Blockbuster dives into subs

New service takes page from Netflix

NEW YORK — The movie rental business has found its new Holy Grail: monthly subscriptions.

Taking a leaf from the success of online rentailer Netflix, video granddaddy Blockbuster is set to roll out its own online subscription service by the fourth quarter and expects to capture 30% of the online rental market within a year of launch.

Netflix founder and CEO Reed Hastings said he isn’t too concerned, maintaining his 4-year-old movies-by-mail company is on a trajectory to reach 10 million-30 million subscribers over the next decade, regardless of Blockbuster’s incursion into the subscription space.

Part of that confidence may have to do with the breadth of Netflix’s offerings, which lean to titles not readily available at the more mainstream WalMart or Blockbuster stores. That niche focus also fosters better relationships with distributors.

Hastings said Netflix can add significant upside for small films that distribs simply can’t afford to heavily promote. Noting Netflix customers rented “Whale Rider” as often as they did “The Hulk” or “Charlie’s Angels II,” which came out in the same week last year, Hastings believes that as the service grows, it can transform the economics of marketing and distribution of indie films.

“The big problem for Hollywood is creating demand. That’s where studio marketing dollars go, and if we can even make a dent in that total by expanding in the market, it can help a lot,” Hastings told Daily Variety.

A boost for homevid?

Nor does Hastings think rental will necessarily undercut Hollywood’s booming DVD sales. Thanks to the subscription model, which encourages a far wider sampling of titles than most studios could possibly advertise cost effectively, Hastings believes rental can expand consumption overall. “Our average customer buys 29 DVDs a year (compared to 13 a year among the typical rental store visitor),” Hastings said.

But as Netflix grows its customer base beyond cineastes to more mainstream movie consumers, Blockbuster could become more of a direct rival.

Blockbuster hopes its online video-on-demand offering, set to launch next year, will help keep it ahead of competitors, but analysts say that market will likely remain small for several years as consumers learn how to utilize home networking technologies.

In the meantime, Netflix’s ability to push more niche catalog titles to its members is a marketing advantage but also a financial imperative, say analysts. That’s because new releases tend to be more expensive since studios typically demand a higher upfront fee or more generous revenue share splits, depending on the output arrangement.

Richard Ingrassia of Roth Capital Partners noted that the newer Netflix subscriber demands more new releases, thus driving up total cost of goods compared to its loyalists, who have proven particularly receptive to Netflix’s proprietary suggestion software.

New subs rent more new releases and therefore act more like the mainstream video renter than the videophiles that Netflix has relied upon to turn 95%-99% of its inventory every month, said Ingrassia. He notes that the Netflix search application has proven a useful inventory management tool, since it directs (or diverts) users away from its most expensive and scarce inventory of current blockbuster hits.

Hastings says only 30% of Netflix’s rental turns are new releases, compared to 70%-80% at Blockbuster.

VOD service to bow

The brick-and-mortar rental king, meanwhile, will be counting on its brand name, database and distribution network as it pushes its own subscription service.

Blockbuster is in the process of rolling out its own store-based movie subscription programs in 1,100 of its U.S. stores and intends to offer the service nationally by mid-2004.

If Blockbuster meets its goal of converting 8% of its members into paying subscribers by year’s end, it could be on track to catch up with Netflix by its second year. Company expects to enroll at least 10% of its customers by the end of 2005, or 2 million households. Company also anticipates its online subscription service should capture another 1.2 million households by the end of 2005.

Netflix is targeting 3 million subs by the first quarter of next year and at least 5 million by the end of 2005.

Firm targets

Blockbuster CEO John Antioco said the chain should capture at least 30% of the online rental market by the end of 2005. He estimated that 40% of Netflix’s 2 million subscribers are current or former Blockbuster customers. “I can’t afford not to get 30%-40%,” he said.

Initially priced at $24.99 a month, Blockbuster’s in-store subscription will be about $2 more than Netflix’s.

According to researchers at Wells Fargo, Blockbuster reports that 12%-15% of members in the subscription test-market program had no rental activity in the year before becoming a subscriber, proving that subscription service should boost total revenues from its existing user base.

(Paul Sweeting of Daily Variety sister publication Video Business and Ben Fritz contributed to this report.)

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