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Blockbuster Cancels Late Fees

You have to give Blockbuster (NYSE: BBI  ) credit for trying. The company has not sat idly by while a changing competitive landscape slowly chips away at its core movie rental business. The latest retaliatory strike? No more late fees. Today, Blockbuster unveiled its plan to eliminate the pesky fees beginning Jan. 1 at all of its 4,500 domestic locations.

Under the new system, movie and video-game rentals will still have a designated due date, followed by a one-week grace period. After that, customers can feel free to keep the movie, as Blockbuster will consider it to be purchased -- and charge the account accordingly (the sale price less the rental fee). There will, however, be a 30-day period during which customers can return the movie for full credit minus a small restocking fee.

Speaking on behalf of renters everywhere who find the concept of returning movies on time to be absolutely, positively, and in all other ways inconceivable, I applaud the decision. Investors, though, should view the move with a certain degree of trepidation. The generous policy is forecast to wipe out $250 million to $300 million in 2005 operating income, along with another $50 million tied to marketing expenses. Much of this should be offset by increased rental transactions (a trend already under way in markets where the new policy is being tested) -- but the $64,000 question is: How much?

Inventory control is another concern. If rentals are allowed to collect dust on the coffee table for an extra week before they need to be returned, then out-of-stock titles are bound to become more frequent. Furthermore, if the company occasionally encountered problems collecting delinquent late fees of a few bucks, will it be any easier to track down $20 for a new release?

Nevertheless, the company has been forced to make some difficult decisions. Not only did Netflix's (Nasdaq: NFLX  ) pioneering online rental program flourish into a formidable adversary that Blockbuster could no longer ignore, but video-on-demand services from cable operators such as Comcast (Nasdaq: CMCSA  ) and Time Warner (NYSE: TWX  ) have become increasingly popular. To compound the problem, there has been a persistent consumer shift toward purchasing videos rather than renting them. After all, why pay $4 to rent Harry Potter and the Prisoner of Azkaban when it can be bought for $15?

Blockbuster has responded to these threats, though: It launched its own competing online service (which I subscribed to on a trial basis and have grown quite fond of), increased the retail segment of its business (merchandise now accounts for one-fourth of revenues, with an 11.1% jump in comps last quarter), upped its bid for rival Hollywood Entertainment (Nasdaq: HLYW  ) , and today announced plans to suspend late fees.

Blockbuster still has a long, difficult road ahead, and the key to its survival just might be its ability to evolve -- something that was no doubt accomplished with today's watershed decision.

If you prefer old movies over new releases, you might enjoy these favorites:

Netflix and Time Warner are bothMotley Fool Stock Advisorrecommendations. Learn more by subscribing today, risk-free for six months.

Fool contributorNathan Slaughterwill not miss late fees and hopes his local library will follow suit by ending late fees for overdue books. He owns none of the companies mentioned.

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