Blockbuster Takes a Beating in War with Netflix

After another quarter of disappointing revenue, a sharp loss in mail-order subscribers, and a rash of store closures, Blockbuster execs admit that the furious battle with Netflix has taken a serious toll on the rental giant.

During its third-quarter earnings call, in which the company reported a $37.8 million loss for the period and the desertion of 500,000 subscribers from its mail-order DVD service, Blockbuster CEO James Keyes said that "our pursuit of by-mail subscribers was a bit overzealous," according to the AP. No kidding.

Blockbuster isn't planning to dump its mail-order Total Access plan anytime soon, but Keyes said he plans on de-emphasizing the service, concentrating instead on online movies (Blockbuster recently acquired Movielink) and the company's sagging brick-and-mortar stores, 500 of which closed in the past few months.

So what happened? Wasn't Blockbuster's Total Access service gaining subscribers by leaps and bounds just a few months ago, while Netflix was starting to lose customers?

Well, turns out a lot of those Total Access customers were essentially freeloaders. Lured by the promise of returning an unlimited number of mail-order rentals to brick-and-mortar stores for free exchanges, customers were (unsurprisingly) taking full advantage of the service, returning as many Total Access movies to stores as they could (and emptying store shelves in the process). When Blockbuster got wind of it and began charging an additional $7 a month for the privilege of unlimited in-store returns, a huge chunk of Total Access customers promptly deserted. About 3.1 million subscribers remain, compared to 3.6 million last quarter; meanwhile, Netflix tacked on 286,000 new subscribers in the third quarter, for a total of 7 million, according to the AP.

OK, so did Netflix win the mail-order DVD war? I wouldn't go that far, but the pioneering company certainly seems to have the upper hand for now. It has the edge in subscribers, it has a market cap of about $1.7 billion (versus about $920 million for Blockbuster), and it seems to have regained momentum in the past few months. Of course, the next frontier for both Netflix and Blockbuster is streaming movies and video downloads—and that could be a whole new ball game.

Related:
Blockbuster 3Q Loss Widens, Plans Cuts [AP, via Yahoo! Finance]