Blockbuster Online: Now $14.99 a month.

Discussion in 'DVD Video' started by One-Shot Scot, Dec 29, 2004.

  1. Blockbuster has always been slow to realize what its customers really
    want: Low cost DVDs, low cost DVD rentals, a large, diversified
    selection and, most importantly, no late charges.

    Even Blockbuster management is quick to admit that its stores have
    little to offer outside of its traditional in depth offerings action
    junk and lowbrow comedies: "We've discovered that a high percentage of
    the titles our online customers want to watch are ones that we don't
    generally stock in our stores, and we wanted to position those titles
    around the country. It's really a different customer set than our
    in-store customers."

    In its latest Johnny-Come-Lately move, Blockbuster is attempting to pull
    the rug out from under Netflix -- and possibly Amazon -- by slashing its
    online DVD subscription rate by 17%.

    Is this a shrewd business decision or a last ditch act of desperation?

    *** *** ***

    DEC. 22 | Blockbuster tried to take some of the joy out of Christmas for
    rival Netflix on Wednesday. The No. 1 rentailer slashed the price of its
    online rental subscriptions to $14.99 a month.

    The cut makes Blockbuster's online offering $3 a month cheaper than
    Netflix's, which goes for $17.99, and sent shares of the online rental
    pioneer plunging more than 7%.

    Analysts who have followed the price war between video rental's old
    guard and new speculated that Netflix would have little choice to
    respond in kind, although a Netflix spokesperson denied any such plans.

    "We're determined to be the high-quality, low-cost provider in this
    space," Blockbuster online VP and general manager Shane Evangelist said.
    "It was always our plan to get more competitive on price once we made
    sure we had the operational side figured out."

    Blockbuster launched its online rental service in August and has said it
    aims to sign up 500,000 subs by the end of the year.

    Evangelist said yesterday that the company is "pleased" with its
    progress so far but declined to provide hard numbers.

    Subscribers get unlimited DVD rentals, with a maximum of three out at a
    time, plus coupons good for two free in-store rentals each month.

    Blockbuster's entry into the online rental business, meanwhile, touched
    off a fierce battle for supremacy with market leader Netflix, which has
    more than 2.5 million subs.

    This new price cut is the second in three months for Blockbuster, which
    has gone from an initial price of $19.99 to $17.49 and now $14.99.

    Netflix cut the price of its basic subscription package in September,
    from $21.99 to $17.99.

    At the time, Netflix CEO Reed Hastings said the price cut was a
    pre-emptive move against the expected entry of online giant Amazon.com
    into the DVD rental arena.

    Since then, Amazon has launched a service in the U.K. but has not yet
    indicated plans for the U.S.

    Analysts speculated Wednesday that Blockbuster's latest move also could
    be aimed in part at Amazon.

    "Maybe they're trying to scare Amazon," said Dennis McAlpine of McAlpine
    & Assoc. "I'd certainly be scared if I were Amazon. But meanwhile,
    they've lowered the profitability for everyone, including themselves."

    Netflix shrugged off any impact from Blockbuster's move.

    "None of the things they've announced recently has had any impact on our
    subscriber growth," a spokeswoman said. "We have no plans to lower our
    price in response to their latest move."

    The battle for online subscribers underscores the dramatic shifts in the
    video rental business over the past two years.

    The popularity of cheap DVDs has taken people out of Blockbuster and
    into Wal-Mart and Best Buy, putting pressure on the rental giant's
    bottom line.

    Netflix also introduced people to the joys of no late fees--long a sore
    point for Blockbuster customers--siphoning more people out of rental
    stores.

    "We see [Blockbuster's price cut] as another sign of the death of the
    bricks-and-mortar video rental business," the Netflix spokeswoman said.
    "Clearly, they see a lot of people moving online."

    Since its split off from Viacom earlier this year, Blockbuster has been
    racing to catch up with market trends.

    While battling Netflix over price, Blockbuster moved earlier this month
    to eliminate most late fees for its in-store renters. It's also pushing
    aggressively into videogames and movie and game trading in an effort to
    lower its dependence on basic movie rentals.

    In its boldest move, it also has made a $1 billion bid to acquire its
    main bricks-and-mortar rival Hollywood Entertainment.

    "To date, more than half of our online customers are new to Blockbuster
    or reactivated, meaning they have not shopped at our stores in the past
    six months," Blockbuster's Evangelist said. "Plus, through the two free
    monthly store rental coupons offered to online subscribers, we are
    giving those customers an incentive to come into our stores, where
    they're discovering new offerings, like trading and games."

    Yesterday's move also might signal a shift in Blockbuster's online
    strategy, however.

    In addition to the price cut, the company said it will more than double
    the number of distribution centers from which it mails out DVDs to 23.
    It also is increasing the number of copies of new releases it buys for
    its online customers and is bumping up the number of titles offered from
    25,000 to 30,000.

    As originally sketched out by chairman/CEO John Antioco, Blockbuster's
    online plans called for relying on the chain's 5,000 U.S. stores as
    shipping points rather than building dedicated distribution centers.

    It also planned to leverage its existing store inventories to service
    its online customers rather than maintaining a separate stock.

    The latest moves suggest the emphasis is shifting away from an
    integrated in-store/online approach in favor of building a standalone
    online operation to rival Netflix's.

    Earlier this month, the company also revealed that it is scaling back
    planned new store openings in 2005.

    "I think the likelihood of combining in-store and online is going by the
    wayside," McAlpine said.

    Evangelist denied the plans have changed, however.

    "We will still be shipping out of the stores, but in the meantime, we
    want to make sure we can deliver the highest quality service," he said.
    "We've discovered that a high percentage of the titles our online
    customers want to watch are ones that we don't generally stock in our
    stores, and we wanted to position those titles around the country. It's
    really a different customer set than our in-store customers."

    http://www.videobusiness.com/article.asp?articleID=9435&catType=NEWS
    One-Shot Scot, Dec 29, 2004
    #1
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