August 30, 2004, 12:00 AM

Blockbuster online brings the web DVD customer into the store

Watch out, Netflix, Blockbuster is going after the online DVD rental market with a new multi-channel strategy. Along with DVDs received in the mail, subscribers get coupons to use in any of Blockbuster’s 6,000 stores.

Blockbuster Inc.’s lack of a web strategy in the face of success by Netflix Inc., which established the market for online DVD movie rentals, and the launch of an online movie rental service by, the online arm of retail powerhouse Wal-Mart Stores Inc., had many wondering if Blockbuster was giving up the portion of the market that preferred online rentals.

Blockbuster’s July launch of an online subscription service for DVDs is Blockbuster’s answer: Not only is it going after the online market, but it is leveraging its 6,000-store U.S. movie-rental chain to gain an advantage over its rivals. Apart from its distribution centers, Netflix has no physical locations. And Wal-Mart customers can rent movies only online.

The July launch is the next phase of a three-step plan to grow its business by going after more customers and making the rental process even easier for those it already has. “We’ve got customers in 50 states already; we are very pleased with how receptive consumers have been to the offer,” says Shane Evangelist, senior vice president and general manager of Blockbuster Online.

Blockbuster’s existing Movie Pass was the first step in its market expansion. For a monthly fee of $24.99, subscribers get unlimited movie rentals, with two movies allowed out at a time. “It’s similar to the online subscription service, but in a store,” says Evangelist.

The new online service is phase two. For a monthly $19.99, subscribers can have up to three DVDs out at a time. Subscribers order their movie preferences in accounts, called queues, which they establish on Blockbuster checks inventory daily against subscribers’ queues and ships what’s next in the queue depending on availability and on how many titles the subscriber already has out. Fulfillment is from 10 regional distribution centers, with about 50% of the subscribers within one day’s shipment of a regional center.

The unique twist that Blockbuster brings is that the online service just launched includes two coupons for in-store rentals every month, allowing Blockbuster to integrate its physical stores into the online service. Evangelist says Blockbuster’s research shows that about 40% of online rental subscribers continue to rent some movies in Blockbuster stores. While rental subscription arranges the distribution of films selected in advance, “Consumers also continue to want to be spontaneous in what they rent, so the coupons are good for picking up something in the store immediately,” he says.

What’s next? “We bring the in-store pass and the online subscription service together,” says Evangelist. In phase three, within a few months, he says, Blockbuster will start shipping rentals to subscribers directly from stores, and will start offering a combination pass that lets subscribers rent either in-store or online. In the future, subscribers with movie queues on also will be able to access and manage them at AOL and MSN, says Evangelist. Within the next month, Blockbuster will be establishing a presence for the new online subscription service on those portals in the form of banner ads and links.

With 65% of the population within a 10-minute drive of a Blockbuster store, the new online rental service positions Blockbuster to go after the other 35% as well. “We see this as a big opportunity and we are going to aggressively try to capture as subscribers consumers who are interested in the service,” says a Blockbuster spokesman. How big an opportunity? Media industry watcher Kagan Research has projected that by 2008, the online movie rental subscriber base will top 6 million people. “We think there is plenty of room to grow in that business,” says Evangelist.

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