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Blockbuster Follows Netflix, Again
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Rick Aristotle Munarriz
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February 15, 2006
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Earlier this week, I looked at the throttling going on at Netflix (Nasdaq: NFLX ) . Now that the popular DVD-by-mail company is handicapping hyperactive accounts with slower delivery times and poorer new-release availability, I concluded that it would be a win-win scenario if the negative publicity cost it only the actively traded accounts.
"If you're blazing through 20 flicks a month on Netflix, you'll do it a favor by going to Blockbuster (NYSE: BBI ) and knocking that company one step closer to bankruptcy," I wrote at the time.
Because of postage costs, revenue-sharing deals, and the costs to acquire DVDs, Netflix is more than likely losing money on you if your monthly disc-viewing habits go into the double digits.
Well, it turns out that Blockbuster doesn't want to keep the busy beavers, either. It is now proclaiming its throttling ways as well on its terms and conditions page. Blockbuster is revealing that it takes the rental volume of its subscribers into account during the allocation process.
I got a bit of email after Monday's story from users who felt cheated by the throttling at Netflix. While I can't say I blame them, given the nature of the "unlimited rentals" pitched in the company's marketing strategy, uncapped rentals were a time bomb waiting to go off.
Subscribers who aren't going through more than a couple of discs a month -- the high-margin accounts -- may not see the value proposition to stick around. The hyperactive users see more value in the uncapped approach and stay.
The only shame here is that Netflix -- and now Blockbuster -- didn't see this coming sooner. They may eventually take the easy way out and limit monthly rentals, the way Amazon.com (Nasdaq: AMZN ) does in the United Kingdom, but a little visibility could have helped them prepare for this. How so? Well, both companies have been slow in taking marketing advantage of their inviting audiences. Netflix, for example, could probably be helping to subsidize some of its high-traffic overhead if it did more than just occasionally print some ads on the DVD mailer. Everything from marketing materials to sample discs to product samples can be feasibly packaged. The companies have also been slow to embrace interactive marketing. There is so much real estate on their sites ripe for third-party sponsorship, yet the companies have chosen to leave that opportunity on the table.
Online ads and beefed-up product-placement deals would have at least covered some of the overhead of the hyperactive subscribers. It wouldn't have been enough, but it would have been a good place to start.
Netflix and Amazon.com are Motley Fool Stock Advisor recommendations. Treat yourself to a free trial to see what other stocks Tom and David Gardner are recommending in their newsletter service.
Longtime Fool contributor Rick Munarriz is a Netflix shareholder and plans to stay that way. He has been a subscriber and investor since 2002. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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