Blockbuster Adds Online Rental Service

Facing stiff competition from Internet-based DVD rental services such as Netflix Inc., Blockbuster Inc. on Wednesday announced the creation of a similar online service.

Blockbuster’s subscription plan will let customers keep up to three movies at a time for $19.99 per month -- undercutting Los Gatos, Calif.-based Netflix by $2. Blockbuster also will offer five DVDs at a time for $29.99 a month or eight at a time for $39.99.

Like Netflix, Blockbuster’s new service will charge no late fees -- customers can keep movies as long as they like -- and will pay the cost of shipping if customers return the DVDs in specially designed envelopes.

Blockbuster will also throw in coupons for free rentals from its stores nationwide.

Blockbuster dominates the movie-rental business but has seen its fortunes hurt by subscription services such as Netflix and by the sale of discounted DVDs at retailers including Wal-Mart Stores Inc. and Costco Wholesale Corp.

In the first six months of this year, sales at Blockbuster outlets that have been open at least a year fell 5.1%, and company officials warned last month that the rental business would keep sliding into next year. Blockbuster issued a warning last month that its earnings for all of 2004 would fall about 30% from last year -- a forecast that sent the company’s stock tumbling.

Consumers last year spent $289 million on online DVD subscriptions, just a sliver of the $8.2-billion U.S. movie rental industry, according to Kagan Research.

However, research firms expect online rentals to grow quickly. Kagan projects $605 million in online rentals this year and $1.9 billion in 2008.

Blockbuster’s online service, which is being offered through a partnership with Microsoft Corp.’s MSN website, is seen as a way to complement video store patronage.

“Netflix has pretty well cornered the market, but Blockbuster is getting in on it, and Blockbuster definitely has the brand recognition,� said Wade Holden, a Kagan analyst.

Holden said Blockbuster’s lower price would help it compete against Netflix. Still, he said, Netflix has had several years to work out its distribution system while Blockbuster may struggle at first.

Blockbuster said it would offer a catalog of 25,000 titles, far more than any of its stores carry. Blockbuster stores are stocked from a warehouse in McKinney, Texas, but the company has opened 10 regional centers to fill online orders. Customers can expect to get their movies within two days.

By next year, customers will be able to return the movies they received in the mail at their local Blockbuster store.

Some analysts think the online subscription model is just a placeholder until the day when movies are widely rented by downloading them from the Internet.

Blockbuster has been studying downloadable movie rentals as a form of video on demand but has no immediate plans to jump into the business.

“We think now is the opportune time for Blockbuster to enter the online rental business,� said Shane Evangelist, Blockbuster senior vice president and general manager of Blockbuster Online. “We plan to quickly establish ourselves in this arena.�

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Associated Press was used in compiling this report.