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UPDATE: Blockbuster to Bust Late Fees

14 Dec, 2004 By: Holly J. Wagner

Blockbuster Video will swap late fees for weeklong grace periods followed by a sale with a 30-day return window at company-operated and participating franchised stores in the United States as of Jan. 1.

“Doing away with late fees is the biggest and most important customer benefit we've ever offered in our company's history,” said Blockbuster chairman and CEO John Antioco. He acknowledged that late fees — which until today, spokespersons and executives called “extended viewing” fees — have given the Blockbuster brand and the industry image a black eye.

“As the leader in the industry, we get a disproportionate amount of the credit or discredit, if you want to call it that, for the No. 1 dissatisfier in the industry — late fees. When Jay Leno or David Letterman talk about late fees, it's Blockbuster they talk about, not some of our competitors,” Antioco said. “This removal of late fees and the effort we are going to put behind it, we think will have more of a positive impact for us than some of our competitors would get from making the same move, if they were inclined to make the same move.”

Under the “no late fees” program, Blockbuster still has due dates — a week for games, two days for hot new release movies or a week for older titles — at the same rates stores have been charging (which may vary). But customers will get a one-week grace period free of charge. The catch: after a week, the chain will charge the cost of the current selling price at the store where the title was rented, less the rental fee, to the member's account. If the customer decides not to keep the movie or game, they return it within 30 days for a credit to their account, less a $1.25-per-title restocking fee.

Late fees would have contributed about $250 million to $300 million to operating income for 2005, but executives expect the “no late fees” program to increase store traffic enough to offset much of the reduction in revenue, based on results of the program in test markets over the past year. The chain, which advertised heavily this year as it rolled out trading and subscription programs, will spend less on promotion and marketing activity going forward.

Faced with increasing competition from online rentailers, sellthrough and new technology delivery systems, Blockbuster has fought back with in-store movie and game subscriptions as well as online DVD rentals. In recent presentations to analysts, Antioco had said the chain was tinkering with fees and terms.

“In [test] markets, customers thought that this was a very, very fair policy,” Antioco said. “Although many customers returned their movies and games by the due date, those who took advantage of the extra time generally kept their product only an extra day and a half. They didn't take more movies or games than they could watch in the rental period, and they seemed to understand that Blockbuster was extending them a courtesy.”

Not everyone is as excited about the announcement as Antioco.

“Blockbuster stores have been forced into creative — or desperate, however you look at it — measures such as charging consumers the full price of the DVD if they are a week late,” chided Netflix CEO Reed Hastings. “We have been without late fees and giving consumers the ‘no late fee' experience for five years, and we don't automatically bill consumers for the movie as Blockbuster is doing.”

Netflix, however, has no immediate plans to offer consumers the option to buy new or previewed movies, Hastings said.

“The challenge for Blockbuster is that Blockbuster Online and Netflix are doing great, doubling [subscriptions] from a year ago,” he said. “The online rental model is coming to dominate video rental.”

Netflix expects to have 2.5 million subscribers by the end of the year, a spokesperson said. Blockbuster is approaching 8 percent of customers on in-store subscriptions, and expects that to reach about 1.8 million customers, or 10 percent, by the end of 2005, a spokesperson said. She would not disclose online subscription figures.

During 2005, the company expects to continue investing in new initiatives. That and the soft rental market are expected to hold operating income flat with this year, minus about $50 million associated with launching the “no late fees” program.

Blockbuster will also spend about $180 million in capital expenditures for 2005, a reduction of about $100 million from what the chain is spending this year. The chain will open and remodel fewer stores, but will continue to invest in games, trading and online subscriptions.

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