Competitive Intelligence

Blockbuster Gunning for Netflix Movies-by-Mail Market

Blockbuster jumped into Netflix's highly-profitable movie-by-mail sandbox last week, pushing its 25,000-title DVD rental library to Internet users and leaving fulfillment to the USPS. Blockbuster says it will begin offering an online movie-rental service beginning in 2005, and in addition to undercutting Netflix's subscription price, Blockbuster will offer two free in-store movie rental coupons per month, to try and juice their differentiation strategy.

Blockbuster’s entry represents at least an intensification on the initial Netflix counter-attack, which began in May and offered subscribers unlimited rentals with no late charges, but still required them to return movies to the stores from which they had been rented.

Can Blockbuster turn a buck in this new market? Netflix has diversity cornered in its eclectic rental library and in being first to market but with earnings of $2.8 million on $120 million in revenue for the second quarter, Blockbuster will need to compete on more than stocking big-name, new releases - it'll have to diversify its library, while moving to spark a price war.

The Blockbuster Online service will provide subscribers with unlimited DVD movie rentals in the mail, with up to three out at a time and no return dates or late charges. A monthly fee of US$19.99 will be charged, which undercuts Netflix's $22 monthly price to new customers.

The Blockbuster deal also includes two free in-store movie rental coupons per month. To promote the new service, Blockbuster has formed marketing alliances with MSN and AOL, which it claims will help it reach 75 percent of U.S. Internet users.

The online-rental service is part of a series of initiatives being implemented by Blockbuster in a bid to transform itself from a neighborhood-based movie rental business into an "anywhere anytime" entertainment operation that eventually will enable customers to rent, buy or trade movies and games, new or used, in-store and online.

In May, Blockbuster launched a store-based subscription service called "Movie Pass." The unlimited rental, no late-charge program requires customers to pick up and return the DVDs to the company's stores rather than get them by mail.

The Blockbuster Online service is expected to be fully integrated and combined with the store-based subscription programs in 2005, the company said. "If a customer is in our store and wants to return a movie they rented online, we'll be able to accommodate them," says Shane Evangelist, Blockbuster vice president and general manager of Blockbuster Online. "If a member rents primarily in-store, but wants a hard-to-find title we don't typically carry in-store, he or she will be able to go online and get it. It's a matter of maximizing convenience and choice."

With total revenues of just US$280 million industry-wide last year, the online subscription business represents only a small percentage of the $8.2 billion U.S. movie-rental market. "However, the online-rental business is growing, and Blockbuster believes it has the potential to appeal to several million U.S. households," the company says.

"The research we have seen from Kagan World Media suggests that the online-rental market will have 6.5 million customers in the U.S. by 2008, up from 2.5 million today," Evangelist told NewsFactor. "The reason the market is so small right now is that online movie rental is a new kind of business, and the service providers need to educate potential customers."

Netflix's success in the home-delivery DVD rental market has led other established retailers to offer a similar service. For example, Wal-Mart Stores has a low-cost unlimited offering, letting customers pay just $15.54 a month for up to two DVDs at a time or $18.76 a month for the three DVDs that Netflix and Blockbuster offer.

"There are also some smaller players in the market," Evangelist told NewsFactor. "But there are high barriers to entry. To become a major player, companies need to make a significant investment. Online movie rental is very capital intensive, as there is the cost of product, buying the customers, and also setting up the service infrastructure."

Blockbuster has set up 10 delivery centers across the U.S. so it can provide next-day delivery to its online customers, Evangelist said. "The way the service works is that you go to our Web site, select your three movies, and then we mail you the first one," he explained. "Once you have viewed the DVD, you mail it back to us in a pre-paid envelope, and we will then send you the next movie. Next year, once we have integrated the online service and the in-store subscription program, we will be able to use our stores to provide same-day delivery to online customers."

Blockbuster is the world's largest video and DVD rental chain, with nearly 9,000 outlets. U.S. media giant Viacom is in the process of selling off its 81 percent stake in Blockbuster.

"It is good for consumers that the DVD online-rental market is getting more competitive," Gale Daikoku, a retail analyst with GartnerG2, told NewsFactor. "It is about time that this happened. Netflix has been under pricing pressure since it put its prices up in June, and now Blockbuster has come in to undercut it.

However, Daikoku warns that Blockbuster's plan to integrate its mail-order service with the in-store program may face difficulties. "The in-store business model and customer experience is really very different from the mail order," she told NewsFactor. "Subscribers will expect to be able to drop off at the stores DVDs that they rented online, or even pick up DVDs from the stores that they had selected on the Web site. But will the I.T. system integration work properly? Will there be confusion about Blockbuster's various subscription programs?"

It seems to me this move can't have been exactly unexpected on Netflix's part - I mean, with all the barriers to entry, who else but Wal-Mart and Blockbuster are really in it to win it? There's one other company that has the infrastructure to make it work and possibly even overcome the Blockbuster advantages: Amazon.com.

- Arik