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Blockbuster to take DVD business online

Blockbuster Inc. plans to launch an Internet-based DVD rental service nationwide on Wednesday, a move aimed squarely at competitors like Netflix Inc., that have cut into the video giant’s store-based business.
/ Source: The Associated Press

Blockbuster Inc. plans to launch an Internet-based DVD rental service nationwide on Wednesday, a move aimed squarely at competitors like Netflix Inc., that have cut into the video giant’s store-based business.

The subscription plan will let customers keep up to three movies at a time for $19.99 per month — undercutting Netflix by $2. It will offer five DVDs at a time for $29.99 a month or eight for $39.99.

All the offers will come without late fees, which are a sore spot with many Blockbuster customers. Blockbuster will throw in coupons for free rentals in the stores.

Taking a page from the Netflix book, Blockbuster will pick up shipping charges if customers return the DVDs in specially designed envelopes.

Blockbuster dominates the movie-rental business but has seen its fortunes hurt by the challenge of subscription services such as Netflix and by cheap DVDs for sale at retailers like Wal-Mart Stores Inc. and Costco Wholesale Corp.

In the first six months of this year, sales at Blockbuster stores open at least a year fell 5.1 percent, and company officials warned last month that the rental business will keep sliding into next year.

President and chief operating officer Nigel Travis said the online subscription business will bring in new customers — the company claims that 65 percent of the U.S. population lives within 10 minutes of a Blockbuster, but many rural areas don’t have one — and lead current customers to spend more.

“The mixture of new customers and getting more out of existing customers ... we see ourselves picking up a greater share of the entertainment wallet,” Travis said. “We’ve taken our time over this.”

Quick growth expected
The roots of the new offering go back two years, to when Dallas-based Blockbuster bought Film Caddy, which charged $19.95 a month and shipped movies from Arizona. Blockbuster studied Film Caddy for a year — learning, for example, that 40 percent of its customers still visited video stores — then began testing online ordering among employees and consumers.

Online subscriptions accounted for $289 million last year, just a sliver of the $8.2 billion U.S. movie rental industry, according to Kagan Research LLC.

However, Kagan and other research firms expect online rentals to grow quickly. Kagan estimates growth to $605 million this year and $1.9 billion in 2008.

“Netflix has pretty well cornered the market, but Blockbuster is getting in on it, and Blockbuster definitely has the brand recognition,” said Wade Holden, a Kagan analyst.

Holden said Blockbuster’s lower price would help it compete against Netflix — which counts many former Blockbuster customers among its subscribers. Still, he said Netflix has had several years to work out its distribution system while Blockbuster may struggle at first.

Blockbuster said it will offer a catalog of 25,000 titles, far more than any one of its stores. Blockbuster stores are stocked from a warehouse in McKinney, Tex. but the company built 10 regional centers to fill online orders and hopes to also tap store stock by next year.

With the new distribution centers, Blockbuster officials said they will fill about half of all orders on a next-day basis, with the rest arriving after two days.

The warehouses and other additions have helped boost Blockbuster’s capital spending from $177 million last year to between $250 million and $280 million this year. The company also expects to earmark $90 million in operating costs for the development of new businesses, including a push into game rentals, in-store trading of games and DVDs and an in-store subscription model that was introduced in May.

The heavy spending helped trigger a warning last month from the company that its earnings for all of 2004 will fall about 30 percent from last year — a grim forecast that sent the stock tumbling.

Some analysts think the online-subscription model is just a placeholder until movies are widely rented by downloading them from the Internet.

Blockbuster is studying downloadable movie rentals as a form of video-on-demand but has no immediate plans to jump in.

“We believe video on demand is a very nice upgrade from pay-per-view,” said Travis, the Blockbuster president, “but we think video-on-demand being a huge business like rentals is still a long ways off.”