February 1, 2007, 12:00 AM

Blockbuster pulls back the curtains on its comeback strategy

Trying to open the curtains on a dramatic comeback after several years of losing market share in the DVD rental market to its online competition, Blockbuster Inc. last month launched a 30-second TV commercial that takes direct aim at its biggest rival, Netflix Inc.

Trying to open the curtains on a dramatic comeback after several years of losing market share in the DVD rental market to its online competition, Blockbuster Inc. last month launched a 30-second TV commercial that takes direct aim at its biggest rival, Netflix Inc.

The commercial is part of a broader growth plan that so far is performing like, well, a blockbuster, having brought in a nearly 50% increase in online customers, to 2.2 million from 1.5 million, from Nov. 1 to Dec. 31. And, as they say in the entertainment business, there’s more to come.

Blockbuster chairman and CEO John Antioco says the company plans to spend about $35 million in the first quarter on its Netflix-targeting TV ad campaign. And that’s after having spent $20 million last fall to launch its Total Access DVD rental program, which offers something Netflix can’t: the option for online customers to stop by their local Blockbuster store to get more movies at no extra charge.

Antioco admits that Netflix, with about 6 million online subscribers, enjoys a significant advantage in brand awareness among online consumers. And with additional online competition from Hollywood Video and others, Blockbuster’s total customer base has been declining for the past five years, he says, noting that last year alone the DVD rental industry underwent a shift of 3.5 million customers from stores to online.

But Antioco expects to continue riding Blockbuster’s recent momentum. “We intend to close the gap with Netflix significantly,” he says. “We’ll make a substantial claim that our online service is as good as theirs, but that we also offer the stores option.”

Blockbuster’s animated TV commercial, developed by Southfield, Mich.-based Doner Advertising, names Netflix and shows its logo, and tells viewers that Blockbuster is the only DVD rental company that lets online subscribers return DVDs to a store and benefit from a unique set of services through its new Total Access program.

Under the Total Access program, Blockbuster’s online subscribers can double the number of DVDs they have out at any one time at no extra charge. A subscriber who pays $17.99 per month to have up to three DVDs rented at any one time, for example, can either return the DVDs through the mail or bring them to any of more than 5,000 Blockbuster stores in the U.S. For every online-rented DVD returned to a store, the subscriber can receive one free rental from store stock in addition to the usual replacements from online inventory. So a subscriber who returns three online-rented DVDs to a store can receive six in return.

Total Access also is designed to expedite the time it takes to get DVD replacements through online inventory, a spokesman says. Once the online-rented DVDs are returned to a store, a clerk immediately enters the replacement order into the Blockbuster system-saving the subscriber the day or two that it would take to trigger a replacement when returning a DVD through the mail.

Blockbuster will pay for the cost of developing and marketing the Total Access program by continuing to trim its number of stores and reducing average square footage, Antioco says.

Netflix declines to comment directly on Blockbuster’s advertising strategy or its Total Access program. “We’re aware of the ad campaign and are continuing to focus on our business model,” a spokesman for Netflix says. “People join Netflix in part because they don’t want to go to a DVD store.”

But Netflix isn’t sitting still, either. It announced last month that it will launch in June a video on-demand program that will let its customers download from the Internet movies for rent-at no extra cost over its monthly subscription plans. The program will start out slowly, making available about 1,000 titles from Netflix’s 70,000-title catalog.

But Blockbuster is also getting ready for the video on-demand business, Antioco says, suggesting that Blockbuster is looking to partner with a digital content provider. “It’s clear that video downloads could be a $1 billion business five years out,” he says. “We need to be in the business, and I won’t be surprised to see us enter a partnership.”

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