Netflix Challenges Blockbuster over Online Rentals

Online DVD rental services that deliver movies by mail are growing quickly, with more than 5 million subscribers nationwide. Now the company that pioneered the business, Netflix, is accusing Blockbuster of trying to copy its patented Internet business model.

Netflix launched its service seven years ago in response to the founder’s frustration with late fees at video stores. Netflix subscribers can keep DVDs as long as they want. As soon as one is returned, a new movie is sent out from the customer’s online wish list. Netflix says that Blockbuster duplicated key features of that service when it launched its own online offering 19 months ago.

“If you think back, five, six and seven years ago, there was no other way to rent movies other than going to the video store before Netflix,” spokesman Steve Swasey says. “So Netflix patented its business methods. And we believe that Blockbuster has deliberately and willfully copied them from top to bottom.”

Blockbuster says that a lawsuit filed by Netflix last week has no merit. Blockbuster has signed up more than a million subscribers for its online service. And although Netflix has three-and-a-half times that many members, Blockbuster says its rival is running scared.

“Blockbuster online has emerged as a real competitive force in the online rental industry,” says spokeswoman Karen Raskopf. “And it would appear that Netflix would prefer to take us on in the courts rather than facing us in the marketplace where the consumer is the judge.”

If the case goes to court, Blockbuster could argue that its service is somehow different from Netflix, or that Netflix’s patents are invalid because someone else was doing the same thing first, or because the idea was so obvious, it wasn’t really an invention at all.

Patent attorney Ben Borson says the challenge for the patent system is to reward pioneers and still allow followers to make their own improvements. With inventions, as with movies, sometimes the remake is better than the original.

“You want to always strike a balance. I mean, you like to have new industries come up,” Borson says. “However, if there’s too much power concentrated in the hands of one entity, then they will tend to stifle further development.”

Patents are enshrined in the Constitution as a way, “to promote the progress of science and useful arts.” But some complain that the system isn’t doing that, especially after some recent high-profile patent disputes about things like Amazon’s “one-click shopping” or the idea behind Blackberries.

Harvard Business School professor Josh Lerner says that, over the last two decades, the legal system has tilted too far in favor of patent holders, while the office that fields patent applications is now too swamped to do a thorough review.

“We’ve simultaneously made patents much more powerful while making them easier to get,” Lerner says.

In the book he co-wrote, Innovation and its Discontents, Lerner proposes legal changes that would make it harder for patent holders to bring frivolous challenges. He’d also like to make it harder to get a patent. The U.S. Patent and Trademark Office issued more than twice as many patents in fiscal year 2005 as it did two decades earlier.

“The people who are really being hurt by this are the true innovators,” Lerner says. “Whether they’re the corporations with the really creative, large research departments or the individual inventors who have that flash of genius while working in their garage. And it becomes harder for true innovators to get the kind of rewards they deserve for their invention.”

The U.S. Supreme Court has begun to show a greater interest in patent cases. And last week, a Congressional subcommittee held a hearing on whether questionable patents are hurting the economy. Meanwhile, home-movie fans will have a front-row seat as the drama between Netflix and Blockbuster plays out.

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