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Blockbuster Finish for Antioco

3/23/2007 8:00 PM Eastern

After 10 years at the helm — the last two spent in a very public fight with corporate raider Carl Icahn — Blockbuster CEO John Antioco threw in the towel, agreeing to resign at the end of the year.

Antioco, who led the video retail giant through fat and lean years — the last few increasingly lean — agreed to a severance package that will net him about $8 million.

Blockbuster, once a key part of entertainment giant Viacom before the latter spun off its 81% interest to its shareholders in 2004, had fallen on hard times in the past few years as customers increasingly opted to rent and purchase videos from other distribution platforms such as mail-order retailer Netflix.

Adding to the uncertainty has been the surprising strength of video-on-demand rentals via cable, which have cut into store-based rentals and threatened to take a bigger bite as cable companies move closer to so-called day-and-date releases.

Blockbuster’s revenue has declined by 3.4% from $5.9 billion to $5.7 billion between 2004 and 2006, in line with industry trends, while VOD movie revenue has slowly ticked up.

According to Adams Media Research, on-demand movie revenue for cable companies grew from $678 million in 2001 to $950 million in 2006, while video-rental revenue declined from $10.3 billion to $8.4 billion during that period.

At Blockbuster, the pain was lessened in part due to online purchases. In-store movie rental revenue at Blockbuster fell 6.2% in 2006 to $2.79 billion, but total movie rentals dipped just 1.6% to $3.65 billion. That was mainly due to a 73.9% surge in online movie rental revenue to $248.3 million in 2006.

Blockbuster’s online initiative — Total Access — began in November and allows customers to select movies online from more than 65,000 titles and receive them via mail, with the option of returning them either at a retail store or through the mail.

Despite the success of Total Access, Blockbuster faces a serious threat from VOD as cable operators are beginning to strike deals for same-day releases of movies on demand and at the video store.

Pali Research analyst Stacey Widlitz said that cable VOD hasn’t taken a huge bite out Blockbuster’s market share yet — she estimated that 80% of Blockbuster’s revenue is new-release driven.

“It [VOD] is one of the problems of the industry, but it’s not one that’s disabling them right now,” Widlitz said. “Certainly if the studios collapse the windows like they are rumored to do by the end of the year, then it becomes a major problem.”

Already, the two largest cable operators — Comcast and Time Warner Cable — have been testing day-and-date releases of on-demand movies. Comcast began its trial in Pittsburgh and Denver in late November with selected titles from five major studios. Time Warner Cable is also testing day-and-date releases in Greensboro, N.C., and a “virtual video store” emphasizing a library of more than 2,000 titles.

But Adams Media president Tom Adams said that all studios might not sign off on day-and-date releases to cable, afraid to cannibalize the $16 billion annual market for DVD sales. “I’m skeptical that will happen,” he said.

Perhaps the biggest factor in Antioco’s decision to leave was Icahn himself. Icahn, who wrested three seats on Blockbuster’s board of directors in 2005 after a bitter proxy battle, has been a harsh critic of Antioco.

That acrimony seemed to reach a head in May 2005, when during a conference call with analysts to discuss Blockbuster’s first-quarter results, Icahn engaged in a heated exchange with Antioco. (See “A Testy Situation”.)

Icahn also objected to a $7.7 million bonus Antioco was set to receive for fiscal 2006.

In the end, Antioco got a $3.1 million bonus, less than the $7.7 million he wanted but more than the $2.3 million the board was offering. He also gets a $5 million payout when he leaves.

“John and the company have reached terms that are clearly in the best interests of the stockholders,” Icahn said in a statement.

“The pressure was probably pretty strong for [Antioco] to come to an agreement to leave,” Widlitz said. “He’s been going through a battle with Icahn for two years and at some point you say, 'I don’t want to do this anymore.’ ”

September