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Blockbuster taking on Netflix for online rentals

Old 04-28-03, 10:04 AM
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Blockbuster taking on Netflix for online rentals

http://www.nytimes.com/2003/04/28/te...gy/28ECOM.html

I didn't see another thread on this, and this looks like the appropriate place.
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Old 04-28-03, 10:54 AM
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Frankly, it looks to me like they will be losing all of the advantages of an e-tailer, while gaining none of the advantages of a Brick and Mortar store.

Blockbuster stores aren't *designed* to be mail distribution centers. Netflix stores all their disks in paper envelopes and probably keeps them in filing cabinets. Blockbuster has theirs on the shelves in stores, face out, in security containers. They also have little room in the back for storage and shipping.
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Old 04-28-03, 11:30 AM
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Tom---

Could you copy and paste the article? It would be easier for those who don't want to register with the Times.
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Old 04-28-03, 11:35 AM
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Here you go. Moderators can delete without apology if they have copyright protection concerns.

Blockbuster Decides to Go Online
By BOB TEDESCHI

[L] ike a fashionably late star, Blockbuster said last week that it would finally attend the online movie party. The question is whether Blockbuster's late arrival will be a long-term disadvantage.

The company, which is 80 percent owned by Viacom, said it would introduce an online rental service sometime next year to compete with Walmart.com and Netflix, which has charmed investors and customers with its performance since going public last year.

Blockbuster's leisurely approach to this e-commerce category reflects the realities of the movie rental industry. Of the $8 billion spent on rentals last year, less than $200 million was spent online, according to industry executives. Access to the Internet, however, is increasing ? 67 percent of adults now go online, according to a Harris Poll in February. But research has shown that it takes years before new Internet users feel comfortable making transactions online.

Waiting until as late as 2004 to introduce an online rental business could be risky, because Netflix, which owns most of the online market, may become enough of a force by then to take some of Blockbuster's offline clientele.

Even so, Blockbuster will be able to make use of its 5,500 stores, an advantage Netflix does not have. The plans are still in progress, but Blockbuster will probably ship subscribers an unlimited number of DVD's each month, provided customers have only three movies in their homes at any one time. Similar services, which include prepaid postage for returns, are offered by Walmart.com and Netflix, for roughly $19 and $20 a month, respectively.

Blockbuster said it would allow its online customers to return mail-order rentals to Blockbuster stores. And online customers who do not want to wait for a new release to arrive by mail may be able to exchange one of their online rentals for that title at the store and pay nothing.

The rental program, which will also give Blockbuster customers the option to rent one DVD at a time, will take a while to get up and running, partly because the stores will act as shipping centers. Both Walmart.com and Netflix use a handful of distribution centers to ship movies and take returns, but Blockbuster will use its store employees to take the orders off the Web, package the DVD's and ship them.

This system means Blockbuster will not have to create huge shipping warehouses. It could also make shipping faster, since the orders will not have to go through a central depot that may be in a different region. But the approach requires considerably more technological work because Blockbuster's Web site will have to display each store's minute-to-minute inventory. And store employees will have to log in returned DVD's quickly so they can be rented again on short notice. If a local store does not have a title on hand, the DVD can be sent to the customer from a more distant store.

Blockbuster representatives said they had the ability to build such a system, having tested an online reservations program in 2001. That service allowed customers in San Diego, Denver and Austin, Tex., the chance to reserve their rentals online and pick them up in stores. The company shelved the service when the program failed to pay for itself, but a spokeswoman said the technology would serve as the foundation for the online rental program.

Relying on store employees to handle and ship online orders, though unusual, is not unheard of. Saks Inc., Home Depot and a few other retailers do so. In such cases, the companies use one store in a given region as a distribution center, and assign additional employees to the shipping and receiving work.

Analysts have questioned whether Blockbuster can stock enough DVD's in its stores for its online customers. Each store carries 7,000 to 10,000 copies, about half of which are DVD's. A Blockbuster spokeswoman said the company had 40,000 titles in its nationwide system, but different stores have different titles because movie tastes vary from region to region. Netflix and Walmart.com each offer more than 13,000 DVD titles.

"The most challenging part of the subscription model is trying to manage the inventory," said Kavir Dhar, an analyst with Jefferies & Company, an investment firm. "How many additional titles do you need to have for this, so you're not out of stock when traditional renters want something?"

Blockbuster representatives declined to speculate on this question, but they may have some data in this field. Last year, the company ran a pilot in-store subscription program like the online subscription programs of Netflix and Walmart.com. That program, which executives said had been successful, showed how long the typical subscriber kept a title before returning it, among other things. In addition, Blockbuster has bought an online DVD rental business, FilmCaddy.com, a company based in Mesa, Ariz., that allows users to rent four movies at a time for $20 a month. That business can also give Blockbuster some guidance on inventory needs.

John F. Antioco, Blockbuster's chief executive, said in a conference call last week that the company still regarded the "online-only subscription rental business as a limited market." Blockbuster executives say that the online program will give customers more options, but will not replace traditional stores.

Walmart.com, meanwhile, is so encouraged by results from the first six months of its pilot program that it has added two DVD distribution centers this year.

Netflix continues to outperform the expectations of many analysts. In its earnings announcement this month, first-quarter revenue reached $56 million, up 82 percent from the period last year, and 23 percent from the previous quarter. The company has more than one million subscribers.

Reed Hastings, chief executive of Netflix, said that even though its mailing costs had increased as customers asked for more DVD's ? an average of 5.75 a month, up from 5 a month a year ago ? Netflix was approaching profitability.

Mr. Hastings said he did not feel threatened by Blockbuster's entry into the market. "Whenever a competitor says that next year they'll have a better offering, to me that's a sign of weakness, because you're telling competitors what you're going to do, and you don't have the service to offer consumers," he said. "But my best guess is that we'll both grow steadily and consistently. It's not a zero-sum game."
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Old 04-28-03, 12:37 PM
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Blockbuster already owns the online rental service FilmCaddy.com, which was previously known as DVDRentalCentral.com.
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Old 04-28-03, 12:56 PM
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Thanks Tom
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