Apple announced today that it will offer movie downloads through iTunes - causing investors to unload stock in movie rental leader Blockbuster. The stock dropped 17% on the day, negating gains made in December when the company announced its intention to raise prices for online subscribers.
In a move to make its online program more cost effective, Blockbuster announced that it was raising prices for online customers as much as 40%. The firm aggressively marketed its Total Access online program in an attempt to stem a customer exodus to Netflix, but leadership has backed away of late as the online division operates at a low margin.
Blockbuster posted increasing losses in the 3rd quarter, due to losses of half a million subscribers. The company cut $45 million in costs in September, laying off 400 workers and collapsing the online organization into store operations. This move was motivated by the higher costs of online subscribers who number just 4 million, compared to 20 million active and 60 million registered subscribers in-store.
Citi Investment Research expects that a small increase in the price of rentals will have a significant positive impact on Blockbuster. Blockbuster is expected to generate more cash as it has raised prices for non-subscribing customer at less than 10 percent of its stores, and also due to the strong box office results this summer. These positive indications and an increased target price of $8 per share from $7.25 from Citi Investment Research resulted in an increase in the company’s share price in the early trading hours.
Blockbuster acquires Movielink for an undisclosed sum. Rumors had been circulating since March. Movielink was a joint venture created by the major studios in 2002 and relies on a download model rather than a streaming model.
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