Blockbuster's Brazen Bet

In a move that may sound as brilliant as it is desperate, Blockbuster (NYSE: BBI  ) is now allowing its online customers the ability to walk into their nearest store and exchange a rented DVD for another title.

Blockbuster's Total Access program goes further than that. Dropping off a DVD at a physical store will also help expedite the exchange process. Netflix (Nasdaq: NFLX  ) has always prided itself on its speedy turnaround time, with the ability to provide overnight delivery through its network of regional distribution centers, but it's ultimately a two-day process. Drop a red Netflix mailer into the mail, and it takes the post office one day to send back your film. Then you have to wait another day for your next selection to arrive after Netflix confirms the receipt of your return. Total Access shaves the process in half by shipping out the next title in your queue the moment that it is processed at the local store.

With 1.5 million subscribers, Blockbuster is a bit player compared to the 5.7 million celluloid buffs that Netflix is presently serving. The differences don't end there. Netflix is cash-rich and consistently profitable, while Blockbuster is saddled with debt and has posted a loss in four of the last six quarters. Netflix is growing, while Blockbuster has seen its top line dip last year, and thus far in 2006 as well.

Odd paths to get even
With its creditors antsy, the bold move by Blockbuster to fortify its online endeavors is surprising. Instead of improving its stores and drumming up the value of its traditional in-store presence, Blockbuster continues to devalue its bricks-and-mortar core. Between last year's "No Late Fees" angle and its new positioning of its stores as a place for speedier online transactions and a clearinghouse for free rentals, Blockbuster keeps nudging its client base out toward Blockbuster.com.

As part of Total Access, Blockbuster is now even letting its customer base sign up for the online service inside the actual stores. Even if you're not exactly dot-com proficient, how can you refuse the dirt cheap smorgasbord of home-delivered flicks and free in-store exchanges over the more conventional way to rent at Blockbuster? The company may not be browbeating you to become an online subscriber, but you're going to start looking pretty dumb if you don't take Blockbuster up on that offer.

If the plan works, it's not as if golden riches await Blockbuster. Netflix is leaner, nimbler, and even at a higher price point, it's not exactly toiling away in margin nirvana. The key, for Blockbuster, will be its ability to milk more out of increased traffic at its stores as the online subscribers crawl out of their homes to redeem their online freebies. It has to be more than just trying to sell them on Raisinets or microwavable popcorn.

Does Blockbuster know what it's getting itself into here? Its new approach is aimed at appealing to the more hyperactive renters at Netflix, and that's an audience Netflix will gladly hand over. Despite the perceived nature of "unlimited" rentals, there comes a point where Netflix begins losing money on individual subscribers. Between the revenue-sharing royalties for the studios, round-trip postage, and other fulfillment costs, if you find yourself going through 10-12 movies a month -- or more -- under the company's most popular plan, you are probably a fiscal detriment to Netflix.

Hyperactive users who find their accounts throttled or shipments delayed may feel that they are exacting revenge by leaving Netflix, but by and large, they're usually doing it a favor. Does Blockbuster really want to run with that crowd? The freebie-redeeming crowd may come in with holes in their pockets.

The point of no return
Blockbuster can't go back. It may not want to. The conventional model is broken. Movie Gallery hasn't quite been the same since it acquired the Hollywood Video chain. Blockbuster's stores have too small a footprint to emulate a more successful model like Hastings (Nasdaq: HAST  ) , which can rent flicks but also serve as a consumer electronics retailer, and the world doesn't really need another RadioShack (NYSE: RSH  ) .

This places Blockbuster in a dangerous game of Frogger, where it's parked on the middle strip -- between the fast-moving traffic behind it and the perilously submerged flow of crocs, logs, and lily pads before it -- as the clock ticks expensively.

If Blockbuster were braced with the tools to win this battle, I would be applauding like a madman. As it stands, Blockbuster's site is not optimized with third-party ads to monetize any uptick in Web traffic. The in-store makeover that would make giving away free films a viable business also seems absent.

Total Access just smells like Total Desperation. A more logical move would have been to simply differentiate its online service from Netflix by providing video game rentals by mail, like Gamefly, to its online accounts, or to take advantage of its local presence to create some form of social interactive marketing.

Instead, Blockbuster's new plan is likely to only attract the audience that Netflix no longer wants, and convert the offline customers that its physical stores desperately need to stay put.

It's a sad thing to see, and I'm not even a Blockbuster creditor.

Netflixhas been recommended several times by David Gardner for hisStock Advisorsubscribers. Discover the Fool's two top picks -- and Wall Street's dirtiest secret -- when you grab our free report.

Longtime Fool contributor Rick Munarriz doesn't consider a Blockbuster Night a good thing. He does own shares in Netflix. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.TheFool has a disclosure policy.


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