Wednesday, December 29, 2004

Competition Motivates Blockbuster

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A couple of weeks ago the Wall Street Journal carried an article entitled Blockbuster Backs Off Late Fees (December 15, 2004, page D1) in which reporter Joe Flint described how, beginning January 1st, Blockbuster will be dropping its late fees. About the same time I received a postcard from Blockbuster informing me that I had returned one of the videos I had rented in November late and owed them "Extended Viewing Fees" totaling $4.21.

According to the article, Blockbuster "euphemistically" refers to the late fee as an "extended viewing fee" and sets it equal to the usual rental fee. Blockbuster's marketing people may feel that an "extended rental fee" is more palatable that a "late fee", but, from the customer's point of view, it is probably worse. On my notice, in microscopic print above the total due was a notice that the "Total includes Tax". In Arizona at least, rental fees are taxable but late fees are not. So, thanks to Blockbuster's euphemistic wording, the State of Arizona and City of Marana, with their insatiable desire for money, were able to add their twenty-one cents worth of taxes to Blockbuster's late fee.

But, as the article points out, competition is coming to the rescue of delinquent viewers. New rental options that do not charge late fees are appearing on the market. Blockbuster itself offers a monthly movie pass that, in exchange for a flat fee of $24.95 per month you can rent unlimited movies (but no more than two at one time) for the month and keep them as long as you keep paying the $24.95 monthly membership fee. News of this offer was included with my late fee notice.

But there is more. Upstart Netflix offers customers the convenience of unlimited movies each month with no late fees. Customers are limited to three DVDs at a time and must return them before ordering more. Customers order the DVDs on-line and receive them by mail. Each order comes with a postage paid mailer in which to return the DVDs. This service has proved so popular that both Wal-Mart and Blockbuster have copied it and offer the same service.

Netflix was charging $20 per month until a few months ago but competition from Wal-Mart and Blockbuster have forced monthly fees down to $17.99 for Netflix, $17.49 for Blockbuster and $15.54 for Wal-Mart.

This is the free market in action. When videos first came out they could only be purchased, not rented, and they carried a high price. Rental companies then emerged and, in time, Blockbuster, taking advantage of economies of scale, drove costs, and prices, down by building a large national chain. With the advent of durable, light weight DVDs, the founders of Netflix saw an opportunity to cut costs further and expand customer service and convenience by eliminating expensive brick and mortar retail outlets. They jumped into an already crowded rental market and within about a year became a major player. The economic profits in the niche exploited by Netflix was sufficient to attract others and now competition within the niche is driving prices down further. The competition is now so great that not only has Blockbuster been forced to enter the "DVDs by mail" niche but is also cutting prices (in the form of reduced late fees) and offering unlimited rentals for a flat monthly fee through its retail outlets as well. Critics will quibble about technicalities. According to the article, Blockbuster is replacing its "extended viewing fee" with a plan that provides a one-week grace period after which the customer's credit card is automatically charged for the purchase of the video. If the customer brings the movie or game back within the next month they will get their money back minus a $1.25 restocking fee. But, while Blockbuster has not entirely limited the penalty for late returns, the trend is toward lower prices and more customer service choices. These technicalities are merely bumps in the road.

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