Netflix & Blockbuster Settle Patent Litigation, BB to Raise Prices?

Blockbuster issued a Form 8-K that included the following update on the patent lawsuit with Netflix:

On June 25, 2007, Blockbuster and Netflix, Inc. resolved the parties' pending patent litigation. While the terms of the settlement are confidential, the parties have agreed to secure dismissal of all claims in the litigation. The settlement will have no material effect on Blockbuster's future financial performance.

Also including in the filing was a credit agreement amendment:

Consistent with its previously disclosed intentions, Blockbuster Inc. ("Blockbuster") has invested significantly in BLOCKBUSTER Total Access™ during the first half of 2007 to capture market share in the overall video rental market and to set the stage for the expected future profitability of its online rental business. Blockbuster intends to continue to focus on subscriber growth but before year-end plans to make modifications to the offering that it believes will strike the appropriate balance between continued subscriber growth and enhanced profitability.

Thanks to Eric, JR & John A. for sending this in.

Comments

[BoB]

Told YA!

All of us saying that TA prices would go up were right on the money. No way BBO could offer all that for as cheap as NF. They were willing to bleed money for awhile and now hope everyone "addicted" to TA will pay the higher fees.

[Scott]

I'm new to this forum, although I've been lurking for some time now. So hello all!

I've been a subscriber to Total Access for 3 months now. Although I've had a few snafus along the way (one dvd getting lost in the mail, and another taking 5 days to reach me), overall BB does as they claim. As soon as I get home from returning my envelope to my local store to exchange for a free movie, I check my queue and the dvd is marked as having been returned, and the next day my next dvd is sent out. I've not been throttled and I am a very heavy used (3-out plan). I just signed up for netflix's 2-week trial (admittedly, just to get a few freebies) and already I've seen what people talk about. The first day I was suppose to get 3 dvd's shipped out, the top 3 movies in my queue were marked "shipping today". But by 9pm on my first night with netflix, only one had been shipped, and the other two changed from "shipping" to "shipped" (and according to their emails, those 2 where shipped after 5pm).
So today, yep, I received only one dvd (the other 2 are from the same set - a tv show). They waited to ship the other 2 after 5pm but claim it shipped today. :)

Anyway, I've been very happy overall with Total Access because they don't throttle me, and I'd be willing to pay more for the service, since the "free" movies fill my instant gratification need.. I asked my local store manager how they could afford it. He said, first, that with each dvd I return to the store, corporate saves on postage (they send them back to BB in bulk with other people's dvds that were dropped off with them at the store). Secondly, it gets people into the store (admittedly I did buy some dvds on sale that I never would have before).
I suggested they shouldn't allow new releases to be snatched up by TA people such as myself (to be fair about it, it's their bread 'n butter really) but he didn't seem to mind. To me, this is one of the things BB should do as one of their "modifications" and I wouldn't be surprised if they do this first, before raising prices.

Each service (netflix of BB) suits different people differently, depending on their situation. For me, TA is great because I'm a caregiver for an ageing parent and work from home, so it helps to be able to pop in old movies for mom or after I have time to myself to sit back and watch something I enjoy to de-stress. Being home so much of the time affords me the chance to view many dvds. But that's my situation. Netflix just can't give me what I want - but for others I can see where they would fit the bill. If BB raised their rates from $17.99 to $25-27 I would still subscribe, as long as TA remained as it is. I get around 22 movies per month, plus 22 free, so for 44 movies a month, yes, even $25-27 would be very fair.
But I can see where for some people, it wouldn't be advantageous to them to keep TA.

Personally, I think their "modifications" will be a mix of what you can rent for free at the store along with some moderate price increase after it's all said and done.

Oh, another oddity....I live 100 miles away from both Netflix's and BB's distribution center. When shipped from that center (Denver), I get my BB movies the next day in the mail. Netflix's took 2 days. Strange. Same postal service. Same distance. Mailed from the same city.

[Jking47]

I just signed up with BBOTA because it's a great deal, but if they up the price by more than a buck or two I'll be headed right back to Netflix. I was never a fan of Blockbuster, but I couldn't make a valid argument against taking advantage of BBOTA. With a large price hike, that would be the only argument that I need to switch back.

[Firstlawofnature]

How do you have time to watch 44 movies per month and work from home all while caring for mom? Do you get to go on dates at all? I guess you can’t catch the nuggets since you live 100 miles from home.

[Hunter McDaniel]

"I get around 22 movies per month, plus 22 free, so for 44 movies a month, yes, even $25-27 would be very fair."

Well, that's mighty generous of you to offer 60 cents a disc. Why, that almost pays the postage; I'm sure the discs and envelope stuffers must be free. I'm not saying you personally have any obligation to help BBO or NF make money, but surely you can see that $27 for 44 discs is not a sustainable business.

[Scott]

FirstlawofNature, like I said in my post, I pop in old movies FOR MOM (re-read please)....they love those old movies and shows. That's what most of the rentals are for. I know exactly what she likes to watch and it helps keep her entertained, and therefore, peaceful (she has alzheimer's). I suppose I could copy these and just play them over and over for her, but I don't steal.

As to Hunter, those 44 movies a month (average) are NOT all shipped to me..only 22 are. The other 22 are free from the Blockbuster store (TA program)...postage has nothing to do with those at all, if you had read my post a bit more carefully (except that BB doesn't pay for each return postage). So I'm saying $25-27 for the 22 or so dvds I get is very fair. Nothing to do with my "generosity" nor is it 60 cents a disc for those mailed to me.

And as I said about the discussion with the store manager, he has no problems with TA...so who am I to argue with him?

[Jking47]

Well said Scott. I was going to come to your defense, but there is no need to.

It's just unpleasant that haters come out like that and attack for no apparent reason.

[Firstlawofnature]

So how many do YOU watch per month? And you haven't tried netflix yet right?

[Scott]

Thanks Jking47. I'm at a loss to understand the more hateful aspects of the competition between BB and Netflix enthusiasts. I just used my situation as an example of how BB is great for me; but everyone according to their situation and needs. That's why there are businesses in competition. Many businesses lose money or break even for various reasons on some customers, be it selling "lost leaders" to get you in the grocery store or giving free trials or other promotions or sacrificing profit now for future (hopeful) gains...it's done all the time.
If BB does raise rates (and they did not say that per-se) and it still is to my advantage, I'll stay with them. For others, it may not be. Just depends. I (nor anyone I know) would walk into a store and say, for example, "excuse me, but that television you have on sale is just priced too low....I insist on paying more to feel better".(If they do, Sam Walton missed the boat completely!)

To Firstlawofnature , I catch a movie on Fri or Sat nights, when I don't have to worry about being tired the next day from loss of sleep. Those two nights I will give up some sleep for a little R&R (unless I'm too tired). So it's about 4-6 movies per month in actuality. Is that too much? And I don't really want to sound rude at this point, but this is the second time you did not really read my posting, otherwise you would not have asked "And you haven't tried netflix yet right?".

[redbill]

You're the first person I've heard complain about "throttling" with your first 3 DVDs from NetFlix.

[Scott]

Wow, I knew from lurking that people read things into what others say, but this is amazing. No, redbill, I never said they throttled me. Please let me know where I used that word. I merely said that (1) 2 dvds appeared as having been shipped (on monday) after 5pm and of course I haven't received them, and (2) that the first one took two days to get here ( and BB's took one...is it the post? netflix? when shipped? who knows - it's just odd, as I said). However, if you want to assume that "odd" means I said they throttled me, you certainly can say that. You can say anything, for that matter.
This really is amazing. Not much point in responding to anyone who doesn't read what someone actually writes; assumptions seem to rule the day (to what was written or not written).

I did find it interesting that Netflix has already offered me 2 upgrades, the first one for 4-out and now, today, to upgrade to 5-out -and still on free trial. Was pretty cool, that.

[Firstlawofnature]

So mom watches ~37 movies per month. That's a lot. Your post was quite long and very detailed so forgive me for missing some of it. Sounds like you are happy with BBI.

I prefer NF. I think the web site, recommendation engine, selection and operations are superior to BBI. BBI shipped me movies out of queue order pretty frequently. I'm a medium user so I've never been throttled and am always pleased with shipping times. I like browsing movies on watch now - 5 minutes on this one, 5 minutes on that one, basically sampling movies on the fly. This is totally unique and original at this time. I also prefer staying out of stores whenever possible so exchanging is low on my list. I also continue to remember BBI as a low service, late fee collecting, dreary video renting outfit. I was so happy to rent without having to go to BBI that NF has me for a long time.

I'll give you hint at how to save even more money. Cancel your BBI service and they will offer you a 3 month discount to stay on. They are so desparate to cling on to subs they will offer you an even crazier price (very good for you). Try it.

[Scott]

Thanks, Firstlaw, since my renewal was this week I had already canceled and got 50% discount to stay (I read it somewhere online last weekend)...but I appreciate the hint. Was kind of you to offer the suggestion.

[Hunter McDaniel]

Scott- sorry if you took it the wrong way, but I was just trying to point out that $27 for 44 discs is not model that either BBO or NF can sustain and that if $27 is the most you'd be willing to pay to get that many discs from BBOTA - well, I think that's a bit chintzy. Postage is not even the largest cost of a DVD-by-mail business, and your free discs from the store with BBOTA cost them even more than the ones they send you by mail.

To repeat what I said earlier, I'm not criticizing you for maximizing the value of your BBOTA subscription; NF and BBO are not charities we have to feel sorry for. I'm just saying that your expectations of a "fair" price for the service you are receiving are quite a bit too low.

FWIW, I get 12-15 discs for my $18 from Netflix and I suspect that puts me in the unprofitable category. I would be willing to pay a good bit more than that if I had to (and it would still be a better value than cable) - but I'm glad I don't have to. I have BBO to thank for that, inasmuch as NF was in the process of raising their prices until BBO came on the scene.

[Edward R Murrow]

I don't see anywhere in the Form 8-K where BBI states that they will be raising prices. Also, BBI is saying that they will make changes prior to year end which could be tomorrow or Dec 31st.

[Hunter McDaniel]

"I don't see anywhere in the Form 8-K where BBI states that they will be raising prices."

What do you think it means when they say they are going to switch from focusing on market share to a focus on profitability? Sure sounds like they want to test the waters on a price increase.

BBI is also trying to increase profitability by shuttering more of its TA access points:

Blockbuster Closing 282 US Stores
http://biz.yahoo.com/ap/070628/blockbuster_stores_closing.html?.v=1

See, they can't lose money if people have no where to go to get the free movies. right? ;)

[Old Timer Too]

As another blogger pointed out, there are other ways to raise profitability (improve the bottom line) than with prices. Right now, it appears there is a price war looming on the horizon. But...

1. BB could be looking to cut its support staff, meaning, middle management. They could be looking to cut bonuses paid to management. They could be looking to put more benefits (health care, etc.) on the shoulders of the employees. They could (of course) look to close more stores (as they have been doing), especially low volume ones, but there is a price to pay whenever you do things like that. They could be studying ways to improve efficiency at the distro points. I suspect that NF is doing the same thing.

They could also cut back store hours (and save $$ on staffing).

Who knows, they could even institute some form of throttling (or delayed shipping) as Scott pointed out in his experience with NF.
By the way, Scott, it is possible that NF is saying shipped, meaning the Red Envelope is in the bag ready to go to the P.O.

My experience with BB is when they say shipped, they mean it has arrived at the P.O. and I often see the film the same day I get the e-mail saying it was shipped. I've had this happen (and I don't have a good explanation) on Sundays, getting the film on Monday. Same with holidays. A P.O. night shift?

2. Raising prices in the middle of a (or on-going) price war is not on the horizon. BB made the first move with $1 mail-only vs TA.

3. There are some bloggers who are so pro-(pick your vendor) that they are negative toward any comment that makes it look like the "other guy" is getting a leg up. It is a form of religious fanaticism and gets very old, very fast. Personally, I like to see the competition because it means a better deal for all of us.

4. Some people only relate to themselves, which means that if you watch a lot more movies than they do, they question it. I am a heavy renter, but haven't participated in BBTA for two months (I finally ran out of spare time to watch those films I was picking up from the stores near me). I have two days a week totally free and here in the upper midwest, you either roast in hot, humid air, or freeze your tail off if you go out. I've been married for 41 years, so the amount of "dating" we do is minimal, usually limited to a meal once in a while. I spend a lot of time with my entertainment and believe me, there are a lot of hobbies/habits that are many times more expensive than renting films. Finally, I don't always watch a film completely that I bring in. Sometimes, I turn it off after a few minutes, and chuck it up to experience. But, among all that dross are some gems, and while Watch It Now (or whatever the service calls it) is available, I use my computer for other things than downloading stuff from the web.

Here's something to consider for your folks - check your local Wal-Mart (or equivalent - Target, for instance) for collections. There are a lot of older titles available as part of multi-disc collections that are really priced so low that you wonder where the profit is.

Also, for those of you wondering about profit for both NF and BB, I know that BB buys a lot of those collections and then rents the discs one at a time. If I see a collection in BB that looks interesting and it is available locally (or through Amazon or DeepDiscount) at a similar price to renting, I'll buy it instead of renting it.

Right now, it looks like the cost to produce a decent DVD in volume is around a quarter, including cheap packaging. Also, checking out the $ stores (like Dollar Tree) for the older titles.

[Old Timer Too]

With all the noise on renting, profits, and such, the main thing was on the patent settlement. My take is that NF didn't want this to go to court for one main reason: the Supreme Court raised the bar on patentability of the obvious and NF would have lost. So, rather than end up paying atty fees for both sides, they settled. That's my guess on this and because both are big boys, they aren't about to publicize the real reason for settling. BB has some of the same problems in their patent portfolio. You'll see a lot more of this type of thing (settlements on patent cases) over the next few years until congress gets around to ordering the patent office to review all present and pertinent patents under the new Supreme Court guidelines.

[leonardodicrapio]

"My experience with BB is when they say shipped, they mean it has arrived at the P.O. and I often see the film the same day I get the e-mail saying it was shipped. I've had this happen (and I don't have a good explanation) on Sundays, getting the film on Monday. Same with holidays. A P.O. night shift?"

I think Blockbuster sends out all their e-mails later in the day (and sometimes the day after the movie ships, which could very well be the day you receive it as you said). This can be a little bit of pain when planning exchanges. The USPS Processing & Distribution Centers pretty much run 24/7 including holidays (Memorial Day, July 4th, etc.).