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Blockbuster's Digital Plans

Jim Keyes thinks we're all misusing the "online video rental" moniker. According to the Blockbuster (NYSE: BBI  ) CEO, what Netflix (Nasdaq: NFLX  ) is doing today should be called a "DVDs by mail" strategy that just happens to revolve around a website, and the same goes for Blockbuster's own Total Access.

Why should I care?
It's an important distinction, because the  former 7-Eleven head  told this Fool that the real online market for entertainment content has "unlimited growth potential," while the postal version may run out of potential very soon.

"We pulled back on the by-mail model because it was growing at the expense of our retail stores," he said. But the company is investing heavily in digital delivery.

That's why Blockbuster bought MovieLink, despite already owning a share in rival download service CinemaNow. With sole ownership of an established all-digital movie service, the company now plans to integrate MovieLink into the site, where Total Access subscribers pick their popcorn bait.

The previous owner was a consortium of Hollywood studios like Sony Pictures and Warner Bros. (NYSE: TWX  ) , but they never could agree on MovieLink's direction and had been looking for a buyer for some time. Microsoft (Nasdaq: MSFT  ) and Cisco (Nasdaq: CSCO  ) seem keen to keep playing with CinemaNow, so it would probably have been tougher for Blockbuster to buy out the partners' share in that service rather than looking elsewhere.

But wait -- there's more!
But if you think Blockbuster's digital plans end with a download service, you're wrong. The company is reaching out in many different directions at once, starting with a slick Facebook application that's clearly meant to appeal to a young audience. If you haven't reviewed any movies yet, Movie Clique says, "We're judging you for not having any reviews. So write one, already!" And a list empty of friends gives you this nugget: "There's absolutely nothing up with your friends right now. You should get some new friends who aren't so boring."

Keyes said that the somewhat edgy writing style is very much on purpose, and meant to draw in a younger demographic that doesn't visit video stores as much as the older crowd. "We want to stay away from interruptive push advertising for Total Access," said Keyes, because pushing unwanted advertising on online-savvy consumers hasn't been all that effective.

But when a Facebook friend sends you an invite to Movie Clique, chances are pretty good that you'll at least check it out. And if you feel good about the app, you just might go with Blockbuster the next time you want a movie. That's a friendlier and more effective "pull" advertising model.

Facebook is the cool kid on the block right now, so it made sense to start there. But Keyes didn't rule out making similar tools for other social portals, including Google (Nasdaq: GOOG  ) OpenSocial partners such as MySpace or Friendster.

We're not done yet
The stores themselves are due for a serious makeover, too. Blockbuster will test several new store concepts before rolling out a couple of the best-performing ones nationwide. One model includes a sit-down coffee bar, and another has a play area for small children. But others feature kiosks where you can download movies to your Apple (Nasdaq: AAPL  ) iPod or to digital memory cards, and you can buy the appropriate gadgets right next to the download stalls.

Jim has seen very different store models working well in different places. The typical Irish video store, for example, sells as many consumer electronics as it does video rentals. Brazilian video stores are often more like supermarkets, with rental videos taking up just a small piece of floor space. And we talked about the Swedish model of half-convenience store, half-video store -- kind of like renting videos at 7-Eleven. But without some testing, there's no way to tell what the American consumer will go for, and even then it will take time to get us used to the new formats.

The Foolish takeaway
You may not agree with Jim on all points. I, for one, happen to believe there's much more growth ahead for the DVDs-by-mail model.

But Blockbuster is clearly headed into a much more progressive future now than it was six months ago. The new store models look good, and I can't wait to see which one will replace my local store's floor plan. And the new management team is willing to try lots of new ideas, which is a prerequisite for surviving in the cutthroat worlds of online entertainment and neighborhood retail.

Wall Street analysts complain about Blockbuster's short-term issues, but any good Fool knows that it's the long haul that matters. Carl Icahn is buying Blockbuster stock even now, as the share price keeps dropping. Maybe you should, too.

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