Blockbuster's Loss of Late Fees Cuts Both Ways

Marjeanne Estes is the kind of customer Blockbuster had in mind a year ago when the company did away with most late fees. Now that she doesn't have to worry about the fees, Estes says she's renting more movies, and she's more likely to take a chance on a possibly forgettable film.

"Because you're not so pressed to get it back," Estes says. "So you have a little more time to watch it if your week gets busy. You still have more time to enjoy it at your leisure."

Blockbuster's year-long experiment doing away with most late fees has substantially increased the chain's movie rental business. In the first nine months of last year, rental fees increased by $284 million.

At the same time, though, the company gave up some $400 million that it had been collecting in late fees. To some investors, that's a clear sign the plan is not working. But CEO John Antioco says he'd do it again.

"Any time you can get rid of the No. 1 customer dissatisfaction factor and in the process generate higher customer traffic," Antioco says, "for me, as a retailer, that spells a good answer."

Even though cutting late fees has cost Blockbuster in the short run, Antioco says the company would have been worse off had it kept charging them. Industry analyst Tom Adams of Adams Media Research agrees. Given the sharp decline in the overall rental business, Blockbuster's doing better than its competitors, Adams says.

"If they've increased transactions because they were basically giving customers a better deal," Adams says, "that will be outperforming the industry by a considerable margin."

Still, the No Late Fees program does have some drawbacks. Since customers can now keep movies out longer without paying a fee, shoppers sometimes have trouble finding the titles they want.

"I've gone in several times looking for movies that are out of stock," says customer Matt Lerche.

Antioco concedes that it may take customers a little longer to find a hot new release they're looking for. The chain has been trying to address that by ordering additional copies.

But that can be expensive for franchisees, some of whom don't buy movies on the same favorable terms that Blockbuster's corporate stores do. About 160 franchisees dropped out of the No Late Fee program after trying it for most of last year.

"Our franchisees generally make rational decisions, sometimes different than ours, but they're businesspeople," Antioco says, adding that what makes sense for the parent company might not make sense for a small franchisee.

Although Antioco believes the No Late Fees program is working for the company, he told analysts last week he's ready to make changes if results six months from now show he's wrong.

Blockbuster also plans to start spending more this year on its online subscription business, the better to compete with Netflix.

"There are so many other ways to get movies nowadays, like online and Netflix. No late fees at all," customer Lerche says.

But the biggest threat to Blockbuster is neither Netflix nor video on demand. Instead, it's ordinary DVDs, on sale cheap at Walmart, Target and soon, even Starbucks. Home movie sales have outpaced home movie rentals for the last five years, taking a big bite out of Blockbuster's popcorn bucket. Industry analyst Adams says that last year, movie sales leveled off, which could signal a revival in rentals. That would be encouraging for Blockbuster — provided it's not too late.

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