Good morning and welcome to the Blockbuster Inc. Fourth Quarter 2006 Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host Ms. Angelika Torres, Blockbuster's Director of Investor Relations. Ms. Torres, you may begin your conference.

Thank you, Crystal. Good morning. Thank you for joining us to discuss Blockbuster's fourth quarter and full-year 2006 results. Today's earnings call may include forward-looking statements relating to our plans, objectives and initiatives such as BLOCKBUSTER Total Access, our outlook for the industry and our performance relative to the industry, projected transfer of financial items, anticipated liquidity, goals for online subscriber growth and profitability, cost reduction expectations, divestitures, industry consolidation, store closures and other matters that do not strictly relate to historical or current facts. Actual results may differ materially from those projected in the forward-looking statements. For additional information regarding these forward-looking statements and factors that could cause actual results to differ materially, please refer to the cautionary statements in today's earnings release and in our public Securities and Exchange Commission filings, including our upcoming Form 10-K. Today's earnings call may also include a discussion of certain non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations to the most directly comparable GAAP financial measures and other related disclosures. Our earnings release is available on our website at Blockbuster.com under the link for Investor Relations. With that, I will now turn the call over to Larry Zine, our Chief Financial Officer. Larry?

Thank you, Angelika, and good morning everyone. 2006 was an exciting as well as challenging year for Blockbuster. In the beginning of 2006 we set goals for ourselves, which included ending the year with 2 million online subscribers, rationalizing our asset portfolio, ongoing cost containment, and as a result, improving profitability and cash flow. So, how did our performance fare against these goals? Let's start with online. We added 700,000 total subscribers during the fourth quarter, our highest online growth quarter ever. And we credit BLOCKBUSTER Total Access with this success. This morning, we announced our expectation to have a total of 3 million BLOCKBUSTER Total Access subscribers by the end of the first quarter, which would be a significant growth yet again from our year-end number of approximately 2.2 million total online subscribers. Moving on to asset portfolio rationalization; we have done a lot of work in that particular area. In addition to closing a significant number of stores during 2006, we completed the divestiture of our MOVIE TRADING CO. locations and Movie Brands Inc. subsidiary, exited Spain and sold our Taiwan subsidiary. This was coupled with a master franchise license to Webs-TV, which is the largest broadband TV operator in the Chinese market. Most recently, we sold our 72-store, U.S.-based RHINO VIDEO GAMES chain to GameStop Corp. Additionally, in conjunction with the BLOCKBUSTER Brazilian franchisee's sale of its stores to LOJAS Americanas, we signed a 20-year licensing agreement with Lojas, giving the Brazilian retailer rights to the BLOCKBUSTER brand for the rental and retail of video products. We also recently entered into an agreement to sell our Australian subsidiary and grant the master franchise rights for the BLOCKBUSTER system in Australia to Video Ezy, an Australian based company with 518 franchise video rental stores. We are continuing to explore other possibilities with respect to our international markets and we will update you as appropriate. Now let's look at cost containment. Despite the launch cost for Total Access, our G&A declined slightly for the quarter and is down $123 million for the full year. In addition, our advertising is down approximately $98 million as compared to 2005. Which brings us next to profitability and cash flow; in 2006, we generated about $251 million in free cash flow and grew our adjusted operating income by over $130 million as opposed to 2005. Now let me briefly comment on our fourth quarter performance. Total revenues for the quarter increased 1.4% to $1.51 billion, reflecting a 9.3% increase in our worldwide same-store merchandize sales. This was led by strong sales of games in some of our international markets, particularly by Gamestation. Worldwide same-store rental revenue decreased 1.8% reflecting 0.3% increase in domestic same-store rental revenues, offset by an 8.3% decline in international same-store rental revenues. Growth in our domestic same-store rental revenues was led by a 2.5% increase in our domestic movie rental comp, which was consistently positive each quarter during 2006. Going into the fourth quarter, we were fairly optimistic about the title lineup, even though there were several large retail titles in the mix. But, unusually mild weather and heavy discounting of key titles like Pirates, Cars and Over the Hedge by the mass merchant retailers has had an impact on our in-store rental business, and we believe on the rental industry at large, during the quarter. Additionally, consistent with the trends we saw throughout the year, our domestic same-store game rental revenues declined 15.9%. This had a negative impact of a little over 200 basis points on our domestic same-store rental revenues. The low installed base for the new generation game platforms and the tendency of early adopters to buy versus rent, continue to put pressure on our game rental comps during 2006, domestically as well as internationally. Our gross profit increased $7.8 million, mostly reflecting strong merchandise sales, particularly with respect to games internationally. Retail gross profit increased by approximately $28 million during the quarter driven by increased revenue, more efficient inventory management and less promotional activity around our new retail merchandise. Retail gross margin increased by about 320 basis points from 2005 to 23.8%. Rental gross profit declined by $17.3 million during the fourth quarter, mostly reflecting the decline in rental revenues. Additionally, gross rental gross margin of 65.2% was essentially flat sequentially as well as year-over-year. Total Access did not have much of an impact on our rental margin during the fourth quarter. Since due to the timing of our Total Access launch, the majority of our subscriber growth occurred in December. Despite the cost incurred to launch and support BLOCKBUSTER Total Access, our G&A expenses were down slightly to the prior year. Advertising costs increased by about $20 million as compared to the same quarter of 2005, largely due to the growth in our online business in the quarter. Immediately following my remarks, John will devote a significant amount of time talking about Total Access. He will also address the trends we are seeing and the investments we are making in media, advertising and rental products to support the program that we believe is imperative to accelerating our online growth, increasing the relevance of our stores and growing our domestic rental market share. Adjusted operating income for the fourth quarter totaled $50.9 million as compared to adjusted operating income of $61.5 million during the fourth quarter of 2005. Adjusted net income for the quarter was $20.4 million or $0.09 per diluted share as compared with adjusted net income of $25 million or $0.12 per diluted share for the same period during 2005. Our net income was impacted by higher than estimated cash taxes this quarter. We guided to approximately $7 million, but due to stronger than expected performance in the international markets where we are a tax payer, our tax expense totaled $10.3 million or an incremental $0.02 per share. Our liquidity remains strong. We have generated approximately $250 million in free cash flow for the full year, an improvement of approximately $460 million over 2005. Additionally, we finished 2006 with almost $400 million in cash on the balance sheet. While we will continue to evaluate stores for closure, we expect our closure rate to be lower in 2007 than in 2006. However, our store openings in 2007 will be similar to last year. Before I turn the call over to John, I wanted to remind you that we changed our fiscal year from a calendar year ending on December 31 to a 52, 53-week fiscal year ending on the first Sunday following December 30. The change went into effect on January 1, 2007. And therefore, there will be no transition period in connection with this change of fiscal year end. In closing, I would like to summarize my remarks by saying that we've established a great foundation in 2006 and hope to build on that this year by meeting our aggressive online subscriber growth objectives, while controlling cost, focusing on the profitability of our overall business and further rationalizing our asset portfolio. And now, over to John.

Thanks, Larry. As Larry said, we established a solid foundation for our business in 2006, and I believe Blockbuster has entered 2007 in a great position. We significantly reduced our operating costs and substantially improved our profitability and cash flow. Customer satisfaction levels with our stores and with our online service are extremely high. We finished the year with more than 2 million online subscribers and expect to finish the first quarter of this year with a total of 3 million, which will mean that we have nearly doubled our online subscriber base in the five months since we launched BLOCKBUSTER Total Access. We are entering 2007 with more points of difference between us and the competition. Those are online and in-store competitors than ever before. The changes we've made to our core business by adding an online service and by getting rid of late fees have positioned us to offer customers the best in-store rental experience, a great online experience and value, and the only rental experience that combines both in-store and online BLOCKBUSTER Total Access. In other words, Blockbuster has evolved from a store-based retailer into an integrated bricks, clicks, and flicks company. We are now dedicated, absolutely dedicated to providing customers with completely convenient access to movies in ways they want and in ways they can't get from any other brand. In spite of the fact that the store-based industry is expected to remain under pressure, we intend to leverage our unique offering, so that contrary to the industry's trend line, we grow our total domestic customer base by adding more online customers and more in-store customers. And as a result, grow our overall revenues. And we believe if we achieve this, which I completely believe we can, it will be the first time in several years that on a domestic basis Blockbuster has grown its active members and total revenues. So how we do this? First and foremost, through BLOCKBUSTER Total Access. Obviously, we launched Blockbuster.com in 2004 and then began offering BLOCKBUSTER Total Access last November because online is the fastest growing segment of the rental marketplace, and we wanted to get our share of those rental transactions. But we also introduced Total Access because we wanted to use it to help us grow our in-store customer base. And although it's still early, we believe that's exactly what is happening. Close to 70% of our online subscribers are coming into our stores around three times a month. They are exchanging their online movies for free-installed movies and many of these customers are also spending money with us on used movies, snacks and games. And we're aggressively working to further monetize this traffic in our stores so that we can get even more of these online subscribers spending more with us on each visit. We are also exploring other initiatives that may allow us to bundle our Total Access service with strategic partners that will allow us to broaden our subscriber reach while enabling them as our partner to take advantage of our store network, the value proposition of Total Access and our customer database. So, Total Access is helping us bring new partners to our business and new customers to our stores. And, it's doing the same for the online side. Almost half of the online subscribers we have acquired since broadcast advertising began are coming from channels outside our stores. And our research shows us that prior to subscribing to BLOCKBUSTER Total Access they were getting their movies from our online and store-based competitors. So all in all, as we continue to examine the benefits of BLOCKBUSTER Total Access and weigh those against the cost, the better we feel about the program's overall impact on our business. Total Access is clearly helping us to retain customers. It has improved traffic in our stores and is attracting new customers to Blockbuster from our online and store-based competitors. It has dramatically improved the growth of our online subscribers from approximately 100,000 net subscribers per quarter to approximately 700,000 last quarter, a number that we should exceed in the first quarter of this year. And Total Access has improved our online churn, trial conversion, and customer satisfaction level. It has also improved the overall effect in our sales and marketing expenditures, because Total Access is a compelling consumer offering that is unique to Blockbuster, and because now we can promote our online service and our stores within the same communication. So, what are the cost and profit implications of BLOCKBUSTER Total Access? The answer is largely still a work in progress and continues to evolve as we move forward. As we had previously stated, our year-over-year advertising spend will be up in the first quarter of this year. In addition to our other subscriber acquisition costs, we are spending an incremental $35 million on network advertising this quarter, because we want to significantly increase the awareness of BLOCKBUSTER Total Access, so that our marketing efforts this year would benefit and build on that awareness. Our plan is working. After only one month of advertising, we have significantly increased consumer awareness of Total Access, and significantly increased the percentage of customers we're getting from outside our stores, which we believe have a positive impact on our revenues and profitability because we're bringing in more new customers to Blockbuster. As for the cost of providing the free in-store exchange, we calculate, it is about $2 per subscriber per month, net of the benefits we receive from bringing more traffic into our stores and the benefits it's giving us online. And that cost should come down over time as we implement program to sell more stuff to online customers in our stores. And we adjust our online inventory purchases to the subscribers with satisfying more of their new released needs through our stores. Additionally, there maybe an opportunity to take a price change down the road, and here is why. Our subscribers who are utilizing the store benefits of Total Access know they are getting a great deal. If they come in two to three times per month and exchange one DVD, they are actually getting an $8 to $12 benefit through their store exchanges, which as I've already said, cost us around $2 a month. So there is a nice price gap between the value we deliver to customer and the cost to us. That gap should eventually lead us to premium price Total Access and still deliver a great consumer value. We should also introduce an online only offering, a discounted online only offering, and that together should enable us to optimize subscriber growth and profitability. So, we'll continue to study the pricing of Total Access. And it will weigh our options carefully against our goal to get more than 50% of all the online subscriber growth in 2007. But let me say this, if I haven't made it clear already. BLOCKBUSTER Total Access is on a roll and we believe that maximizing the benefits of Total Access, in order to increase our store traffic and our online subscriber base, would appear to be the best way to create shareholder value. And when the time is right, taking a price increase could have significant future profitability benefits. Meanwhile, we continue to work on enhancement to BLOCKBUSTER Total Access that provides further benefits to our customers and to our business. One of these enhancements that we think holds the most potential, is special order rentals. So, if a customer can't find the title they want in our stores, they will be able to rent it online without being a subscriber. They would pay the in-store rental price for the service. But the benefit is that they would have access to our 65,000 plus online titles. And they could have the movies of their choice delivered right to their homes. Additionally, these special order rentals could enable us to reduce our in-store catalogue inventory. We could then use the excess space in our stores for other products and services, or in some locations perhaps reduce our footprint to around 3,000 square feet, with a goal of reducing our occupancy costs, while maintaining revenues. And in the future, we could use these smaller stores to increase our physical points of distribution for BLOCKBUSTER Total Access. I will begin my remarks this morning by saying, our goal is to buck the industry's trend and grow our total domestic customer base in 2007. We continue to believe that our competitors will be forced to close stores. And that Blockbuster is positioned to benefit from this, because of our conveniently located stores, and because of our exclusive offerings like BLOCKBUSTER Total Access, no late fess, BLOCKBUSTER Rewards, the BLOCKBUSTER Movie Pass and our exclusive rental agreement with the Weinstein Companies. Some of you would ask; how we expect this agreement to benefit our business? The box office size, genres and the store power of the Weinstein Movies make them strong rental titles. And we would have carried these movies even without an exclusive arrangement. However, because of our arrangement, the Weinstein's are marketing, that these movies are available exclusively for rental at Blockbuster. We are promoting this as well. And we are stocking more copies than usual, so we are better able to satisfy customer demand. As a result, we have experienced significantly higher rentals on all the Weinstein movies we carry under this arrangement than we normally would have. And these or additional rents we believe are coming from our competitors, both in-store and online. So we see the agreement with the Weinstein's as yet another way for us to differentiate ourselves and that another way will increase our share of the overall rental market. We also expect to grow our share of the rental market in the future by entering the digital downloading business and we plan to do so in a cost effective manner sometime this year. We are also working to tightly control costs across the company. As Larry outlined, we are selling or refranchising non-core assets. Our focus and our investment need to be at Blockbuster North America, because that is where our greatest opportunity lies. So in summary, our goal in 2007 is really simple. It is to grow our total domestic customer base. And we plan to do it by accelerating growth of our online subscriber base, increasing our store customer base and finally by finding a cost efficient way to enter the digital downloading business. We want to enter 2008 as a fully integrated bricks, clicks and flicks, multi-channel retailer with a growing customer base. We want Blockbuster customers in 2008 and beyond to be able to go to any of our thousands of retail locations, to rent in-store, or to rent online and have movies delivered to their homes. We want customers to be able to go to Blockbuster.com to rent, buy movies, new and used, and to be able to check the availability of movies at their nearest Blockbuster store. And we want customers to be able to go to Blockbuster.com to download movies through our stores, through online, through digital delivery, the Blockbuster Triple Play. We plan to give customers more ways to conveniently access movies than they can get from any other brand. And in doing so, we want to grow our domestic customer base and revenues. Thank you. And we are now open for questions.

Thank you. The floor is now open for questions. (Operator Instructions). Your first question comes from the line of Tony Wible with Citigroup.

My starter question was to look at your comments about the percentage of subs that you are indicating that you were getting to-date from inside the store versus outside the store. I think you said it was 50%, but you are expecting that rate to go down as you added new subs. Is there a way to better define what that rate is on that $3 million target of incremental net adds? What percentage is coming from in-store versus competitors?

Tony, what I said is that, since we began broadcast media, the mix of customers coming to online has improved; in other words, the mix of customers coming from outside of the stores to approximately 50-50. We feel good about that. And we feel as we continue to move forward with our marketing efforts, our external marketing efforts of BLOCKBUSTER Total Access, which realistically had only been approximately 60 days that, that mix will get even richer. I think you also have to consider that in-store we have a significant number of customers that are splitters. In other words, as they go to Blockbuster and they go to other video stores. Obviously, once they join either our Movie Pass program in-store or a BLOCKBUSTER Total Access program that splitting behavior goes away.

And that $2 per sub per month net cost that you refer to is that on just the customers that come in from competitors or in-store? Is that combined?

Tony, that's across the subscriber base. It obviously changes from customer-to-customer. We feel really good about that number, given what we think is an enormous amount of levers we have as our subscriber base continues to grow. That we can obviously adjust as we want, given the fact that the value received from our lightest users would exceed the cost to provide that service.

Two of the comments that you made on the call were that you were looking to bring partners in with Total Access that opened up some doors. While another comment you made is that you are planning on entering the download market, emphasizing in a cost effective manner. Would we be going too far to assume that there could be a potential partnership here with a download player?

No, I don't think we would be going too far. I am not going to say exactly what our method of entry will be. But obviously to do it in a cost effective manner would mean just that we will try to enter the business in a way that allows us to provide downloads to people. We want to do that primarily because we want to be in the business relatively early. We don't want to be at any competitive disadvantage to any of our online competitors, but not because we see the downloading business being in and out itself extremely profitable over the next few years. Although we do believe it's a business that over a five-year period will grow to a reasonably sizeable business. And we want to be able to obviously participate in it. And I think most importantly, we want to be able to have what no one else out there has, which is the Triple Play I alluded to; go to the stores, rent in-store; go to the stores, rent online; go to online, rent online; go to online, check the availability of what's in the store; go to Blockbuster.com, and download a movie. We think that's a pretty powerful combination from a consumer perspective. We think that downloading and electronic sell-through could largely get commoditized going forward. And we think a winner in that space is an intermediary like Blockbuster, who adds significant value to the content owners, because we can sell more stuff to more people by understanding what customers want, by having a relationship with them, by merchandising better. And also offer great value to customers because we are a one-stop-shop for whatever they need. So, that's why we are striving for and what we will evolve into as we move forward.

A last set of question, and then I will let somebody else jump on. Can we speak to the actual accounting on the bonus situation that was alluded to in the press release? Was there a reversal in the fourth quarter followed by an accrual that we'll see in the first quarter? And also more quickly what was the foreign exchange benefit? I know you guys talked about the foreign exchange impact on the taxes, but what was the actual benefit on the P&L?

First of all, Tony, as it relates to the bonus, there was no reversal. That represents the amount that is accrued in the fourth quarter of 2006, and as such it was properly expensed in accordance with the GAAP. In terms of the foreign exchange, while obviously you benefit from the top line, there really is no benefit to EBITDA once you flow it through the P&L. So, while we benefited, call it $20 million to $30 million in revenues, you'll also have the cost and expenses that also have the same foreign exchange impact. So, again to repeat, by the time you get the EBITDA there's really no overall effect.

If I understand you correctly, the taxes benefit disproportionately more than your profits or the taxes get hit more than your profits?

No, I think to say it another way, with taxes, since we're not currently a U.S. tax payer, we take no benefit overall for that. So, what we book is cash taxes that we pay in certain international jurisdictions. And we estimated that to be about $7 million it actually came in about $10 million, which is the kind of $0.02 per share impact.

Okay. Great. Thank you.

Thanks, Tony.

Your next question comes from the line of Stacey Widlitz with Pali Research.

Thanks. Good morning. John, can you just comment on some of the test trials for the studios that are collapsing the rental window? And just, if you've seen any reaction in the markets that's been captured in the stores? And then secondly, what are the implications if the windows do collapse at the end of the year like a lot of the studios you are talking about? Thanks.

Stacey, I think in terms of really being able to measure the impact, it's really too early to tell. I think over time the big decision for the studios is what impact it has on retail sales or key titles, because this is where all the money is made. So, as we have consistently said before, we do not believe a wholesale flip of the windows makes sense economically for the studios. And we continue to believe because of that it won't happen. I have kind of mixed emotions about the tests that are going on. On one hand, I say kind of bring it on, because I think we need to get the answer to this question, so we will know. But I think intuitively and we believe that if lots of retail transactions are driven wholly by convenience, and in the Wal-Mart's store shopping anyway they have a bunch of catalog little's that they are selling real cheap or they have this week's Blockbuster for a very-very attractive price and I pick up that retail title. That same convenience orientated purchaser can very well be susceptible if there is time, day and date availability on the pay-per-view window could just watch it once that way. So, I think the real key here that has to be measured over time is what happens to retail sales of movies as a result of an early window. And I don't think you can measure it in two to three months. Quite frankly, I think, it takes a while for people to get it. And if people start getting the fact that the movie that they were going to buy for $18.99 is available on pay-per-view tonight for $4, that's a pretty big hurdle for them to get over. Again, it's little too early to tell. We don't believe, long-term, it's in the best interest of the industry to make that switch.

Thanks, great progress.

Thank you.

Your next question comes from the line of Carla Casella with JP Morgan.

Hi, I have a couple of questions on the cash flow and implications for next quarter. I saw your deferred taxes were up. Do you have a payment that needs to be made in first or second quarter, or do you have an idea when the tax payment would be?

Yeah, I mean, really there is not anything going on the tax side. Essentially, we pay cash taxes in few foreign jurisdictions, so they are not material from that perspective, and would not have a major impact on cash. I think that the major implication that I would think about in terms of cash flow is that, traditionally the fourth quarter is a quarter where there is a building of cash flow. You buy products for the fourth quarter that intends to build your payables up a little bit. That is a very normal occurrence for us, $400 million, and cash balance is a little high. But it is based on obviously the improved operating income in the company for the year, significant year-over-year improvement there and kind of a normalized purchase activity in the fourth quarter.

Okay. And then the payable, it looks like the payable days also went up. Did your vendors give you even better terms this year than last?

Yes, better terms this year than last. But I would say, overall, that's really more timing of when days fall on month-end --

Okay.

Versus anything more unusual than that.

Okay. And then just one last question. The merchandise gross margin was a lot stronger than we were expecting and I am wondering if that's mix or something else driving that?

I think largely it's a matter of mix. Certainly, this year we spent a lot of time and energy focusing on bringing in product that will turn well and give us very good margins on a retail basis.

Okay, great. Thanks.

Thank you, Carla.

Your next question comes from the line of Arvind Bhatia with Sterne Agee.

Good morning guys and good quarter.

Thanks a lot.

Thank you.

I just want to follow-up on the window's collapsing question a little bit. What about the argument that the renter is essentially different from the buyer, that really this collapsing might have an impact on somebody's desire to rent as opposed to buy? That's my first question. And then, I have a couple of other questions.

I certainly wouldn't argue, Arvind, that there wouldn't be some trade-off by pay-per-view versus a rental. I really wasn't trying to infer anything different, but I was inferring that there would be equal or potentially greater trade-off to retail purchases. On some movies, there is that dynamic that I want to own, because they are family favorites that people are going to watch over and over again. But many of the movies, big box office movies that generate enormous retail sales, really don't fit into that category. And the purchase is driven by that convenience aspect of wanting to buy and own that movie. Again, the way the math works is, even on a 60% margin to the studio on $4 pay-per-view VOD transaction. It doesn't come anything close to the $16 plus margin that they make on the sale of a DVD.

Got it.

So, that's our story and we are sticking to it.

And so, in those markets where the tests are being done, is there any data or have the studios shared any data with you, even if it's for the first three months that would confirm your thinking or not?

First of all, we continue to say that, it's just too early to read the test, either for us or we believe for the studios. I know that Comcast has said they believe that all boats are going to rise in this tide, that there's going to be more rentals in store, more sales and more pay-per-view. So, let's hope they are right.

Got it. And then, just a bigger picture question. As the online business grows, the industry grows and the downloading aspect of the business that grows. What do you think is the appropriate store-based industry going to look like in terms of size? And how much more do you think the industry needs to shrink to be at a level where the industry can have positive same-store sales?

I think that if you assume an overall in-store industry rate of decline in the low to mid single-digits depending on what stores close, obviously then you need to have that proportionate number of stores closed to have positive comp store sales. I think in 2007 BLOCKBUSTER has been, let's call much more aggressive than our competitors recently closing marginal stores and transferring revenue. And so, we believe our rate of growth will slow. What the optimum number of stores are is a good question. I think in certain markets, certain trade areas there is clearly too many stores. And those are primarily markets where there is a Blockbuster store across the street from a Hollywood Video store. In other markets because neither, Blockbuster or Hollywood Video has expanded aggressively over the last couple of years, there are probably too few stores. And we believe as a result of the integrated Total Access program the ability to shrink our footprint and operate with significant revenues and provide a point of distribution that would not only be an in store, a store for in-store customers, something redundant. But also it plays where online customers can make an exchange that provides us an opportunity now to examine expansion in a very cost affective manner in under serviced markets. So, I think the total number of stores in the industry will continue to shrink over the next couple of years. I believe you will see redistribution from at least Blockbuster that will suggest that we will open some stores in underserved markets that can be very profitable and extend the reach of Total Access.

Okay. And then, on the movie release schedule for the first quarter. Based on what we're looking at, it looks likes it might be at par with Q1 of last year. Would you agree with that? And then the second question is on the games business. When do you think the rentals based on history and that business will start to turn around?

As far as the box office for the first quarter, it looks like it's down kind of low single-digits versus last year.

But in terms of the big movies though?

Somebody else is holding up their hand. I will let them whisper in my ears, as I tell you about game rentals.

I think, Arvind, based on what we're seeing it's probably in the 5% to 10% range that the box office is down overall during the first quarter.

But in terms of the number of movies, the big movies coming out versus last year, you are looking at about the same number?

Yeah. Overall, I think that's right.

Okay. And then, one question for you Larry. Based on the mix of online and in-store revenues in 2007, how much of a hit should we expect in gross margins?

Obviously, we are not going to guide to specific numbers in gross margin. I think John alluded to earlier that we had $2 incremental cost net of benefits. Obviously, we want to support this program and that comes through product, and it comes through advertising support. So, you are going to see impact on the cost line from that. And you are going to see the opportunity created by investing and getting those subs to create future value for us. In terms of price opportunities or value opportunities to the consumer that should drive overall revenues.

I guess, on the advertising line if you looked at the 2005 levels, overall ad spending levels, 2006 was obviously down about $100 million. Do you think '05 levels are a good way to look at the incremental spends?

No, because the '05 levels had significantly lower subscription costs in them from the online business. That significant growth we are going to have in the online business through natural sources is going to create an increase in advertising cost. In addition, the significantly higher media spend that we have in the first quarter is obviously incrementally going to add to the advertising line. And in addition, as we maintain this momentum for the online subscriber growth if media works, we will continue to spend significantly more on that. '05 was one of those years, where we had significant investment in advertising during the first and second quarters, and then obviously didn't spend any more the rest of the year. So, I think you can look overall as, we are not going to have a year like 2006. We are going to have a year, where we have good spending on advertising based on growth we see in the online business and the complement of the online business with Total Access to the store business. So, it's linkage of all.

Let me build on, what Larry said two ways, Arvind. First of all, I will answer your question on game. We expect an up year on games this year. A significant up year based on platform penetration. So, games will definitely be a net incremental additive to us in 2007. As it relates to Total Access, subscriber growth or whatever, here is the way I would say it. Total Access has exceeded even our most ambitious expectations. Three million people at the end of the first quarter, doubling the size in five months. So we are going to end 2007 with significantly more subscribers than anyone had anticipated before the launch of Total Access, which is essentially the fourth quarter of last year. That will have some cost implications for us even at what we consider to be a very attractive subscriber acquisition cost. Now, I said in January and I'd be disappointed to see us not hit 4 million subscribers. Obviously, as of today, my expectations are much higher than that. So, if we could enter 2008 with significantly more subscribers than we thought we would have, even as early as January of this year, and then think in terms of an overall program that has a premium-priced Total Access offering and a comparable offer to our competitor at the same price with perhaps same in-store benefits. We think we've got a winner that will add significant incremental revenues and profitability in '08 and beyond. So, we are clearly running a balance this year of profitability and subscriber growth, but Total Access is on a roll and I want to end 2007 with as many online subscribers loyal to our program, shopping in our stores, and be blown and gone when we hit the end of 2007 and into 2008.

Right. One last question, if I could, on the G&A side. Larry, is there anymore room there on that line? You have obviously shown great progress there and lot of reduction this year in '06. What about '07? How should we be viewing that line item?

We obviously have made significant progress. I think that the thing you always have to keep in mind with G&A expenses, since it's largely a compensation and rent and occupancy cost, that you're always fighting an uphill battle with inflation. So, we will be doing our best to manage cost, reduce cost wherever possible by dealing with whatever the inflationary impacts are on the business. So, I won't say there is not more room, because obviously there is always an opportunity to look inside and look deep and try to reduce cost wherever possible. And we think we have been doing a good job doing that and we will continue to do that. But in terms of absolutes, we have taken care of a lot of the big issues, and I think I would look at G&A more as tweaking than huge opportunity going forward.

That’s helpful. Good quarter guys. Thanks.

Thanks, Arvind.

Your next question comes from the line of Barton Crockett with J.P. Morgan.

Okay, great. Thank you for taking the question. Obviously, a couple of questions I wanted to ask. First, I know you are not in the business of giving guidance at this point, but there is this very large unknown you have put out there in the press release of the potential for incremental investment in Total Access, and your view that, that's strategically important for you to offer a good 2008. But as we try and prepare ourselves to think a little about what's in-store, is it in your mind that, this investment could potentially drive erosion and adjusted EBITDA from the '06 level, or is that really not what you mean by investment? That will be my initial interpretation. So, that's one question. And then the second question is, when we look at that the Total Access economics, a very important part of that is the churn, and can you give us an update on what you are seeing in churn out of the program? I know, John, you were quoted in the New York Times article about 70% to 75% retention of free trial subs. And I was wondering if you could update us, and you say if that's still the case with the new search in the first quarter, and some sense, at least roughly, what the churn might be after the free trial conversion? So that's one set of questions.

The first number you talked about in terms of the 75%, what you are referring to there is the conversion rate from free to pay, and that conversion rate has gone up since the introduction of Total Access. Also our churn, the length of time a subscriber stays on the service has gone down since the introduction of Total Access. On the original number I gave you the conversion, it actually really depends on what channel the customer comes from. For instance, our direct to site channel, a channel that is growing because of growing awareness of Total Access. Don't forget we were at a huge disadvantage to Netflix going into Q4. Depending on what number you look at either half their awareness or maybe a little bit better than that, that gap has been closed enormously. And I only have researched through the end of January and I expect when we will get results from the end of February, you'll see it close even further. That gets more and more customers to us on a direct to site basis, which obviously is the lowest subscriber acquisition cost and the highest conversion and over time the lowest churn. So, we feel good about all of those metrics in our online business improving. Now, as it relates to the question of, you said we are not in the business of providing guidance, and we are not, and I want to try to manage expectations the best way I can. But as I have also said, we are trying to balance maximizing subscriber growth and total EBITDA performance. But not just for 2007, I think we've got to look at 2007 and 2008, and the difference between entering 2008 with significantly more subs. And I hesitate to give you a number because I don't want my colleagues at the table to get too concerned. But we have some pretty high expectations. Not as high as that, Larry. We have some very high expectations of what that number can be. And if we hit that number, as far as what the impact on '08 is, we are talking significant. So, let's see how the year progresses. Clearly, the first quarter over the year is a big investment quarter for us, where we said our goals were two fold, grow our subscriber base but also we had to make an incremental investment in closing that awareness gap. That awareness gap has essentially been closed. I don't know that we are at parity as yet. We will find out soon. But it is closed significantly. So, now our focus going forward will be on marketing that's truly based by the most efficient way of gaining a subscriber. So, we believe we can grow faster than our competitor. We believe can grow cheaper than our competitor. And we believe long-run, we can drive more profitability per sub than our competitor.

Okay that's all is very helpful and thank you for that. I guess to follow-up on the churn. You guys have said in the past that your churn was somewhat higher than Netflix. I am just wondering if that's still the case in aggregate? But the churn that went towards for the gap narrowing and I am also assuming that that's still the case, but if you could just update us that would be great?

Yeah, let me say that, first of all, one of the reasons why we are going to hit $3 million by the end of the first quarter is the reduction in churn. The second thing I'll say, as we examine our subscribers, our churn on a cohort basis. In other words, if we look at our churn vis-à-vis the length of time a subscriber has been on our service, it is very, very similar to our competitors. So, what we have here is a slightly different maturity base of subscribers, where they have a much larger percentage of their subscribers on their service for a much longer period of time. And that accounts for a slight drag in our overall churn versus theirs. But it's a gap that's closing and will continue to close. One, because of Total Access in value and benefits, and two, because of the maturity of our subscriber base.

Your next question comes from the line of Jeff Logsdon with Bank of Montreal.

Friends, couple of questions. John, first of all, I understand the antecedents of the two classes of stock, as you spun out of Viacom. Is there really any corporate value left to having two classes of stock? And has the Board discussed any changes that might take place in that area?

Larry?

Yeah. I think, Jeff, first of all, we don't talk about Board matters on conference calls. But I would say to you that obviously there's a value disparity in the two classes of stock, which is a little bit surprising since 40% of the shares outstanding are actually the B2 vote shares versus the A1 vote shares. So, we continue to look at this. We continue to evaluate it. And I'm not saying that we've reached a conclusion on it, because we haven't. But you are in a situation where one class of stock trades a little bit lower than the other and if there was a way to get them to some kind of parity, obviously that would be good for everybody. So, still under consideration and we'll continue to think about it. I guess time will tell if we choose to do anything about it, but there's nothing mechanically that prevents us from doing anything with it today.

Great. Secondly, what percentage of the rental revenues are coming now on the DVD side out of revenue sharing agreements and perhaps you could walk us through the economics of the revenue sharing agreement on DVD now? What your costs are and what the participations are, and maybe any limitations on when those disks can go into the resale cycle?

Well, not a lot has changed regarding that over the last year. About 80% of our DVD rentals come from revenue sharing arrangements. So that's where we wanted to be, quite frankly. We are not really interested in upping that percentage. It would probably not be productive in terms of the improvement in gross profit dollars or customer satisfaction levels. The studio deals vary from deal-to-deal in terms of when we sell off a DVD. But we are real comfortable that it aligns with basically the K curve, if you will, of the rental transactions. So, we don't sell any DVDs off for the first three or four weeks and probably don't have a lot to sell off for the first three or four weeks. We begin generally selling them off after the first month or so of being in the stores. We sell predicated on the decline of rental demand as fast as we can. And we think it's a cycle that works beautifully as far as optimizing customer satisfaction at the beginning of the cycle when the demand is the highest and maximizing the revenues on previously viewed movies as quickly as we can. And obviously, when a movie first goes on, you say, how we get a higher price than the last few of any title that we sell in some kind of blowout program at the end of the cycle. So, all that's working real well and there is nothing that's changed a lot about that. And the studios seem, I would say, more than ever very supportive of the rental channel and very supportive of Blockbuster.

Thanks. John, I am sure that accolades from the analyst don't cause anyone to breakout any champagne, but you and your team have done a terrific job over the last year.

Well, if we had champagne, we'd break it out. So, we'll take accolades wherever they come, even analysts. Thank you, appreciate that.

Yeah.

We have reached our allotted time for questions and answers. I will now turn the conference back over to Ms. Angelika Torres for closing remarks.

We would like to thank everybody for participating, and please feel free to call us with follow-up questions. Thank you and have a great day.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.