Blockbuster to end late fees Jan. 1

Desperately trying to mollify its restive customers, Blockbuster Inc. said yesterday that it plans to effectively eliminate late fees on game and movie rentals, starting Jan. 1.

Company officials estimated the move will cost the company $250 million to $300 million next year, but they hope to offset the loss of revenue with increased rentals and sales and various expense reductions.

"Late fees are the number one dissatisfier in our industry," said John Antioco, chairman and chief executive of Blockbuster, in a conference call with analysts. "Eliminating late fees is good for customers, and we believe it will be good for our business as well."

Antioco acknowledged late fees have always annoyed customers, but said the issue came to a head this year as the number of no-fee alternatives multiplied.

Soaring DVD sales have had the biggest negative impact on movie rentals, but rivals like Netflix and Comcast have exploited anger about late fees to promote their own businesses at Blockbuster's expense.

Blockbuster has taken steps this year to deal with anger over late fees. It launched an online subscription service to compete against Netflix and started an in-store subscription plan called Movie Pass. Each program allows customers to rent an unlimited number of movies, a few at a time, for a flat monthly fee, with no late fees.

Boston-area Blockbuster stores slashed their late fees and simultaneously offered a one-time amnesty to customers with late-fee balances to woo them back into stores.

But, Antioco said, market tests in other parts of the country found that eliminating late fees was the most effective tactic. He said the tests indicated consumer perceptions of Blockbuster improved dramatically after late fees were eliminated. He said employee morale also improved, because store personnel no longer had to engage in unpleasant confrontations with customers.

"If you gave the video store to a customer and said what's the first thing you'd change, they'd all say they would eliminate the late fees. They all hate them," said Demy Martin, who owns 33 Blockbuster franchises in New England.

Under the new policy, movies and games will still have rental periods -- two days for a new movie release and a week for games and all other movies.

Customers will automatically be given a one-week grace period to return a movie or game. If the movie or game is not returned by then, the customer will be automatically charged the sale price of the movie. The purchase price can be refunded, minus the $1.25 restocking fee, if the movie or game is returned within 30 days.

But the approach comes with two major risks. The first is whether the goodwill generated by eliminating late fees will over time boost sale and rental income enough to offset the immediate loss in revenue. Martin, the franchisee, said 8.25 percent of his revenue currently comes from late fees.

The second major risk is that hot new rentals may be taken out of the store's inventory for extended periods of time, which could cut into revenue substantially.

Antioco, Blockbuster's chairman and chief executive, said he doubted consumers would hold movies and games that long. In tests, he said, customers on average kept the movie or game 1.5 days beyond the due date. He said customers seemed to view the no-late-fee policy as a courtesy and returned movies promptly, so other customers could rent them.

Blockbuster is forecasting that operating income for 2005 will be on a par with the depressed results for this year, not including the $50 million cost of launching the no-late-fees initiative.

Blockbuster had earlier projected a 30 percent decrease in 2004 earnings per share, compared to 2003 results, but in late October said profitability would probably erode even further because of sluggish rentals and other charges.

Bruce Mohl can be reached at mohl@globe.com.