WAL-MART, BLOCKBUSTER TESTING ONLINE DVD RENTALS

DAN ALAIMO

BENTONVILLE, Ark. -- At a time when video rentals are slipping because of DVD sales, two of the biggest names in retail are testing online DVD rentals using a subscription model.Wal-Mart Stores here, through its Wal-Mart.com division, and Blockbuster, Dallas, through DVDRental-Central, are testing a form of rentals popularized by Netflix, Los Gatos, Calif. Customers pay about $20 a month for "unlimited" DVD rentals, delivered and returned by mail, with no late fees. In the case of Wal-Mart and Netflix, customers can check out up to three titles at a time, while DVDRental-Central offers four. DVD-RentalCentral and Netflix charge $19.95 a month; Wal-Mart charges $18.86 a month.

Both the move to a subscription model and the online rental offering are seen as signs of the rental industry's health, said industry observers.

"Wal-Mart doesn't go into anything half-heartedly," said Bill Bryant, vice president, sales, Ingram Entertainment, La Vergne, Tenn. "They enter whatever segment they are going after in an effort to succeed and, if it can be successful, they will succeed.

"The fact that Wal-Mart is entering with a subscription rental model shows that rental is very healthy, that there are still many opportunities in the rental market, and there will continue to be for many years."

Wal-Mart launched its test last month, will seek feedback from its initial group of customers, then fine-tune the service and roll it out nationally next year, said Cynthia Lin, a spokeswoman for Wal-Mart.com, based in Brisbane, Calif. "We looked at our own sales figures of the sales of DVD players and DVD software in our stores, and it's clear that it's becoming more and more popular among our customers," she said.

"We are optimistic that customers will appreciate the kind of value, convenience and selection that they can get through this online DVD service," she said. While the household penetration of DVD players is now over 30%, some researchers have said that could reach 70% over the next two years, "so we think there is certainly a market there," Lin said.

Meanwhile, Blockbuster's test of online DVD subscription rentals has been very low-key. The company acquired DVD- RentalCentral using the name "Online Subscription Partners" and did not confirm the connection until media reports appeared saying that Online Subscription Partners had the same address and phone number as Blockbuster. The video specialty giant is treating DVDRentalCentral as a research and development laboratory, said Karen Raskopf, spokeswoman for Blockbuster. "We are looking at it. We are monitoring it. We continue to believe that, from everything we see, that online DVD rentals is a niche market," she said.

On the other hand, a three-month-old test of subscription rentals of DVDs in several hundred Blockbuster's stores has been so successful, the company just expanded to a fifth market, Raskopf said. Blockbuster calls the program "DVD Freedom Pass." "What we've seen in our early results is that our sales have exceeded our expectations. Customer satisfaction is at an unbelievable 98% level. We've never offered anything at Blockbuster that has had a higher satisfaction rate," she said.

"It gives people the immediate gratification they want, a good value, unlimited access to DVDs, and no due dates and no extended viewing fees. We really think there is an opportunity for store-based subscription models and we are going to see that grow. We think the online subscription model is just a small sub-component of that," Raskopf said.

Netflix was the pioneer of online DVD rentals and the subscription pricing model. The company is both concerned and vindicated to see Wal-Mart copy its program, said Rick Sneed, spokesman. "It's sort of a validation of the market to have the largest company in the world decide that it is interested in the market and develop a service that would compete with us," he said.

But Netflix's head start gives it an advantage over new entries, no matter how large they are, he said. Speed of delivery depends on systems and infrastructure, and Netflix has 11 distribution centers across the country, with more planned. Wal-Mart has one, Sneed said.

"We've spent a lot of time, money and effort on convincing people that this is a cool way to rent. For Wal-Mart or Blockbuster, or anybody else, to come against us, because we have such a head start, they are going to have to spend a lot of money advertising and promoting their product. By doing that, they are going to speed up the process of growing the market," Sneed said.

Sneed compared Netflix's advantage to the one Amazon had when Barnes & Noble tried to compete with it in the online bookselling market. "We have a very good brand. We have a very loyal customer base," he said.