Blockbuster looks for way around late fees

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Posted 8:39AM on Friday, April 26, 2002

DALLAS - Blockbuster Inc. officials say they believe that more people would rent movies if they didn't have to return the tapes and DVDs a couple days later. The chain plans to test that theory this summer by letting some customers pay a subscription fee and keep a handful of movies as long as they want without paying late fees. The Dallas-based entertainment giant has profited by devoting more shelf space in its stores to DVDs. Now it wants to head off competition from pay-per-view on cable and mail-order rentals from companies such as Netflix Inc. that offer more convenience. Under an approach to be tested in one city this summer, customers would pay a monthly fee ranging from $19.99 to $29.99 to cover unlimited rentals for that month. For the smaller fee, they could get two movies at a time, for the larger fee they could rent three or four titles together. Blockbuster also will test a variant in which customers would pay a yearly fee of perhaps $49.99 to $59.99 and get to keep up to three movies as long as they want. They would still pay a rental fee, typically $3.99, when they check out each movie. Company officials announced the trials during a conference call with analysts Wednesday. They declined to identify the two test cities - a spokeswoman said they didn't want to tip off competing cable systems. Chairman and chief executive John Antioco said the subscription service could be Blockbuster's form of video-on-demand, a tantalizing prospect that hasn't yet come into widespread use. Antioco said customers love browsing video stores, "but one of the things they've not particularly crazy about is extended-viewing fees," Blockbuster's term for late fees. "What we've done is developed a model that ... we believe provides the consumer an opportunity to take home more movies than they normally do, keep them longer and still spend more money with us than they would otherwise," he said. Antioco called the hassle of returning tapes and DVDs on time "one of the largest potential obstacles" to rentals. Customers have filed several lawsuits against Dallas-based Blockbuster over its late-fee policy. In January, a Texas state judge in Beaumont approved a settlement in a class-action lawsuit under which Blockbuster will issue coupons with a face value of about $450 million to millions of customers. The lack of late fees has helped Netflix, which claims more than 500,000 subscribers. For $19.95 per month, they can rent up to three DVDs at a time and return them in postage-paid envelopes. The Los Gatos, Calif.-based company's service is popular in the Bay Area but not on the East Coast because DVDs take longer to arrive by mail. "The end game is to do what the customer wants, and the customer doesn't like late fees," said Sarah Gragg, an analyst for Robertson Stephens who follows Blockbuster but doesn't own its stock. Gragg said the average renter gets fewer than two movies per month, and Blockbuster could profit handily by converting customers to a $19.99 monthly fee, even though it might require more inventory. "Blockbuster is always looking for additional growth vehicles, and they're extremely successful with most of them," Gragg said. Peter Mirsky, an analyst with SG Cowen Securities, said the subscription service wouldn't generate huge profits but would help Blockbuster's customer relations as long as subscribers don't hog every copy of hot new movies. He didn't think Antioco would let that happen.