S-1 Filing (SEC form S1)
We are the world's leading retailer of rentable home videocassettes, DVDs and video games, with about 6,500 stores in the United States and 26 other countries as of March 31, 1999. We operate primarily under the highly recognized BLOCKBUSTER brand name, which, according to The Gallup Organization, achieves nearly 100% recognition with active
movie renters in the United States. Based on 1998 industry estimates from Paul Kagan Associates, Inc., a leading video industry expert, we estimate that our company-operated and franchised stores attained a U.S. market share in excess of 27%, over three times greater than that of our nearest competitor. In the United States, our customer transaction database contains information on about 87 million accounts, and we estimate that about 65% of the population lives within three miles of one of our stores. Our revenues in 1998 increased 17.5% from 1997, with about 79% of these revenues generated in the United States and about 21% generated outside of the United States. Nearly 60 million people worldwide have rented in excess of
970 million movies and video games from us or our franchisees within the last 12 months. For the year ended December 31, 1998, we and our franchisees recorded worldwide revenues of about $4.7 billion, $3.9 billion from our company operations and $0.8 billion from our franchised stores.
Under the management team led by John F. Antioco, our chairman, president and chief executive officer, we developed and implemented a new business model that focuses on our core rental business and significantly improves customer satisfaction. Most significantly, we entered into domestic revenue-sharing agreements with all of the major Hollywood movie studios. Under these agreements, we agree to share our U.S. rental revenue with the studios for a limited period of time. We believe that these agreements have significant benefits to us, including:
- substantially increasing the number of newly released videos in our stores to better satisfy customer demand;
- contributing to an increase in revenues resulting from an increase in the total number of transactions and the number of videocassettes rented per transaction; and
- aligning the studios' economic interests more closely with ours because they share a portion of the rental revenue with us for a period of time.
Under our new business model, quarterly domestic same store rental revenues increased 8.6%, 17.5%, 20.0%, 20.5% and 23.1% in the first through fourth quarters of 1998 compared to 1997 and the first quarter of 1999 compared to the first quarter of 1998, respectively.
INDUSTRY OVERVIEW
According to Paul Kagan Associates, the U.S. videocassette and DVD rental and sales industry grew from $15.7 billion in revenue in 1997 to $17.1 billion in 1998 and is expected to reach $22.0 billion in 2002. Paul Kagan Associates estimates that in 1998, 83.5 million, or 81.5%, of the 102.5 million total U.S. households owned a VCR. According to Paul Kagan Associates, 19.7 million VCRs and DVD players were sold in the United States in 1998, and this expert expects sales to reach 21.5 million units by 2002.
The home video industry is highly fragmented, with single store owners currently operating about 49% of all locations that rent video titles. We believe that there are several competitive advantages of being a large home video chain and therefore believe individual stores and small chains in the home video industry will continue to consolidate with national and regional chains.
STRATEGY
BUSINESS MODEL
We believe our business model gives us an advantage over other large home video chains and a significant advantage over our single store competitors. The key elements of our business model are to:
- provide a large number of copies and a broad selection of movie titles;
- operate conveniently located and highly visible stores;
- offer superior and consistent customer service;
- optimize our pricing to local market conditions;
- nationally advertise and market our BLOCKBUSTER brand name and the differences between us and our competitors;
- use our extensive customer transaction database to effectively operate and market our business; and
- improve our efficiency and lower our costs through self distribution.
GROWTH STRATEGY
The goal of our growth strategy is to increase our U.S. systemwide market share from 27%, as of December 31, 1998, to over 40% within the next three years and to significantly increase our market share in those countries outside the United States where it is profitable to do so. The key elements of our growth strategy are to:
- increase our same store revenues;
- expand our domestic store base;
- expand our international store base;
- expand our worldwide franchise program;
- apply the benefits of our greater size by spreading fixed costs across our expanding operations;
- pursue strategic acquisitions; and
- pursue new technologies and products related to rentable home
entertainment which capitalize on our brand name.
SEPARATION FROM VIACOM
We are currently an indirect wholly owned subsidiary of Viacom. Immediately after the completion of this offering, Viacom will
own none of the outstanding shares of our class A common stock and 100% of the outstanding shares of our class B common stock. Accordingly, Viacom will own common stock representing about % of our equity value, or about % if the underwriters exercise their over-allotment options in full, and about % of the combined voting power of our outstanding common stock, or about % if the underwriters exercise their over-allotment options in full. Viacom has rights protecting its ability to control at least 80% of our equity value and the combined voting power of our two outstanding classes of common stock. We refer you to "Agreements Between Viacom and Us -- Initial Public Offering and Split-off Agreement" for additional information with respect to these rights. Viacom has announced that, if it receives a favorable tax ruling from the Internal Revenue Service, it currently intends to distribute all of its holdings in our common stock to certain of its stockholders in a transaction intended to qualify for tax-free treatment under Section 355 of the Internal Revenue Code. Viacom has the sole discretion to determine if and when
such split-off will occur and all terms of such split-off. If Viacom determines to make the distribution, it will occur some time after the later of (1) September 29, 1999, the five-year anniversary of the merger of Viacom and Blockbuster Entertainment Corporation and (2) unless the underwriters consent to an earlier date, 180 days after the completion of this offering. For additional information on the risks associated with Viacom not completing the split-off, we refer you to "Risk Factors -- Risk Factors Relating to Our Separation from Viacom."
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