hollywood’s high-tech tomorrow, which promises television viewers fingertip access to what amounts to an electronic video store.

Hardly a week goes by without the announcement of some kind of technological development or alliance that would provide films on demand to viewers--coupled, inevitably, with predictions that the American video store soon may be leapfrogged out of existence. Just last week, American Telephone & Telegraph Co. formally unveiled plans to introduce a video storage and retrieval system starting next year that will allow local telephone and cable companies to offer more extensive pay-per-view and video-on-demand programs.

No one has a bigger stake in all this than Blockbuster, which dominates video retailing the way IBM once ruled the computer industry and General Motors used to dominate autos.

Founded less than eight years ago, the company has grown to the point where Blockbuster Video stores generate more revenue than their next 300 competitors combined. Blockbuster rents some 10 million videotapes a week to 30 million families, and more wallets contain blue-and-gold, plastic Blockbuster rental cards than hold American Express credit cards.

If Blockbuster executives are worried, however, they don’t show it. “We’re not afraid of technology,” Chief Executive H. Wayne Huizenga insists. “We’ll use it to our advantage, not to our disadvantage.”

Still, Blockbuster is hedging its bets. A good chunk of the $1 billion in cash it expects to generate over the next three years--and the $2 billion it should produce over the next five--is being used to acquire diverse entertainment-related assets, from stakes in Hollywood production companies Republic Pictures and Spelling Entertainment, to indoor playgrounds and maybe even sports franchises that Huizenga and his family now control.

Blockbuster became the nation’s sixth-largest music retailer overnight when it bought the Music Plus and Sound Warehouse chains last year. And it is in a joint venture with Virgin Retail Group to build and own huge music “megastores” in the United States, United Kingdom and Australia--among them a block-long store now open on Sunset Boulevard.

Huizenga (pronounced HY-zen-ga ) argues that music could well serve as Blockbuster’s ultimate hedge against technology.

“If in the year 2000, we’re wrong about video--which I don’t think we are--fine,” Huizenga said, sitting in his spacious 11th-floor corner office overlooking downtown Fort Lauderdale. “We’ll put music in our stores. We’re not going to face the crunch of someday having a bunch of stores and eating the real estate leases.”

Where Blockbuster is headed isn’t exactly clear. But Huizenga’s fast-forward picture of his company suggests he wants to transform Blockbuster into a well-rounded entertainment conglomerate that sells and rents entertainment in formats that may not have even been invented yet. Huizenga, who wants to develop projects ranging from theme parks to high-tech entertainment centers, strives for the marketing prowess of McDonald’s and the family image of the Walt Disney Co.

But while Blockbuster’s stock has reached new highs in recent months, some investor skepticism remains. The shares are among the favorite targets of short sellers, who bet on stocks to fall. And though the company continues to post record revenue and profit, Blockbuster’s stock price over the past three years has hardly reflected that explosive growth, outperforming the market but trading at a low price relative to its earnings.

The larger question to some is whether Blockbuster is acting quickly enough. Some of its critics say the company needs a clearer long-term vision and should have started to diversify much sooner. “About a year and a half ago, they finally woke up,” said one senior entertainment executive.

Blockbuster executives acknowledge that they are averse to risk but insist that their plans are not haphazard. Expanding more into the programming side of the business and acquiring film and television libraries is a key part of their strategy.

“People look at the last year and say these guys went out like a bunch of drunk sailors and bought all those things,” said Steven R. Berrard, Blockbuster’s vice chairman and chief deal maker. “That’s an unfair observation.”

Two important parts of Blockbuster’s move into the Hollywood production business involve assets no one but Blockbuster can boast of: the world’s most extensive database detailing what video customers want and some 3,228 video stores spread across the world.

The database helped Blockbuster anticipate that the Lou Gossett Jr. film “Diggstown” would be a big video hit, even though it was a box-office disappointment, company officials note. As for the stores, the company believes that they can be invaluable in promoting a series such as Spelling Entertainment’s “Beverly Hills 90210” or become a fountain of research if customers take home tapes of TV pilots.

“We could go so far as to do a series that sells one episode a week in video,” suggests Spelling Entertainment vice chairman and namesake Aaron Spelling.

One doesn’t have to be around Blockbuster executives for long to pick up a sense that they feel somewhat unappreciated by Hollywood. Blockbuster plans to pump about $1 billion into Hollywood’s coffers this year through purchases of videocassettes--including a fair number of box-office bombs that will get a second chance to make money with a push from Blockbuster.

The company’s annual report includes sparkling color graphics detailing video’s financial importance to Hollywood, including one graph showing that by the year 2000, home-video revenue will nearly triple theater receipts. So it’s no wonder that company executives are easily irked when they hear predictions about video’s demise.

“Some of those same people out there making the statements made movies that have been dismal failures at the box office, yet we came right behind and rescued them,” Berrard said.

Once-feared by Hollywood’s studios, video today is a gold mine; overall, the video rental and sales business is estimated at anywhere from $12 billion to $17 billion a year. Video sales of the animated “Beauty and the Beast,” for example, are expected to generate some $200 million in profit for Walt Disney, with “Aladdin” expected to do at least as well when Disney releases it on videocassette in October.

Still, studios are eager to see the development of video on demand--in part because they will receive a larger chunk of the profits than they do from video rentals today.

But some skeptics--Blockbuster executives chief among them--believe that the threat to video is overstated and the technology craze sweeping Hollywood overlooks some financial realities.

“The cable people are out there trying to raise money, so they are putting a little hype to it,” Huizenga said.

A recent internal report for Blockbuster on video rental versus video on demand is titled, “The battle that isn’t happening.” One argument in the 12-page report is that $30 billion to $200 billion in capital investment will be required for electronic infrastructure--sums that cable and telecommunications firms will find difficult to pass on to consumers in the current regulatory environment.

Some industry executives agree that video stores won’t disappear altogether but instead adapt as pay-per-view and video-on-demand services grow. “I don’t see anything out there that will completely cut the legs out from under video,” said Bill Mechanic, Walt Disney’s top home video executive.

Huizenga says Blockbuster estimates that pay-per-view movies--despite being around since the early 1970s--generate only $168 million a year now, half of that from adult movies which Blockbuster won’t rent. Assuming those numbers are accurate, Blockbuster stores in the Los Angeles area alone generate more revenue than pay-per-view does nationwide.

Blockbuster executives add that the studios have a stake in video’s success as well. Sony, owner of Columbia Pictures and TriStar Pictures, and Matsushita, owner of MCA and its Universal Studios unit, both are major manufacturers of videocassette recorders.

Eventually, the studios may become uncomfortable with the degree of control that electronic delivery of films will give cable and telecommunications companies, the Blockbuster officials say. And in the end, wiping out video stores may be a wash for the studios if video revenues are simply shifted to pay-per-view or video on demand.

That dilemma was evident when, during a recent press conference, a Time Warner executive gushed that new technologies would mean people never would have to go the video store again. Time Warner Chairman Gerald Levin quickly tempered the executive’s remarks, suggesting they were a little too enthusiastic.

Levin had good reason: Video is now a $1-billion-a-year business for Time Warner.

That the demise of the video business--which has become as much a part of everyday American life as the weekly trip to the supermarket--is even being discussed is remarkable, when one considers that the business barely existed 10 years ago. At that time, it was a collection of mom-and-pop operations to which renters often had to pay a membership fee for the right to rent tapes.

Less than eight years ago, Blockbuster started from a single store in Dallas. Huizenga did not even own a videocassette recorder when a friend asked him in early 1987 to visit a Blockbuster store that had opened in suburban Chicago. Huizenga had retired from Waste Management Inc., the nation’s largest trash-hauling firm, which he co-founded.

A quick look at the books of some Blockbuster stores really got Huizenga’s attention. (Today, company-owned stores clear about 26% before taxes, and Blockbuster collects a 7% royalty from franchised stores.) Huizenga tried to get franchise rights for Florida but found they were taken. So he bought a piece of the company itself, gained control two months later and turned it into the first nationwide video supermarket.

Along the way, Huizenga’s personal fortune grew to an estimated $560 million, according to Forbes magazine. He nabbed Florida’s first Major League Baseball franchise, the Florida Marlins, which are averaging more than 40,000 fans a game in their initial season. This fall, Huizenga will launch Miami’s first National Hockey League franchise, the Florida Panthers.

Blockbuster’s directors now are considering whether the company should buy part--or even all--of the sports franchises and whether to build a baseball stadium and indoor arena in the Miami area, too. Huizenga’s sports ventures--along with the firm’s investments in Hollywood libraries and production companies--has led to speculation that a Blockbuster cable channel may be planned, a prospect Huizenga downplays but acknowledges could happen someday.

Far from an exercise in ego gratification, Huizenga insists that getting involved in sports was a business decision founded on his belief that it is best to own something--be it videos or sports seats--that you rent out to people. He points out that he attended only five baseball games in his life before buying the Miami franchise and has seen only four hockey games.

For that matter, Huizenga adds, he only watches three to four videos a year, with his personal favorite being “The Sound of Music.”

As Blockbuster and Huizenga’s holdings have grown, so has his celebrity status in South Florida. There, Huizenga, 55, is simply “Wayne”--the way he signs his annual reports to shareholders. Tour boats along the Fort Lauderdale marina stop by Huizenga’s waterfront home, where United States and Blockbuster flags fly.

During a Sunday afternoon game against the Chicago Cubs last month, Huizenga chatted during the eighth inning with the Marlins’ TV announcers. Color commentator Gary Carter told him that there was interest in naming the outfield fence “Wayne’s Wall.” And after the game, young boys and their fathers seeking autographs waited for Huizenga to emerge from his private suite at Joe Robbie Stadium.

For a company whose revenue soared past $1 billion for the first time last year, Blockbuster has a remarkably small management team. Huizenga and longtime aide Berrard, 38, run the operation. Indeed, one criticism of the company--to use a sports metaphor--is that its bench isn’t deep. The question has been asked more often as Huizenga devotes more time to sports and other interests.

Berrard and Huizenga deny that Blockbuster is spread too thin. Berrard says Huizenga is firmly in charge and always has the last say. “We have an executive committee of two,” he said--”and one vote that counts.”

Huizenga notes that the small management team helps keep Blockbuster flexible, along with the company’s small debt load and the huge amounts of cash it generates.

“When you throw off the cash we do, it presents you with a whole bunch of opportunities,” Huizenga said. “We can’t build enough video stores to spend all this money, so what are we going to do with it? We can pay higher dividends, buy back shares or grow this business.

“We’re the kind of guys who want to build something.”

A Blockbuster Story

Founded less than eight years ago with a single store in Dallas, Blockbuster Entertainment is now the world’s largest video chain. The Fort Lauderdale, Fla.-based company’s video revenues today exceed those of its next 300 competitors combined.

Blockbuster Entertainment

Sales are soaring and profit rising as it keeps opening stores and outperforming the market.

Video stores, year--end except latest

1988: 589 (248 Franchise, 341 Company owned)

1989: 1,079 (518 Franchise, 561 Company owned)

1990: 1,582 (795 Franchise, 1,787 Company owned)

1991: 2,028 (1,003 Franchise, 1,025 Company owned)

1992: 3,127 (1,125 Franchise, 2,002 Company owned)

May 1993: 3,228 (1,147 Franchise, 2,081 Company owned)

Sources: Blockbuster Entertainment; Bloomberg Business News

Beyond Video

In the last year, Blockbuster Entertainment Corp. has been on a deal-making binge as it diversifies from its main video rental business.

* June, 1992: Dutch electronics giant Philips Electronics completes purchase of a 6.7% stake in Blockbuster; Blockbuster promotes compact disc games for Philips’ new interactive game systems.

* November: Blockbuster acquires 236 Music Plus and Sound Warehouse music stores.

* November: Enters joint venture with London-based Virgin Retail Group, in which Blockbuster will develop Virgin “megastores” in the United States, Europe and Australia.

* January, 1993: Buys 35% of film producer Republic Pictures Corp., whose library includes such classic films as “High Noon,” “The Bells of St. Mary’s” and “It’s A Wonderful Life.”

* March: Buys control of Spelling Entertainment Group, which produces such television shows as “Beverly Hills 90210” and has a library of films including “Basic Instinct,” “Terminator 2: Judgment Day” and the “Rambo” pictures.

* April: Purchases 20% interest in Discovery Zone, operator of FunCenters indoor playgrounds, with a two-year option to buy control.

* May: Blockbuster and computer giant IBM announce plan to develop technology for making compact discs in stores.

* May: Blockbuster proposes building a baseball stadium and indoor arena in the Miami area.

* June: Board considers investing in Florida Marlins baseball team and Florida Panther pro hockey team, now controlled by family of Chief Executive H. Wayne Huizenga.

* June: Blockbuster will open an outdoor amphitheater near San Bernardino.