Blockbuster Business Model

Since the new "late fees" at Blockbuster amount to "Whoops, you bought the movie," I thought I'd do a little model in an attempt to explain why they make it so difficult to get your money back. My results? There's not much reason for them to make it difficult, but it was fun to think through anyway.

So here I am, eagerly boring you with the details.

The new "late fees" scheme seems to be a normal rental period, a week grace period, after which they bill your credit card for the purchase price of the movie less rental fees. The trick is that if you return the movie, you're given a refund.

The details of this refund are a hassle: you must present your credit card at the store where you returned the videos, and otherwise the fees are applied as "store credit". While they seem eminently capable of automatically billing your credit card, they seem incapable of automatically refunding your money. You can't get a refund at a different store, either.

The only way I know how to make money off such an inconvenience is an investment approach. If you're familiar with how Paypal makes money, I think this will make some sense. Paypal holds money during a transaction, typically with a minimum holding period of 2 days. Since they handle a lot of transactions, they have a large amount of "float" that they can invest, at a profit.

So here's my back-of-the-envelope math:

Blockbuster's annual revenues are about $6B, mostly from rentals -- let's say average rental fees are $4, resulting in about 100M (rounded down to account for purchases and other merchandise) rentals annually.

Let's also say that 20% of rentals have this "purchase" system applied to them. So in our back-of-the-envelope world, about 20M videos a year are "purchased" and maybe later returned. Let's say the average video costs $10 when purchased, and the average "holding time" (during which they have your money but you haven't gone back to the store for a refund) for such a movie is a week.

This means Blockbuster is handling about $2B of these transactions annually (sounds nice, huh?) Since each transaction lasts a week, they have about $40M of investable "float" to use for whatever they want. Presuming they can invest this at 4%, they make an additional $1.5M annually on this scheme.

Not a big dent in their earnings, but annoying for their customers.

Maybe a better reason for their approach is to discourage late returns.

I've discovered a solution to this problem by accident. Change your credit card number often, and only tell the people you want billing it. Then Blockbuster will not bill your credit card when you have late movies, and when you return the movies, everything's even.

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