Blockbuster Puts On Its Game Face

By Alan Wolf On Jan 6 2005 - 8:00am




With its core video rental business under assault by DVD subscription services, and widespread adoption of direct movie downloads looming ahead, Blockbuster has gotten busy retooling its business model.

In the last few months, the former Viacom unit has changed management, bolstered its gaming offerings, launched its own subscription service, and made a $700 million bid for No. 2 video rental chain Hollywood Entertainment.

In its most recent move, Blockbuster dropped late fees on all video tapes, DVDs and video games, effective this week. Rentals still have due dates — two days on new movies, one week for everything else — but customers now have a one-week grace period to return them. After that, their credit cards are automatically charged the full purchase price of the selections, less rental fees, and customers will have 30 days to return them for a credit, less a $1.25 restocking fee.

“For the past year, the company has been testing a variety of rental options in markets across the United States,” it said in a statement. “In 'no late fees' test markets, the increased rental transactions and retail sales offset the lower level of revenues resulting from eliminating late fees.”

Blockbuster said that late fees would have contributed between $250 million and $300 million in operating income this year, or about 10 percent of annual profits, although that contribution will likely be offset by higher revenues as a result of increased store traffic, plus cuts in promotional and marketing expenditures and tighter expenses. Operating income is expected to be flat this year, excluding the initial $50 million cost of eliminating late fees.

Blockbuster also launched an online delivery service last summer to compete with similar models offered by Netflix, Wal-Mart and, many believe, a forthcoming entry from Amazon.com. The chain has since lowered its monthly $19.99 fee by $5.00 in a price war with Netflix and has more than doubled its delivery capacity to 23 distribution centers.

In other recent moves, president/chief operating officer Nigel Travis left the company, effective this month, after tending his resignation in October, and late last year introduced an in-store gaming shop concept called Game Rush in about 400 Blockbuster locations in 20 cities. The 900-square-foot shops carry 600 titles for rent or sale, triple the number in traditional Blockbuster stores, and also offer hardware, accessories, literature and collectibles for purchase. The shops are staffed by dedicated cashiers and gaming experts, and feature interactive demo stations.

“Game Rush was developed in direct response to consumer demand,” said Thibault de Chatellus, senior VP/category manager for games. “The design of the concept, integrated within a Blockbuster store, enables us to take advantage of our existing store traffic, while leveraging our existing operating expenses and capital investment.”

The launch of Game Rush is Blockbuster's latest effort to further grow its gaming business, which represents about 11 percent of all rentals and 25 percent of all sales. Last spring, the company purchased Rhino Video Games, a Southeast regional chain based in Gainesville, Fla., that specializes in buying, selling and trading video games, and last October rolled out its trading model to all Blockbuster stores for games and DVDs.

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