By Michele Gershberg and Gina Keating

NEW YORK/LOS ANGELES (Reuters) - No. 1 U.S. movie rental chain Blockbuster Inc said on Thursday it was testing pricing for its rental formats and will experiment with store layouts to add downloading stations, books or beverages in a bid to shore up its customer base.

Shares of Blockbuster slipped more than 7 percent after Chief Executive Jim Keyes said that while raising prices could boost results almost immediately, he preferred to take an approach that was mindful of customers.

"Are we raising prices? No, as of today," Keyes told a company analyst day in New York. "What I don't want to do is raise them three or four times."

While Keyes said he expects the company's new emphasis on its stores to turn around falling same-store sales and rental revenues, he warned that change would not come in the fourth quarter nor would the initiatives be "an overnight success."

Keyes also said the company was looking at recapturing some of the revenue it lost when it abolished late fees and allowed some online customers to exchange DVDs for free at its stores.

Tightening the number of days that customers can keep films also will help boost in-store inventory and mend Blockbuster's reputation for often being out of stock on first-run titles, Keyes said.

He noted the retail success of Apple Inc , which has a far smaller store base and sells its iPod digital media players, iPhone mobile phones and personal computers.

"I get excited about what we could do with what is some of the most choice real estate," Keyes, a former 7-Eleven CEO, said.

CHANGING PERCEPTIONS

The company was looking for promotional partnerships with movie studios and manufacturers for exclusive product tie-ins, such as proprietary toys or beverages linked to DVD releases.

To avoid being saddled with excess inventory, Blockbuster plans to negotiate risk-sharing arrangements with the studios and use management systems at its U.S. stores to let local store operators manage product assortment and inventory.

Ideas for its retail format include creating an interactive area in stores for children, a destination for downloading entertainment onto portable media devices or a kiosk for Sony Corp's PlayStation 3 video game console.

"We believe we're going to very aggressively by (the first quarter) ... have these prototypes in place ... and learn how customers perceive our stores differently," Keyes said.

Another option was to place kiosks in high traffic areas such as airports or shopping malls, he said.

He said the aim was to "help move the needle in the short term" with its new initiatives, rather than institute a multiyear turnaround plan.

"The things we're doing today are going to have impact today," he said.

To that end, Blockbuster planned to cut back on advertising for the next six months as it formulates its new plans and evaluates its current marketing strategy, Keyes said.

"When you (are) a household name brand there is not much return in advertising that you're there," he said.

The company is also considering ways to build up a digital distribution channel for films, including merging its Blockbuster.com Internet site for ordering films by mail with its Movielink download service, and partnering with telecom and cable companies.

Blockbuster posted a wider quarterly loss on November 1 as it closed stores around the world. It has set its sights on boosting sales at its remaining stores and away from its online battle with Netflix Inc .

Keyes said, however, that Blockbuster's "desire to compete has not waned" but that the company wanted to refocus on the 20 million customers who use its stores each month rather than its 3.1 million online subscriber base.

Blockbuster shares fell 11.4 percent, or 54 cents, to $4.30 on the New York Stock Exchange at mid-afternoon.

(Reporting by Michele Gershberg and Franklin Paul in New York and Gina Keating in Los Angeles; Editing by Jeffrey Benkoe, Richard Chang)
© Copyright 2007 Reuters.

Photo:
A Blockbuster video store in an undated file photo. No. 1 U.S. movie rental chain Blockbuster Inc said on Thursday it was testing pricing for its rental formats and will experiment with store layouts to add downloading stations, books or beverages in a bid to shore up its customer base. REUTERS/Handout