Blockbuster CEO Jogn Antioco sent a letter to Carl Icahn, its largest shareholder and critic, in response to his attack on April 7, 2005. Below is a copy of Antioco's letter:
Dear Mr. Icahn,
The Board of Directors and I have reviewed the issues raised in your April 7, 2005, letter. We strongly object to your criticism and believe that it is both inaccurate and potentially misleading to our other shareholders.
Since late 2003, Blockbuster has been following a well-planned and broadly communicated strategy that is essential to confront the significant challenges facing our industry. This strategy, which is designed to revitalize our core rental business and create alternative revenue sources, is working. We believe abandoning this strategy would be shortsighted and could bring about a precipitous drop in our future cash flow from which there may be no recovery.
A key feature of our growth strategy is the recently introduced "End of Late Fees" program, which directly addresses the major problem customers had with their movie rental experience. The program also positions us better to compete with home entertainment options that do not have late fees, including retail DVD, pay-per-view and VOD. To date, the "End of Late Fees" program is producing the desired results. Since the first of January when we introduced the program, we have had positive growth in active membership for the first time in nearly two years.
Another critically important initiative - and the only significant investment we intend to make this year - is our online rental business. Blockbuster is uniquely positioned to compete in this fast growing business. Given the views of leading industry experts that within three years online rental could represent 20% to 30% of movie rental revenues, it is imperative that we pursue this opportunity, which we believe will mean hundreds of millions of dollars in future operating income for our company.
Furthermore, your characterization of Blockbuster's essential investments in the business as a "spending spree" is simply wrong. We are prioritizing new initiatives, investing wisely for the future and cutting costs aggressively. We have cut 2005 capital spending by over $100 million from last year and reduced corporate overhead by $70 million on an annualized basis. Additionally, to reduce costs further and better focus our resources, we have put our game initiative, as well as the marketing of our movie trading business, on hold until 2006.
Regarding our dividend policy, during 2004 Blockbuster paid a one-time dividend of $5 per share in addition to its normal quarterly dividends. As a result, our shareholders received a total of $920 million in dividends in 2004. We have consistently said that once we have successfully executed our business initiatives and delivered on our strategic plan, we would consider paying increased quarterly dividends or repurchasing stock.
Your suggestion that we now pay an additional $330 million in dividends would not be financially responsible. The constraints of our capital structure and the realities of a declining video rental market do not allow it. We truly believe that following such a course would be tantamount to a liquidation strategy and destructive to shareholder value.
In regards to our market cap, from the time of the split-off in mid-October until the end of 2004, Blockbuster's stock price increased 18%. The newspaper article you quote, which states Blockbuster's market cap declined by almost half last year, is inaccurate. That calculation does not properly adjust for the $5 special dividend that we paid to shareholders in 2004 and the more than $900 million in debt we incurred to make that dividend payment.
As to your comment about ensuring that any offers for the company "see the light of day," if you have or know of any legitimate offers, please send them our way. We are always willing to consider legitimate offers. As you are aware, Viacom considered a number of alternatives for the separation of Blockbuster. This included extensive discussions over the course of a year with numerous financial investors about a potential sale of Blockbuster.
On a more personal note, the figure you reference in regards to my 2004 compensation is not correct as it takes into account compensation that has not yet been earned or paid. Our independent directors and their advisors specifically designed my compensation package to achieve a payout over the next five years in order to align my interests with the interests of Blockbuster's shareholders.
In closing, Blockbuster is engaged in a strategy that requires tremendous focus and enthusiastic execution by all our employees. The turmoil and uncertainty you have created threaten to distract the organization and jeopardize our success and could prove damaging to shareholder value.
The Board of Directors and I are committed to build and fight for the future of Blockbuster.
John F. Antioco
Blockbuster Chairman & CEO