- The Washington Times - Tuesday, November 9, 2004

The online DVD war is escalating as home-delivery popularity grows and the industry expands.The three current rivals: Netflix, Blockbuster and Wal-Mart are fighting for a significant part of the growing online DVD rental business — which accounts for a small fraction of the $8.2 billion U.S. movie rental industry.

The threat of a big electronic-commerce company — Amazon.com — joining the competition has the businesses adjusting prices and fine-tuning their models to compete effectively.

The businesses look identical right down to the Web site’s layout and the envelopes the DVDs arrive in.

For a monthly fee ranging from $17.36 and $17.99 — depending on the company — consumers can choose from thousands of movie titles. The first three available titles get sent to their homes. When one DVD is returned the next DVD on the movie-renter’s list is sent.

There is no limit to the number of DVDs that can be rented during the month, no due dates, no late fees and no shipping fees.

And that’s the appeal, which is evident by the growing number of subscribers, said Dennis McAlpine, an analyst and managing director for McAlpine Associates in New York.

“The growth of Netflix says the concept itself has gained acceptance,” Mr. McAlpine said.

Netflix, the industry leader and pioneer that started in 1999, has 2.3 million subscribers and expects $500 million in revenue this year, said founder and Chief Executive Officer Reed Hastings.

Mr. Hastings expects Netflix, which offers more than 25,000 movie titles, to have more than 4 million subscribers by the end of next year and 5 million in 2005.

“We are constantly raising the bar,” Mr. Hastings said.

Blockbuster, which has more than 25,000 movie listings, started its mail-order DVD service in August. The company won’t say how many subscribers it has, but CEO John Antioco recently said he expects 500,000 subscribers by the end of the year.

Wal-Mart, with 16,000 movie titles, will not disclose its number of subscribers.

The decision for the world’s largest retailer to enter the DVD rental business in June 2003 was simple: The company had strong sales of DVD players, spokeswoman Amy Colella said.

“It was clear to us that the DVD rental business was a natural fit for our customers,” she said.

Mr. McAlpine doesn’t think Wal-Mart is much competition for the industry’s two big players. But the industry panicked when rumors arose that Amazon.com would start a DVD rental business.

The largest Internet retailer isn’t saying whether it plans to, but spokeswoman Patty Smith said Amazon is well-positioned to do so and customers have asked for it.

The threat of Amazon’s participation prompted a quick drop in prices.

Last month, Blockbuster lowered its price by $2.50 to $17.49. Netflix lowered its price from $21.99 to $17.99 on Nov. 1.

The Netflix price drop is “in response to us possibly having an impact on their growth,” said Shane Evangelist, senior vice president and general manager of Blockbuster Online.

Wal-Mart dropped the price of its three-DVDs-at-a-time package to $17.36 on Nov. 2. Wal-Mart also has an unlimited two-disc package for $15.54 per month and an unlimited four-DVD package for $21.94 per month.

Consumers can test the services for free before shelling out monthly payments. The competitors agree free trials are a necessity.

“People are not used to renting online,” Mr. Evangelist said. “It’s so foreign to people.”

One of the biggest draws for customers is movie availability and how quickly they get their DVDs delivered. The companies have shipping centers, which stock the DVDs, strategically placed across the country. When the DVDs are ordered, consumers are told when movies are available and when to expect them.

A recent Blockbuster online order of the new release “Mean Girls,” revealed a potential “long wait,” which meant the DVD may not arrive for two to four weeks because of a “high number of requests compared to the number of copies available.”

The next day, the teen movie was on the “short list,” which estimated the DVD would be shipped within two weeks. The movie was received eight business days after the order.

“Mean Girls” was received just two business days after the Netflix order and three business days after the Wal-Mart order.

Netflix, which has 29 shipping centers, reaches more than 85 percent of its subscribers with generally one-day delivery, the company says. On average, the company ships more than 3 million DVDs per week.

Blockbuster has 10 distribution centers and plans to open 10 more by the end of the first quarter of 2005, including one in the District.

But more important, Blockbuster plans to ship directly from its stores, which will give a much quicker turnaround time, Mr. Evangelist said.

The stores are also playing an important marketing role for both Wal-Mart and Blockbuster.

Wal-Mart advertises its online service in the DVD players sold at the store. Blockbuster advertises its online service at its stores.

“The power of the Internet and the leverage of the store base makes a powerful offer for customers,” Mr. Evangelist said.

More than 50 percent of Blockbuster’s online customers haven’t shopped in one of its stores in the past 12 months. To entice them, Blockbuster’s online subscribers get two free in-store coupons per month for movies and games.

The goal for the online DVD rental industry is the proliferation of on-demand movie business, through which movies could be delivered electronically through the Internet.

It may not be for five or 10 more years, but Mr. Hastings vows his company will be ready.

Blockbuster plans to compete, too.

“When video-on-demand becomes a demand, Blockbuster will be there,” Mr. Evangelist said.

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