 |
| photography courtesy of Blockbuster |
 |
| CEO SNAPSHOT JIM KEYES BIRTHPLACE: Worcester, Mass., in 1955 EDUCATION: BA from Holy Cross College in Worcester, Mass. MBA from Columbia University in New York. WORK EXPERIENCE: Gulf Oil, 1980-1985. CITGO Petroleum, 1985-1991. 7-Eleven, 1991-2005. A BRIEF RETIREMENT: After Seven-Eleven Japan Co. Ltd. acquired 7-Eleven, Keyes left with $64 million—from personal savings, equity, and a retirement package—and then spent the next two years painting, sculpting, playing music, flying his plane. And looking for new work in retail. RAGS TO RICHES: Keyes grew up very poor. A family with six kids in a three-room, unheated home with no indoor plumbing. He worked as many as 70 hours a week at McDonald’s in both high school and college to help pay for his education. His success from there helped him win a Horatio Alger Award in 2005, and helps him in business today. “Because of my background,” he says, “I feel I have the ability to relate with everyone.” HIS MANAGEMENT STYLE? HE DOESN’T HAVE ONE: “There is no one management style,” he says. “The key to management is having the ability to change.” photography by Dan Sellers |
“Dumb, dumb, dumb, dumb” are not the words you want applied to a $1 billion acquisition if you’re a CEO. Certainly not if those words come from the loud mouth of CNBC’s Jim Cramer. And most definitely not if they’re followed by the posting of your picture on Cramer’s Wall of Shame. So why is Blockbuster Inc. CEO Jim Keyes—the subject of that TV backlash over his proposed deal with big-box retailer Circuit City—laughing about it? “I think Cramer cut up his Blockbuster card, too,” Keyes says, chuckling.
Maybe Keyes finds Cramer’s insult funny because, as an amateur composer (jazz and classical, mostly), Keyes sees the musicality in Cramer’s slam. “Dumb, dumb, dumb, dumb.” It’s the Beethoven’s Fifth of affronts. Or maybe Keyes is laughing because being dubbed quadruple dumb is nothing compared with the other insults slung at Blockbuster and its executives in recent years. As the company’s stock has lost 90 percent of its value, and its competitors’ ranks have swelled—Netflix, Wal-Mart, Best Buy, and Apple are all counted in that group—the company’s leaders have been called “reckless” by respected analysts. They’ve been accused of “smoking crack” by disreputable blog commenters and, worst of all, an array of observers have declared simply that, “Blockbuster is dead.”
And, yet, on a rainy May day in Manhattan this year, Keyes, the CEO who remade 7-Eleven stores into a profit machine before leaving that company in 2005 and joining Blockbuster in 2007, was smirking when he addressed his first shareholder meeting as Blockbuster’s CEO. Smirking. Why?
Probably it was because Keyes had good news to share about Blockbuster. Finally. In only his second full financial quarter as CEO, Blockbuster had posted a $45 million net profit. Even more encouraging, the company registered an increase in same-store sales—a comparative measure of stores open at least a year. This was the first same-store sales increase in five years. That, Keyes concludes, put the company on track to post an annual profit for the first time in two years, and for only the second time since 2003. And that could happen even though Blockbuster has only just begun implementing the changes that he thinks will really boost profits. So, Blockbuster is dead? Hah.
“I don’t see this as a dead product,” Keyes said from the front of a small conference room. “I see this as a cash cow. I don’t see this as a dying industry. I don’t see our stores, as some have, perhaps, as a millstone. I see them as a springboard to combine both physical and electronic distribution to produce new levels of convenience for our customers.”
Translating the CEO-speak a bit, Keyes’ vision is for a Blockbuster that does far more than rent videos. (Er, DVDs, actually; the videos are already gone.) He sees Blockbuster renting and selling video games, movies, and TV shows, as well as selling “entertainment solutions.” You want a Blu-ray player? Buy it at Blockbuster and buy a subscription to get Blu-ray movies delivered to your home at the same time. You’ve got a portable media player? Come to the store and plug your player into a Blockbuster kiosk; in two minutes, you’ve got a full-length movie on your handheld player. You want a movie on your PC? Blockbuster.com now has that, thanks to the 2007 acquisition of Movielink, a deal Keyes did just after arriving at Blockbuster. You want DVDs by mail? Blockbuster Total Access has you covered there, too. You want to watch a new release on your TV without leaving home? Blockbuster is working on everything from set-top boxes to a Blockbuster on-demand channel for that, too. “This is not your grandfather’s Blockbuster,” Keyes says.
  |
| The retailer has physically revamped several of its stores in Dallas; test prototypes eventually will be rolled out nationwide. |
Of course, like that “grandfather” line, many of the changes Keyes is making at Blockbuster are predictable. Mostly that’s because they’re necessary to keep up with the competition. Netflix has forced Blockbuster’s hand in mailed DVDs. Apple is pushing the market for direct download of movies. Redbox has had success with renting movies through unstaffed kiosks. And cable companies that have made the transition to digital cable are offering more on-demand movies than ever. What’s not as predictable is that, while Keyes is committed to the electronic future, he’s also still devoted to Blockbuster’s brick-and-mortar past. That makes sense if you know anything about Jim Keyes.
“I’m a retailer at heart,” says Keyes, who, as CEO of 7-Eleven from 2000-2005, changed the look and product offerings of thousands of 7-Eleven stores while boosting revenue in the U.S. and Canada from $9 billion to more than $12.2 billion. “When I got here, some employees thought of the stores as a boat anchor. I saw the stores as a springboard.
“Anybody can do a startup Internet company,” he says. “But it would take 10 years to replicate the retail footprint that we have … 5,000 [U.S.] locations where we can touch the customer and make their lives better. I believe the retail experience is here to stay if you deliver what the customer wants.”
And what has Keyes learned so far about how to give Blockbuster customers—and employees—what they want? Three things.
1. CHANGE IS A DISH BEST SERVED CONSCIENTIOUSLY.
Jim Keyes can play Guitar Hero. he proved this back in May when Keyes, as he puts it, “thumped” Dallas Mayor Tom Leppert in a Guitar Hero III showdown in Dallas.
Keyes can play Guitar Hero because, well, he plays Guitar Hero. “I’ve become a casual gamer,” he says. “It’s addictive.” But Keyes also can play Guitar Hero because when he’s not working, he plays a real guitar. And a piano. And he paints. And sculpts. And, oh yeah, he flies a plane. His plane; a Cessna Citation. When he has to go to, say, Los Angeles to meet with studio executives, Keyes flies himself there. “Flying is my single greatest passion outside of work,” he says.
That’s strange. “Fly jock” is not exactly what comes to mind when you meet Keyes in person. “Mild-mannered reporter” is more apt. Keyes is a soft-spoken type who stands a fit 5-feet-10-inches tall, has a penchant for being photographed in basic Navy, and wears his brown hair in a coif that’s uncomfortably close to a comb-over.
By most accounts from Blockbuster employees, Keyes is easygoing—a consensus builder. In his first weeks at Blockbuster, as he was pushing a dramatically different approach in a company that had already tried plenty of different approaches and failed, Keyes treaded lightly. He went to 19 cities in 10 days to hear directly from store employees and offer them his support. And he was careful not to alienate the executives who were already in place at Blockbuster’s downtown Dallas headquarters. “I was dealing with a management team here that knows far more about the industry than I ever will,” Keyes says. “So I wasn’t saying, ‘My way is right and your way is wrong.’ I was saying, ‘Here’s a different point of view. Let’s put it to work in the stores and let the customer decide.’ ”
2. PEPSI-COLA IS NOT PARAMOUNT STUDIOS. BUT SELLING MOVIES IS A LOT LIKE SELLING SLURPEES. OR APPLES.
If there’s one word that sums up Jim Keyes’ point of view toward Blockbuster, it is “convenience.” Sounds familiar.
“The parallels between Blockbuster and 7-Eleven are amazing,” says Keyes. “Before I came here I was a little nervous about this new industry. But when I arrived I was shocked by the similarities. Blockbuster’s business is really all about convenience—maybe not Slurpees or soft drinks, but it is about convenient access to entertainment. The Blockbuster of the future will provide the convenience and immediacy of all types of media entertainment—what you want, when you want to see it.”
One of the biggest challenges so far in making that change happen at Blockbuster, though, is one Keyes never faced at 7-Eleven: Supply. Coke and Pepsi would swamp 7-Eleven with product if it meant getting more shelf space than the competition. But in Hollywood Economics, Lack of Supply = Demand. “I never thought I’d find myself in the exact 180-degree negotiating strategy with suppliers as I was at 7-Eleven,” says Keyes, who has so far successfully pushed studios to help Blockbuster increase its stock.
Another company has been fighting similar supply battles with entertainment companies: Apple. Maybe that’s why the Apple Store, and not 7-Eleven, is Keyes’ model for the new Blockbuster. “Apple wasn’t intimidated by the idea of small shops,” he says. “They recognized that retail and the physical distribution of products can actually complement the electronic distribution of products. That’s where we see the future of Blockbuster.”
To reach the future, though, Blockbuster’s more than 7,800 stores need to be physically revamped. So, at test stores in Dallas, Keyes has already ditched the yellow walls and blue shirts and aisles of DVDs in favor of a more open and interactive aesthetic. These concept stores will start to roll out nationwide as soon as the fourth quarter of this year.
Other, subtler changes have already come to Blockbuster’s almost 5,000 domestic and nearly 3,000 international stores. The company pushes video-game rental and sales more aggressively now. And it has begun selling products that tie to movies that are still in theaters. In May, as the newest Indiana Jones movie hit theaters, Blockbuster stores hawked an Indiana Jones box set along with fedoras, and the company partnered with Lucasfilm to get a Blockbuster/Indiana Jones car in the Indianapolis 500. That kind of promotion, Keyes says, has made studio execs—who are looking for anything that boosts box-office—very happy. Just as importantly: The fedoras made money. The same is proving true for some of Blockbuster’s other test concepts, like self-serve drink fountains that have been set up in some Dallas stores. Keyes says the drinks sell at a 70 percent margin.
All that has helped boost those same-store sales numbers after a five-year slide. And that, Keyes says, has been the key to motivating Blockbuster’s nearly 60,000 workers—whether in the C-suite or in the stores. “The single-biggest factor in turning things around is that you’ve got to put scores on the board,” Keyes says. “You can do all kinds of things to motivate people. But nothing is as effective as financial success. And we’re starting to put scores on the board.”
Among those scores: The company has cut $100 million in costs and has dropped long-term debt to $840 million from more than $1 billion. But Keyes isn’t thrilled that part of those cost cuts involved closing more than 200 of the company’s worst-performing stores.
“By closing stores, we actually had to decrease convenience for our customers,” he says. Blockbuster also had to pay costs associated with those closings, as well as for due diligence for its potential, but now defunct, deal to buy Circuit City. That partly explained the $41.9 million loss Blockbuster posted in the second quarter. But Blockbuster still projects about a $20 million profit for 2008, which would be a marked improvement over the $74 million loss it posted last fiscal year—the final year of former CEO John Antioco’s tenure.
3. BRICKS AND MORTAR ARE STILL WORTH A DARN.
Blockbuster’s projections for a profitable 2008 are all about bricks and mortar. Same-store sales were up 2.9 percent in the first quarter and 14.2 percent in the second from the same periods last year. DVD and video game rentals and sales are up, but the big driver is fedoras, fountain drinks, and other merchandise you wouldn’t have expected in a Blockbuster store as recently as a year ago. As he proved with his April 2008 proposal to buy Circuit City, Keyes is intent on selling entertainment hardware at Blockbuster. To wit: In the second quarter of 2008, Blockbuster sold as many as 3,000 Sony PS3s each week.
Still, while Keyes was convinced that combining with Circuit City was a good idea, many investors sided with TV’s Jim Cramer that the idea of merging two underperforming companies was “dumb.” Several analysts have called the idea Keyes’ only misstep in his tenure at Blockbuster. And the company’s stock price slumped on the news, falling below $3 a share, where it has remained since (at least until D CEO went to press).
Keyes dropped the bid in July, blaming a cascade in Circuit City’s market value for the change of plan. But he insists the deal’s detractors missed the big picture because they still were seeing the old “Blockbuster Video” and not his new concept, “Blockbuster Media.”
“People said, ‘Why would you put together a video store with a store that sells refrigerators and washing machines?’ ” Keyes says. “Well, if you look forward to a time where the line is being blurred between hardware, software, and service, then what better way to satisfy the customer in the future than to offer the device, the content, and the smart people in the store that can be trained to help make a convenient transaction?”
Which is not to say that Blockbuster without Circuit City can’t still do all that. It’s just to say that Keyes thinks the transition will take longer. “We are still aggressively transforming our business, and consumer electronics will be a big part of our business going forward,” he says.
The company is also transforming into a distributor of online content. One of Keyes’ first moves at Blockbuster was to acquire Movielink, which had the rights to 9,000 movie titles in digital format. Movielink’s content was merged into Blockbuster.com in August 2007.
That same month, Blockbuster started rolling out two types of kiosks. With one, customers can rent DVDs anywhere the machine is—airports, convenience stores, street corners. The other works with Archos portable video players to provide digital movies in electronic format. Full-length films can be downloaded in just two minutes. It’s called “Blockbuster To Go.”
That, as Keyes will proudly tell you, makes Blockbuster the only company that offers movies and TV shows online, by-mail, in-store, and “on the go.” The DVD rental market, Blockbuster figures, is an $8 billion industry. But the combined market of renting and selling movies and TV shows by mail, by vending machine, online, and direct to homes is worth more than $30 billion.
Then there’s that potential for selling “entertainment solutions.” But that’s hardly an easy market. Picture your nearest Blockbuster store. Now picture buying the next, cute little video-watching gizmo there. Now picture asking someone at Blockbuster’s version of Apple’s Genius Bar how to operate the thing. Quite possibly this sounds either scary or ludicrous; maybe both. Blockbuster has to make it seem reasonable and workable. To that end, Keyes is spending his own time every week communicating with all 8,000 Blockbuster store managers worldwide about his new initiatives.
That transition is, well, key to Keyes. He admits that the main reason people now come to Blockbuster, the DVD rental business, has no more than 10 years left before electronic distribution replaces it entirely. So what happens to those nearly 8,000 stores in 10 years time? Do they become a “boat anchor” then? Keyes looks to his future geniuses, a broader product mix, and, again, to Apple for the solution.
“Is the iPod worth a darn without iTunes?” he asks. “There’s room for both electronic distribution of content and a place where you can buy complete entertainment solutions. That’s what we’re transforming Blockbuster to be.”
 |
Netflix vs. Blockbuster: A fair fight?
SUBSCRIBERS:
Netflix, 8.4 million.
Blockbuster Total Access,
about 3.2 million
ANNUAL REVENUES:
Netflix, $1.2 billion.
Blockbuster, $5.54 billion
OVERVIEW:
Under Keyes, Blockbuster took a new approach with the Total Access program, reducing advertising expenses and increasing prices. Subscribers fell for Blockbuster and increased for Netflix. Some market watchers declared that Netflix had won the online DVD distribution business.
KEYES’ TAKE:
“The market misinterpreted our move away from such aggressive competition with Netflix. Netflix competes with us on only 6 percent of our core business. And we looked at that market and said, ‘You know, really, that’s not online. It’s still the physical distribution of DVDs.’ We don’t see as that as the future of convenient access to media entertainment. We saw it as a channel and a one-time niche, but we think the future is more about electronic distribution through portable devices and directly to your home television. We want to use our stores as places that make it convenient to either get those devices or get unique and proprietary content for them.”
THE BATTLE CONTINUES:
Netflix, like Blockbuster, has begun to offer movies online for direct downloading. Netflix is also working with Microsoft on a set-top box that will allow movies to be streamed from a home PC to a home TV. Blockbuster has a similar project in the works, though the company isn’t sharing details yet.
