Icahn prevails in Blockbuster battle

Corporate raider Carl Icahn claimed victory Wednesday in the shootout for control of the nation's biggest home video retailer, calling the shareholder vote a great day for stockholders everywhere who want to hold corporate managements more accountable.

“We won a very strong victory,” Icahn told CNBC. “Most importantly, we want accountability and I think that is going to be done.

The vote electing Icahn and two other dissident candidates to the company’s board of directors was a referendum on Blockbuster Chairman John Antioco and his management team. Antioco had vowed to resign his $50 million-a-year job if he lost the vote.

"I would be lying if I told you this is a happy day, because it is not," Antioco said. "But we'll roll with the punches."

Antioco declined to answer questions from reporters, including whether he would accept Icahn's offer to stay with the company. That invitation was influenced by the generous terms of Antioco’s severance package, said Icahn.

“We certainly don't want to be in a position, the board to be in a position, to have to pay a $50 million golden parachute,” he said. “And so the board was able to cure the default, so to speak.”

Icahn, who made a fortune in the 1980s with raids on TWA, USX, and Texaco, holds a roughly 10 percent stake in Blockbuster. He has been harshly critical of the current management’s strategy of spending heavily to fight back competition from rivals like mail-order distributor Netflix. And he wants Blockbuster to pay shareholders like him a bigger dividend.

“I think shareholders are fed up with a lot of management,” he said Wednesday. “Some managements are good. But it is ridiculous and almost reprehensible if a company is not doing well that the CEO gets a $50 million bonus, and 20 to 30 percent of the workers are laid off.”

As proxy fights go, this one was nasty, with both sides turning up the heat as the vote approached. In an April 7 letter, Icahn claimed that Blockbuster management botched a potential takeover of rival Hollywood Entertainment and needs to curb “egregious bonuses” to executives. Blockbuster CEO Antioco fired back with a letter accusing Icahn of making misleading statements and creating “turmoil and uncertainty” that is hurting the company. And on a conference call last week to discuss the company’s latest financial results, Antioco and Icahn squared off again — until Icahn was cut off in mid-sentence by the operator.

Shareholders Wednesday basically had three choices: endorse the status quo, vote for Icahn’s slate, or split the difference — keeping Antioco, but electing two of the candidates hand-picked by Icahn, who owns nearly 10 percent of Blockbusters stock.

Blockbuster vs. Netflix
Their decision could have a major impact on the $24 billion home video market.

Until recently, Blockbuster was the company to beat in home video rentals. With some 9,000 stores worldwide, the company has enjoyed a dominant position as the leading provider of home video and games in the U.S. and 24 other countries, taking in $6 billion in revenues last year.

But from virtual obscurity six years ago, online rival Netflix has delivered a serious blow to Blockbuster’s business. Netflix has more than three million subscribers who pay a monthly fee to go to the company's Web site and pick from some 40,000 movie titles. Subscribers' DVD choices are delivered by mail, and they can keep up to three of them for as long as they like. The company says it can deliver movies to nearly 90 percent of its subscribers within one business day.

Without the heavy cost of building, maintaining and staffing stores, Netflix has been able to quickly grab a big piece of the home video rental market. Netflix Founder and  CEO Reed Hastings has estimated that the average Netflix customer will generate more than $100 of profit over the life of their subscription at a cost of about $40 in marketing costs, a formula he called “a great bargain for us.”

So far the plan is working. For the past four years, Netflix's revenues have roughly doubled each year; the company made $21.6 million last year on revenues of about $500 million. And about half of those revenues came at Blockbuster’s expense, according to Michael Pachter, an analyst at Wedbush Morgan Securities

But Netflix no longer has mail-order video market to itself. Last year, Blockbuster spent more than $200 million to launch its own mail-order online service and now claims nearly 1 million subscribers. Wal-Mart has also entered the fray with an online rental service, but has not disclosed how many subscribers have signed up.

All this competition is good news for DVD renters. Netflix charges $18 a month for up to three DVDs at a time. Blockbuster has fired back with a $15 a month plan and added two free in-store movies or video games. Not to be outdone, Wal-Mart is pitching a $13 a month plan with unlimited DVD rentals.

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