Blockbuster faces threat from big retailers over DVDs

Like the tapes and DVDs it rents, Blockbuster Inc. always seems to be living on borrowed time.

Since emerging more than a decade ago as the nation's dominant video rental chain, Blockbuster regularly has shaken off apocalyptic predictions, whether they stemmed from antitrust suits or looming technology that eventually could enable people to call up any movie they want without rising from their recliners.

Blockbuster has remained the nation's overwhelmingly dominant video chain, reinvigorated by an internal overhaul and an explosion in DVD rentals as well as a booming business renting video games.

But fast-forward to Blockbuster's future and things get murkier. Blockbuster's biggest challenge is shaping up not in courtrooms or over fiber-optic lines but in the shopping aisles of discounters, electronics superstores and even drugstores and supermarkets.

Big merchandisers such as Best Buy Co., Circuit City Group, Wal-Mart Stores Inc., Target Corp. and Costco Wholesale Corp. are taking dead aim at Blockbuster, trying to muscle their way onto the shelves of family home entertainment centers by selling DVDs of "Black Hawk Down'' as aggressively as they might sell a new CD by Eminem or Pink.

Price it low enough -- say $17 for a hot, fresh title -- and people might want to spend a few more bucks to own rather than rent a DVD-quality version of a favorite hit movie such as "Spider-Man" or "Monsters, Inc." when it is released, especially if it includes extras such as alternative endings and games.

'The bigger issue'

Studios say owners of DVD players are buying about 15 DVDs a year, compared with the five videotapes a year that consumers averaged when that format was at its peak.

"That's the bigger issue for a Blockbuster," said Ben Feingold, chief of Sony Pictures' Columbia TriStar Home Video unit. Feingold said Wal-Mart has become the company's biggest account, with Blockbuster ranking fourth or fifth.

Although Blockbuster is by far the largest video rental chain, it ranks ninth among DVD sellers. According to estimates from Video Store Magazine, DVD sales totaled $905.5 million last year at leader Wal-Mart and $746.6 million at No. 2 Best Buy, while Blockbuster's total was $160 million.

Circuit City announced recently that it is dumping videotapes altogether for DVDs. Best Buy has reconfigured its stores to carry a broad selection of films. And stores have found DVDs make good "loss leaders" -- products priced dirt cheap to get people into stores, where they presumably will buy other things.

Officials at Blockbuster and its majority owner, Viacom Inc., said they recognize the challenge and vow to adapt, although they question whether the general merchandise and electronics stores will remain competitors when the current hyper-growth driven by the sale of DVD players inevitably eases.

"Blockbuster is principally in the movies business," Viacom President Mel Karmazin said. "Places like Best Buy and Wal-Mart sell DVDs when they think it generates foot traffic. If they could make more money selling thimbles, they'd replace all the DVDs with thimbles."

'We aim to make money'

Best Buy product manager Peggy Munnagle called the notion that the company uses DVDs only to lure customers into the stores "ridiculous."

"That's only accurate for the newest of new releases," she said. "Everything else we aim to make money on. We plan to be in the business for a long time."

Behind the shift is the explosion in sales of DVD players. Bob Chapek, president of Walt Disney Co.'s Buena Vista Home Video, said the studio projects the number of DVD players in homes will double in four to five years, from 40 million now to about 80 million.

Chapek said that although renting DVDs remains a healthy, vibrant business, selling them directly to users "is bigger and bigger all the time," especially now that films are available to buy the same day they can be rented. During the height of the VHS video boom, many films were available only for rent before they were offered for sale at affordable prices.

Blockbuster CEO John Antioco said he is confident Blockbuster can remain competitive on both fronts. The chain's 5,300 stores are expanding their selections of DVDs for purchase, while keeping intact the company's rental program, which accounts for about 84 percent of its business.