Why Blockbuster clings to its DVDs and rentals

Forget about Blockbuster's new "no late fees" policy, which has sparked questions from consumer groups and a lawsuit from the state of New Jersey.

The behemoth is in the middle of a bigger battle to win and hold customers: a $1 billion-plus bid to acquire Hollywood Entertainment, the No. 2 player in the video-rental business. That strategy - now imperiled by antitrust concerns - would help Blockbuster enlarge its already considerable brick-and-mortar presence.

Blockbuster is also taking a hipper approach, mounting a hard charge at Netflix with the launch of its own through-the-mail subscription DVD exchange, which was announced last summer and touted in high-priced Super Bowl ads.

The US video-rental business may be worth a scuffle. It reeled in $8.2 billion in 2003, according to the Video Software Dealers Association (VSDA) in Encino, Calif.

So what makes the attempted grab so bold? Trends in technology and consumer behavior that reject middlemen and signal a rapid evolution away from traditional delivery formats. More buyers want anything, anytime, through digital downloads.

In sticking with discs and tapes, Blockbuster is banking on a revolution delayed.

Already, as wildly popular as rentals remain, the real action is in sales: $14 billion in VHS and DVD combined in 2003, up from about $10 billion just two years earlier, according to the VSDA. Rental revenues slid slightly during that period.

And some experts point to budding threats to the DVD itself, formidable though it is (discs accounted for 85 percent of those 2003 sales). For example, signs point to long-awaited improvements in video on demand (VOD) programming, piped into homes now that high-speed broadband runs into nearly one-third of US households.

The world of audio - while inherently different from video for many reasons - has shown how fast digital media can become a bottle-it-yourself affair. Though compact-disc sales have held on amid a frenzy of downloading, "the new format is no format," one music-industry insider told The Washington Post earlier this month.

DVDs won't vanish tomorrow. Demand for "packaged" - professionally produced - DVDs has soared, especially abroad, says Gerry Kaufhold, an analyst for In-Stat, a market research firm in Scottsdale, Ariz.

He also points out that movie downloading remains too cumbersome for average consumers, most of whom lack the hard-drive space to store full-length movies, particularly in the high-definition formats soon to hit stores. [Editor's note: The original story misstated when it is expected high-definition DVDs will be available for purchase in stores.]

But VOD has already made inroads, Mr. Kaufhold says, and cable, phone, and satellite companies will widen those significantly within the next two years. "They're all going to be trying to push [video] content into your house that gets stored on a disc drive and lets you play it back at your convenience," he adds.

In addition, antipiracy technology being put in place - it uses digital "watermarks" to register video-replicator machines and even their individual operators - will give the movie industry the confidence to allow on-the-spot "pressings" of custom DVDs while you shop.

"In the next five years you'll go to a convenience store, hit the kiosk, and say, 'I want "Pirates of the Caribbean," the director's cut, in French,' " Kaufhold says.

And for residences, he adds, service providers will offer high-capacity set-top boxes into which they will transmit a much broader selection of movies than current pay-per-view services can offer.

Page: 1 | 2