Blockbuster, the nation's biggest movie rental company, says it will eliminate late fees on games and movies as of Jan. 1 — but if you keep them too long, you buy them. The offer announced yesterday...

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DALLAS — Blockbuster, the nation’s biggest movie rental company, says it will eliminate late fees on games and movies as of Jan. 1 — but if you keep them too long, you buy them.

The offer announced yesterday suggests that Blockbuster is still struggling to blunt the competitive threat from Netflix and cable. The company had expected to earn $250 million to $300 million in operating profits next year from its unpopular late fees but believes it can make up for the lost income with increased volume — betting that customers, no longer worried about late fees, will rent more movies and games.

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“We had to deal with late fees,” said Chairman and Chief Executive John Antioco. “It’s the source of jokes on late-night TV. It’s still anecdotally, and in some sense really, the biggest negative to Blockbuster. … There were customer transactions that never happened because of late fees.”

Blockbuster shares rose 40 cents, or 4.6 percent, to close at $9.20 yesterday. That is near the lower end of their 52-week trading range of $6.50 to $19.37.

Blockbuster faces new competition on several fronts — cheap DVDs in discount stores, mail-delivery service from Netflix, and movies on demand from cable TV operators — none of which come with late fees. Dallas-based Blockbuster said it tested dropping late fees in several cities over the past year and found that retail sales of movies increased.

Blockbuster customer Susan Murray, who raced to a Dallas store just before noon yesterday to avoid a charge, welcomed the planned elimination of late fees. Murray said she gets dinged a late fee almost every time she rents — $11.50 for two movies last week alone — including occasions when she was sure she had beaten the deadline.

“I was going to cancel (Blockbuster) and get Netflix,” Murray said. “I decided a couple days ago that was it. Now I’ll have to reconsider.”

But rivals claimed that Blockbuster wasn’t really eliminating late fees, only giving customers more time before incurring even larger payments.

Blockbuster said due dates at its 4,500 U.S. stores would remain one week for games and two days or one week for movies. The company said it would give customers a one-week grace period at no charge, starting on New Year’s Day.

Renters who keep the movies or games beyond the grace period will be charged for purchasing the DVD or tape at Blockbuster’s full retail price, minus the rental fee, the company said. If they return the movie or game in the next 30 days, they will get a refund for the purchase but will be charged a restocking fee of $1.25, the company said.

Reed Hastings, CEO of Los Gatos, Calif.-based Netflix, said Blockbuster had to do something to prevent losing store customers to Netflix and its own online movie-order service, which together have doubled their customers in the past year, to 3 million. Hastings said Blockbuster’s move would backfire because of the potential of being charged for purchasing a late DVD.

“Many consumers will be unhappy with the idea that their credit card is going to get charged” if they miss the grace period, he said.

Dennis McAlpine, an analyst at McAlpine Associates, said that giving up $250 million to $300 million in operating profit didn’t make sense.

“What’s he getting, other than a warm fuzzy feeling in the bellies of his customers?” McAlpine said. “That’s lost money. He’s not going to get that back.”

Marla Backer, an analyst with Soleil Securities, called Blockbuster’s move a positive step but said she was still worried about the weak rental market.

In August, Blockbuster launched an Internet-order, mail-delivery service like Netflix and set a goal of signing up 10 percent of its store customers by the end of next year.

Blockbuster, Netflix and Wal-Mart are locked in a brutal price war that has raised questions about the profitability of online-ordering services.

Icahn boosts stake

in Hollywood

Billionaire financier Carl Icahn boosted his stake in Wilsonville, Ore.-based Hollywood Entertainment video-rental chain to 9.54 percent and said he supports Blockbuster’s bid for the company.

In response, Hollywood Entertainment Chief Executive Mark Wattles said a buyout group he’s leading won’t be able to top Blockbuster’s bid.

Blockbuster’s bid for Hollywood Entertainment is $700 million, or $11.50 a share. Wattles and Leonard Green & Partners offered $10.25 a share in October. Another suitor, Movie Gallery, last month made a bid without disclosing terms.

Wattles said he welcomed Icahn’s involvement and suggested that a strategic buyer like Blockbuster has an advantage over a financial buyer like his group.

Bloomberg News