CNN reported yesterday that the Attorney General of New Jersey is suing Blockbuster, Inc., accusing the movie rental giant of consumer fraud. Blockbuster touts an end to late fees, which previously made up a big portion of its profits.

High late fees became an Achilles heel when NetFlix entered the market. NetFlix customers pay a monthly fee and get 3 movies mailed to them. After viewing, renters mail them back to NetFlix in a prepaid envelope, and NetFlix sends out the next movie on the customer’s “queue.” The program has proved wildly popular, especially with people who either 1) rent a lot of movies or 2) end up paying a lot of late fees. In other words, some of Blockbuster’s best customers.

Blockbuster’s “End of Late Fees” program has some small print, which is what the NJ AG is going after. If users don’t return the movie within a week of the due date, Blockbuster bills them for the cost of the movie. If customers then return the movie within 30 days, they get a partial refund, minus the original rental cost and an unspecified “restocking fee.” And while Blockbuster’s website features the “End of Late Fees” quite prominently, they do as much as they can to obscure how the program actually works–see http://www.blockbuster.com/nolatefees/index.html. If you actually want details, you can click to — not a page that explains how the program works– but an “FAQ” with such useful tidbits as:

Question
Now that late fees are ending, can I keep movie and game rentals as long as I want?
Answer
Movie and game rentals are still due back by the due date shown on your receipt.

In short, the program tries to make it difficult for customers, and doesn’t reveal all the pricing details. The AG has a point.
Unfortunately, Blockbuster came to rely on late fees for profit. And since so much of their inventory and volume are new releases, they wanted customers to pay for those expensive titles, whenever they were out of the store. Great revenue management theory. And it worked really well for a long time.

What could Blockbuster have done? For starters, their advertising is deceptive. Don’t treat your customers that way. They could have just said “keep all your movies for a week” and people probably would have been happy. They could have included a prepaid mailing envelope to let customers return movies like NetFlix. Customers might even be willing to have the postage cost added to their rental to avoid late fees.

Blockbuster also has a huge retail network, a strong brand, and buying clout. They’re trying to leverage this into their own NetFlix-like service, but again, they seem to treat their customers like the virtual monopolist they once were. “Sign Up Today To Guarantee Your Price Through January 2006*” In other words, we’re pretty much announcing that we’re going to jack the prices up on you.

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