Blockbuster Teams with TiVo Go Global to Escape Extinction

By Mike Caggeso
Associate Editor
Money Morning

Facing near extinction at the hands of Netflix, Inc. (NFLX) and increasingly popular pay-per-view movies, Blockbuster Inc. (BBI) announced that it would team with on-demand television powerhouse Tivo Inc. (TIVO) to sell and rent movies via digital video recorders (DVRs).

According to the deal, TiVo users will be able to rent Blockbuster's 10,000 titles for $1.99 and $3.99, and purchase movies for between $14.99 and $19.99. Blockbuster will also sell Tivo DVRs in its stores and on its Web site.

The move shows Blockbuster is starting to understand what Netflix and Inc. (AMZN) have all along: It's cheaper and more profitable to chase the customer instead of building stores and waiting for the customer to walk in during business hours.

It's also the second time Netflix beat them to the punch. Its top rival began renting films on TiVo last year and has developed streaming video on its Web site and through Microsoft Corp.'s (MSFT) Xbox 360 video game console.

This time - unlike Netflix - Blockbuster's TiVo offerings will be available a few weeks after they arrive in rental stores, but before they reach pay-per-view audiences.

"You will see us in a large number of other devices going forward," Kevin Lewis, senior vice president of digital entertainment at Blockbuster, said.

Lewis added that the company also plans to sell its movies via Apple Inc's (AAPL) products.

"We need to be in the normal places that consumers want to watch movies," he said.

Shareholders Happy... For Now

More than ever, Blockbuster needs a better business model - and fast. Last quarter, the movie-rental chain posted a net loss of  $359.8 million, or $1.89 per diluted share, while taking a $435 million non-cash charge "for the impairment of goodwill and other long-lived assets."

Blockbuster's shares dipped as low as 13 cents early this month when a report surfaced that the company hired Kirkland & Ellis LLP to advise a possible bankruptcy filing.

Chief Executive Officer Jim Keyes didn't refute the report outright, but rather misdirected it, saying that bankruptcy is "not our objective," Bloomberg reported.

"We have retained expertise both on the legal side and the investment-banking side to very aggressively pursue our refinancing alternatives," Keyes said.

Keys said he has support from his investors, including Mark Wattles, founder of rival Hollywood Entertainment Corp., who took a 5.7% equity stake in Blockbuster as a sign of his confidence in the industry and Blockbuster's financial stability.

"I was pleased to find he is a strong believer in our industry," Keyes said. "We didn't have any strategic discussions. He just emphasized his confidence in the direction of the company."

But there's one shareholder who demands that his actions and opinions about the company's direction be watched: Billionaire Carl Icahn, who owns an 8.7% stake in Blockbuster, making him the company's largest shareholder.

Icahn famously, and successfully, led the charge to dethrone Yahoo! Inc. (YHOO) co-founder Jerry Yang from his job as the company's Chief Executive Officer. Icahn - upset with Yang's performance - threatened to seek control of the board and resuscitate takeover talks with Microsoft.

Icahn ultimately won the battle, with Yang stepping down and Yahoo selecting Carol Bartz, chairwoman of Autodesk Inc. (ADSK), as his replacement a few months later.

Icahn did not get his ultimate wish, however, as Microsoft did not succeed in taking the company over.

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