Blockbuster Targets Netflix By Barry Willis February 23, 2004 — Warren Lieberfarb's "sell through" agenda for DVD pricing has had some unintended consequences. The former head of Warner Home Entertainment pushed hard for an industry-wide pricing policy that made movies on DVD one of the greatest bargains in the history of entertainment. For compact disc prices, movie fans can own archival copies of films that cost tens of millions to produce—a strategy that has had serious consequences for the video rental business.

Based on figures compiled over the last two years, the Video Software Dealers Association (VSDA) believes that the rental industry may have already passed its peak, at least for those rental outlets that continue to depend on walk-in business and the late fees it generates.

The rent-by-mail model, however, is growing like mushrooms in a spring rain, with pioneer Netflix reporting almost 1.5 million subscribers. The Internet DVD service, with one $20 monthly fee and no late charges, has spawned several imitators, including Wal-Mart DVD Rentals, operated by Wal-Mart Stores, Inc.

Video rental giant Blockbuster may be the next to join the trend, according to reports in mid-February. With traditional rental business stagnant, Blockbuster hopes to leverage its 48 million-strong membership into a Netflix-style mail-order business. Startup costs should be minimal for Blockbuster, given its huge inventory. The program, to be launched in the fourth quarter of this year, will likely follow in Netflix's footsteps, with a $20 monthly fee covering three or four rentals, which can be kept as long as desired and effortlessly returned in pre-paid mailers.

Some Blockbuster stores already operate a subscription service that lets customers rent three DVDs at a time, and as many as they want in a month, for $25 per month. By mid-year, the in-store subscription service should be operational in all Blockbuster stores.

The company says that it will eventually integrate the mail order and in-store subscription services, giving customers more options. That may prove a great competitive advantage, given Blockbuster's huge retail presence. The company has thousands of stores; reportedly, 80% of all Americans live within a few minutes of a Blockbuster location.