August 8, 2002 4:18 PM PDT

Blockbuster takes aim at Netflix

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Blockbuster is quietly testing a new DVD subscription-rental program, aimed directly at undercutting competition from Web-based mail-order service Netflix.

The video-rental behemoth has started experimenting with a monthly, all-you-can-rent subscription model in four major U.S. cities: Phoenix, Seattle, Houston and New York. The Dallas-based company said it began trials the week of July 24 for one test city, which it would not name, and launched service in New York on Monday.

The service, called DVD Subscription Pass, is geared toward frequent movie renters and film buffs irked by late fees--the same target audience as Internet rental agency Netflix, which delivers DVDs to subscribers through the U.S. mail. Netflix customers can keep a limited number of DVDs for as long as they want for $19.95 a month, and there are no late fees.

Blockbuster's service is based in stores, with customers allowed to rent an unlimited number of DVD films per month for a flat rate, without the hassle and cost of late payments. With two options--$19.99 to take out two films at once or $24.99 for three--Blockbuster customers can return for more movies as often as they like, until the 30 days is up. If movies are not returned in that time, late fees will apply.

However, the company is playing with different pricing models and products in various cities, said Blockbuster spokeswoman Karen Raskopf. The company will decide whether or not it will introduce subscriptions nationally in the next two months.

"It differs from mail-order," Raskopf said. "We look at that and say, 'That's a niche market'--most people decide to rent the day of. This (service) gives you the ability to go to the store and get the product you want. So you have that immediate satisfaction, but you don't have to have the worry about extended movie fees."

"We think (this) is a good way to address one of the last rental barriers out there," Raskopf added.

Blockbuster is testing the waters of new rental models at a time when momentum for change in movie distribution and consumption is accelerating. With the advent of the Internet, digital formats and a greater push for video-on-demand service, consumers have more choices than ever to view films and programming.

The Internet, for example, helped spawn the simplicity and service of Netflix, a 4-year-old company that became popular as DVD home rentals took off.

For most subscribers, Netflix sends off three DVD movies at a time in thinly packaged envelopes with a postage-paid return sleeve inside. For big-time movie buffs, Netflix charges higher rates for more films. Netflix picks up the postage costs.

The company's subscribers total 670,000, according to a recent filing, and it expects to have more than 800,000 by the end of the year. Though that's just a drop in the bucket for Blockbuster, whose U.S. customers total about 96 million, the threat of Netflix's DVD service and other new, inventive models, which often capture the most lucrative segment of customers, is too dangerous to ignore.

"Blockbuster has two problems in terms of customers: some of their best customers, frequent renters, would prefer to work with Netflix," said Forrester Research analyst Josh Bernoff. "Having a subscription will make sure that no more of their customers will stray. But the bigger problem for Blockbuster and even Netflix is video-on-demand."

Waiting for VOD
Ideas about instant digital access to movies via TV have been bandied about for years with little effect. But now, major cable providers such as Comcast and AOL Time Warner are getting behind video-on-demand services, testing different models in various markets.

Forrester estimates that by the end of the year, 8.5 million people will have video-on-demand access through their cable or satellite service. Within five years, more than 30 million people will have access. The threat to the likes of Blockbuster is that more people will stay home and order films right from their TV sets.

"(Video on demand) is becoming a standard offering of cable," Bernoff said. "We're not suggesting that (rentals) will go away, but that a nice chunk of it will go away."

Blockbuster's subscription program will prevent some frequent renters from converting to Netflix, he said, but "three years from now those renters are likely to be VOD subscribers, so this is short term."

Blockbuster's Raskopf downplayed the importance of Netflix, but she said that it is something the company monitors. Video on demand is still a long time coming, she said, and for now doesn?t even make a dent in the packaged media business, a $23 billion-a-year industry for movie rentals and sales. In addition, she said the program may threaten cable companies because customers could see this as a viable alternative to cable fees.

"VOD is further off than we thought it was. We keep monitoring all this stuff, and when it looks like a sustainable profitable model, we can get into these things," Raskopf said.

Blockbuster even tested a video-on-demand service, but it failed after the costs ran too high.

Blockbuster's latest program lets customers subscribe for a single month or sign up to have their credit card charged monthly for as long as they'd like.

The company confirmed the test in New York and Phoenix, but would not name the other two cities. A call to local Blockbusters in Seattle and Houston revealed that the company is offering DVD Subscription Pass in those areas. For $22.99, customers in Seattle can rent unlimited DVDs, two at a time, as long as they allow Blockbuster to automatically charge their credit card every month. It costs $24.99 per month without the automatic debit.

Blockbuster also plans to test an annual subscription rate for customers who want to avoid late fees. For $59.99, customers who pay for a basic video rental won't have to return the film all year. "The upfront fee says you don't have to pay late fees," she said.

 

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