Blockbuster pays a price in Netflix duel

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Blockbuster returned to losses as it spent heavily to sign up online subscribers that otherwise might have gone to Netflix, and the company unveiled its secret weapon in its ongoing war with its chief rival: video games.

Timed to accompany its second-quarter earnings report, Blockbuster said that some subscribers to its Total Access online product can now exchange movies for discounted games.

The move is designed to further differentiate Blockbuster's myriad plans with those offered by Netflix, which acknowledged this week that its competition with Blockbuster has resulted in slowed growth.

Besides throwing video games into the mix, Blockbuster has been allowing its subscribers to return movies at stores as well as by mail. Netflix can't match either offering yet because it has no stores and no video games.

"Video games are a great example of how we can use our stores in a way our competition will find hard to match," Blockbuster's new CEO, James Keyes, told The Hollywood Reporter.

Blockbuster added 600,000 subscribers to its online service in the second quarter, bringing its total to 3.3 million. Netflix, which invented the business model, reported this week that its subscriber base fell during the last quarter to 6.7 million.

But Blockbuster's aggressive grab for online market share is taking a toll on its bottom line. The company said it lost $35.3 million in the quarter compared with a $68.4 million profit in the same quarter last year.

Revenue fell about 3% to $1.3 billion because of store closures and a drop in in-store rentals. The company beat Wall Street expectations on the bottom line but fell short on the top line.

Blockbuster shares rose 2.4% on Thursday, making it the third-best performer on The Hollywood Reporter's Showbiz 50 stock index. Netflix was the top performer, rising 6.9% to $17.84. Only seven stocks of the 50 were higher Thursday.

Blockbuster's overhaul of its online strategy includes an additional couple of monikers:

  Blockbuster By Mail for $16.99 gets consumers three DVDs at a time by mail and allows for the swapping of DVDs for $1.99 each at stores.

  Blockbuster Total Access Premium for $24.99 gets consumers three DVDs at a time by mail and unlimited free exchanges at stores, plus the ability to swap movies for video games at stores for $4.99 each. Normally, Blockbuster rents video games for about $7.99 each.

  Rules change for Blockbuster Total Access, at $17.99, by far the company's most popular option. Consumers now get the video game option, though only get to swap five DVDs in stores each month, whereas before it was unlimited.

During a conference call with analysts, Keyes said Blockbuster interfaces with 2 million people per day either online or in stores, and it intends to monetize them better than it has been.

He used the example of one franchisee that sold 40,000 "Harry Potter" books at his 40 stores, and he called movie-based books and soundtracks the "low-hanging fruit" of products Blockbuster should sell in stores.

He compared Blockbuster to Coca-Cola, PepsiCo and Apple Inc., each of which has had to reinvent itself to maintain growth.

"Blockbuster shares that same opportunity," he said, adding that it will "not be easy, or inexpensive."

Keyes told The Hollywood Reporter that he will be closely watching the results of Blockbuster's exclusive deal with the Weinstein Co. come October, when the popular "1408" will be available for rent exclusively through Blockbuster for three years, and he said he is open to more such deals.
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