Blockbuster erases its late fees-sort of

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Click on Blockbuster.com and Roy Orbison distinctively warbles, "It's Over," as a banner declares "The end of late fees." But it's not the end of penalties.

Because while Blockbuster will no longer charge customers for returning a movie a day or two late, those who keep them for seven days will be charged the full purchase price minus the original rental fee. That's down from the 12 days the chain used to wait before taking that step-although renters then were also socked with compounding late fees.

Blockbuster's aggressive multimedia and in-store campaign promoting the "end of late fees" doesn't indicate that any penalties remain. But the rental giant dismissed the danger of customer confusion.

Blockbuster said it gives special training to store employees and created pamphlets explaining the details. The chain also calls customers who haven't returned overdue films, explaining what will happen if they don't show up. If they're charged for a DVD, consumers can return it within 30 days for a refund, minus a small restocking fee.

The chain also indicated the policy wouldn't affect many customers; research and test market results showed that most late returns came in within a day or two. "It puts us back in the entertainment business and takes us out of the enforcement business," said Scott Parks, Blockbuster's VP-advertising and brand management. "There was a lot of emotional baggage with late fees."

benefit of the doubt

Consumer advocates give the chain the benefit of the doubt. A spokesman for Consumer Alert said Blockbuster doesn't need to spell out each detail of its new policy in ads so long as the company takes other steps to make consumers aware of them.

Blockbuster has been feeling heat from discount retailers such as Wal-Mart, film-rental services such as Netflix and cable video on demand, and its new policy is a response to those pressures. CEO John Antioco told investors that operating income likely would be flat this year, but that the company expects to make up in new rentals much of the $300 million lost from late fees.

"Blockbuster had to stop Netflix from stealing their customers," said Michael Pachter, an analyst at Wedbush Morgan Securities. "That's lost revenue forever."

The ad campaign, from independent Doner, Southfield, Mich., will run through the month on national TV, radio, online and outdoor. Blockbuster's company-owned 4,500 stores are participating in the no-late-fees program, as are an unspecified number of its 600 franchisees.

"Late fees have been an Achilles heel for the home-video-rental business," said Larry Gerbrandt, an analyst at Alix Partners, Los Angeles. "Blockbuster didn't have to deal with it until competition came in. Now, they can use it as a hook for their marketing." Consumers are more accustomed to time shifting because of emerging technologies, he said. "The ticking clock is out of step with trends in entertainment consumption."

The move comes as Blockbuster, which has about a 40% market share, is trying to take over one of its rivals, Hollywood Entertainment Corp.'s Hollywood Video. It's become a struggle between the larger company and another retailer, Movie Gallery, which last week offered $850 million for Hollywood Video. Analysts said they expect Blockbuster, whose executives wouldn't comment on the matter, to outbid Movie Gallery.

Blockbuster has become aggressive in other areas in response to the competitive marketplace. The company cut the price of its online rental service to $14.99 a month, with additional coupons for free in-store rentals. Consumers can rent an unlimited number of movies and keep them as long as they want. Delivery is by mail, postage paid by Blockbuster, and the company is refining its system for shorter waits. Eventually, its neighborhood stores will be used as distributors. Netflix costs $17.99 a month.

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