Market Scan : Total Access Costs Blockbuster

Blockbuster's first-quarter earnings missed expectations on increased investment in online movie rentals, a service that shareholder Carl Icahn has already criticized for its costs.

Shares of Blockbuster (nyse: BBI - news - people ) were down 72 cents, or 11.6%, to $5.49, after the company announced a first-quarter loss Wednesday of $46.4 million, or 26 cents per share, vastly wider than the shortfall of $1.9 million, or 3 cents per share, a year ago. Analysts polled by Thomson Financial expected a loss of 16 cents per share for the period ending April 1.

Investment in Blockbuster's rental service, Total Access, contributed to the growing losses. First-quarter gross margin decreased 4.8 percentage points, to 51.7%, from 56.5% a year ago, because the company was forced to purchase more rental offerings for its retail stores for Total Access subscribers. The program allows subscribers to get new rentals from brick-and-mortar stores as well as by mail, in contrast to the by-mail-only service provided by competitor Netflix (nasdaq: NFLX - news - people ).

A $35 million Total Access ad campaign pushed total advertising expenses up to $76.6 million, from $39.2 million a year ago.

Chief Executive John Antioco said after the release that he believes the investment "is the right thing for the business and will contribute to our future profitability and to the long-term success of the company."

Since Icahn purchased shares of the company in 2004, the 42nd-richest man in the world has been critical of Antioco and management for pouring money into its online video service. As of Dec. 31, Icahn's firm, Icahn Management, owned around 9.2 million shares of Blockbuster.

But Icahn won't have to deal with Antioco much longer. The CEO is stepping down from his position at the end of this year. (See "A Blockbuster Exit")

In the latest quarter, Blockbuster was also hurt by weak demand for movie rentals from its brick-and-mortar stores. In-store movie rentals were $683.6 million in the first quarter, down from $756.2 million a year earlier.

Last month, online rental service Netflix also provided disappointing results. Shares dropped by 8.5% after the company missed estimates and posted disappointing subscriber numbers. (See: "Netflix Losing Ground".)

Source : http://www.forbes.com