Blockbuster Targets Netflix with 'Total Access'

Blockbuster mounts a challenge to the DVD-rental company Netflix. The key: Customers can get DVDs from Blockbuster through the mail, but with Blockbuster, have the option of using brick-and-mortar stores, too. The company is battling back from financial loses and the resignation of its CEO.

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Just as Blockbuster was trying to get into gear, it announced its CEO will be leaving. John Antioco's departure at the end of this year comes at a critical time for the company. He was forced out because of a salary dispute with the company's board, led by billionaire investor Carl Icahn. That dispute temporarily overshadowed another battle - Blockbuster's attempts to compete with the online DVD rental company Netflix. NPR's Greg Allen has more.

GREG ALLEN: Twenty-two years ago when Blockbuster was founded, videos were still being rented on Betamax. Since then, Blockbuster, which is based in Dallas, has weathered many changes in the video rental industry, new formats and new competitors.

Through the 1990s, despite predictions that with cable and the Internet the days of video rental stores were numbered, Blockbuster continued to grow, absorbing competitors and generally turning a tidy profit. In the early part of this decade, though, the world's largest video rental company ran into trouble. And one problem was a new rival, one that didn't have any stores at all.

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Unidentified Man #1 (Announcer): Nearly one billion movies delivered so far. Zero late fees. Netflix.

ALLEN: By allowing customers to select their movies online and receive them through the mail, Netflix quickly carved out a profitable niche in the video rental market. Although Blockbuster responded with its own online service, it didn't really take off until last fall, when the company upgraded it to something called Total Access.

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Unidentified Man #2 (Announcer): What if you're thinking, let's get a new movie right away. With Netflix, you mail them back and wait. But only Blockbuster gives you the option of bringing them back to the store and exchanging them, no extra charge.

ALLEN: It was an almost immediate success. Michael Kulchnee(ph), who runs a Web site about online video rentals called Hacking Netflix, says Blockbuster has done well, picking up some Netflix customers who chafe at the time they spend waiting for their videos to arrive in the mail.

By taking the DVDs back to a Blockbuster store, Kulchnee says, video junkies quickly realized they were getting more rentals for their money.

Mr. MICHAEL KULCHNEE (Hacking Netflix Web Site): Instead of, you know, waiting for the movies to go back, you immediately get some more movies. So if you're on the three-out plan, three movies a week, you can actually double it. You can get six movies a week by going into the store.

ALLEN: Blockbuster says it already has more than two million subscribers to its Total Access service, and expects that number to keep growing, but it has a long way to go. Netflix has a subscriber base of more than six million. At the same time it was going mano-a-mano with Netflix, Blockbuster also had another fight on its hands: one involving CEO Antioco and influential board member Karl Icahn.

It involved Blockbuster's profitability and whether Antioco was entitled to a multimillion-dollar bonus. After a string of years in which it lost money, in 2006 Blockbuster was finally able to turn a profit, in part by cutting costs and closing on profitable stores.

Michael Pachter, an analyst with Wedbush Morgan Securities, says online is still just a small part of Blockbuster's business. But the success of Total Access shows that the company is on the right track.

Mr. MICHAEL PACHTER (Analyst, Wedbush Morgan Securities): They didn't make money on Total Access per se. But they clearly stopped losing customers from their brick and mortar business to Netflix. So I think that was the real victory. That Netflix is no longer really cutting into their core business.

ALLEN: The value of Total Access, says Blockbuster, is that it's increasing traffic at the company's stores, where customers don't just rent movies, they also buy them, along with popcorn, soda and other things on which Blockbuster makes a lot of money.

One delicate issue, though, may be pricing. Blockbuster currently is charging the same fees as Netflix. But by allowing online customers to also use its stores, the company says it's giving them better value. Blockbuster now is investigating how much more customers might be willing to pay for that service.

Greg Allen, NPR News.

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