Blockbuster to Halt Late Fees, but There’s a Catch

Blockbuster Inc. said Tuesday that it would eliminate the late fees that have annoyed a generation of video renters, although its biggest procrastinators would have to buy any DVDs that they let gather dust.

The move comes as the nation’s traditional video rental business, long dominated by Blockbuster, has increasingly come under siege on a host of fronts.

Discount retailers such as Wal-Mart Stores Inc., Best Buy Inc. and Target Corp. are selling DVDs at discount prices, enticing customers to buy “Spider-Man 2” and other blockbusters rather than rent them. Online DVD renters led by Netflix Inc. -- which make no late fees a cornerstone of their appeal -- also have eaten into video store profits, prompting Blockbuster to recently launch its own online version.

Some analysts and competitors viewed the Dallas-based chain’s latest move as a risky financial gambit. They said that competitors had forced Blockbuster’s hand, and that the strategy marked just another step in the demise of the video store business that Blockbuster has led for some 20 years.

“They are smart to do away with it, but it won’t stem the decline and eventual disappearance of this industry,” said Paul Levinson, a communications professor at Fordham University. “No commercial venture willingly gives up something that is making them money. Giving up the late fee is a sign of desperation and the beginning of the end.”

In a conference call with analysts, Blockbuster Chief Executive John Antioco said that late fees were the top customer complaint, conceding that Blockbuster needed to make a “bold move” to revitalize its rental business and improve its image. He noted that late fees had even been the butt of jokes by talk show hosts David Letterman and Jay Leno.

“There can be no denying that the competitive landscape for the home entertainment industry has changed over the last few years,” Antioco said. “This is a bold action to deal with these competitive threats.”

The company said that it would give up $250 million to $300 million in operating income in 2005 and that the policy shift would cost an additional $50 million to market and implement. But the company said tests of the new program convinced executives that they could make up for the lost revenue by increasing business and boosting customer goodwill.

Some analysts and competitors were skeptical.

“They are under such pressure ... they felt they had to try something,” said Netflix Chief Executive Reed Hastings. “What they think of as creative, the rest of us probably think of as desperate.”

Analyst Dennis McAlpine of McAlpine Associates said he found the move puzzling. “I don’t know what they got for losing $250 million in operating income.... I have a feeling there is another shoe that is going to come down,” McAlpine said.

Although the program was hailed by Blockbuster executives as the most important customer benefit in company history, there is a catch. Movies and video games will still have to be returned by a certain date -- one week for games, two days for new movie titles and one week for older ones. If customers don’t meet the deadlines, they may end up having the full price of the DVDs and games put on their credit cards.

Starting Jan. 1, if a DVD or game isn’t returned within a week after the due date, the customer will be automatically charged the retail price, minus the rental fee. That charge can be erased if a customer returns the DVD or game within 30 days of the due date, but he or she will still be charged a minimal “restocking” fee of $1.25. Blockbuster has been charging late fees of $3.99 for new movies, $3 for older films and $6.99, on average, for video games.

When the new program was tested, the company said, people typically were only a day late.

Blockbuster’s new policy also comes as the company is seeking to buy its biggest rival, Hollywood Entertainment Corp.

Hollywood Entertainment also is being sought by Dothan, Ala.-based Movie Gallery Inc. and a buyout group led by Los Angeles-based Leonard Green & Partners. On Tuesday, financier Carl Icahn, who has endorsed a Blockbuster-Hollywood Entertainment merger, disclosed in a Securities and Exchange Commission filing that he had raised his stake in Hollywood Entertainment to 9.54%.

Blockbuster shares on Tuesday rose 40 cents to $9.20 on the New York Stock Exchange.