Thursday, March 04, 2010

Late Fees at Blockbuster

Apparently, Blockbuster has chosen to reinstate late fees, according to this post by Laura Heller. One wonders whether the revenue generated by this move will make up for the decrease in customer satisfaction. Blockbuster already faces severe challenges. Its very existence is at stake. Driving away more customers with such a move is a real possibility.

According to a Harvard case study by Willy Shih and Stephen Kaufman, when the firm eliminated late fees in January 2005, "Blockbuster chose to forgo about $600 million of revenue by eliminating late fees. While early signs suggested this program resulted in increased traffic and rental volumes, it did not offset the loss of revenue as base movie rental revenue grew only 5%." The question is: Will Blockbuster now realize a $600 million gain? One would expect not. It will be substantially smaller. First of all, base movie rental revenue may now fall as a result of this move, as customers opt for other movie rental or downloading alternatives. Moreover, in 2004, before elimination of late fees, the firm had more than $6 billion in revenue. The company's sales have fallen by more than 10% since that time. Moreover, base movie rental revenues are off by approximately 15% since 2004. Thus, Blockbuster stands to gain something significantly less than what it used to generate in 2004 from late fees.

1 comment:

Jagadeesh Venugopal said...

Blockbuster's business model is toast, and they don't have an alternative. They have negative shareholders' equity and will probably declare bankruptcy (all this from their annual report).

For the interim, the movie business will thrive on selling tiny plastic discs with movies on them, but in the long run, it will have to be downloads and video on demand. If you were able to view every movie ever offered for an average of $3 per viewing, why would you even bother with DVD rentals or purchases?