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The once lopsided battle between Netflix (NFLX) and Blockbuster (BBI) has become more interesting and competitive of late. During the final three months of 2006, Blockbuster emerged as a credible competitor after finally figuring out how to use its brick and mortar stores to its advantage.

nflx_bbi Blockbuster was years late and millions of dollars short when it unveiled Blockbuster Online in 2004. Since then it has struggled mightily to imitate Netflix’s success without cannibalizing its 5,000+ U.S. retail locations. The results have not been pretty: during the first nine months of 2006, Netflix gained 5 net new subscribers for every one Blockbuster added. Netflix’s 3X lead in subscribers is also reflected in the traffic disparity between the two websites.

Total Access, Blockbuster’s reworked online offering that debuted in November, has finally injected some much-needed life into the underachieving service. Beyond simply allowing subscribers, if they choose, to speed up their rental queues by returning movies directly to stores, Total Access now entitles members to free in-store rentals as part of their subscription. Essentially it’s all of the convenience of an online rental service plus the added benefit of immediate access to movies.

Thanks to Total Access, Blockbuster had a break-out quarter in Q4, netting 700,000 new subscribers, which puts it narrowly behind the tally Netflix is likely to report:

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For Blockbuster, Total Access finally makes sense. Previously, store employees faced a clear conflict of interest: they were asked to hawk a service that, if successful, would likely lead to the elimination of their own job. These folks can now rest assured knowing that Blockbuster Online is no longer a replacement for the brick and mortar business, but rather one that works in concert with it. To get Total Access off to a strong start, Blockbuster outfitted its stores with wireless laptops (for enrolling new members) and incentivized employees to pitch the service…and pitch it they did as evidenced by the nearly 50% jump in Blockbuster Online membership during Q4.

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Unlike Netflix, Blockbuster is not solely dependent on the online channel for new enrollments. Its ubiquitous retail stores had until recently been an underutilized channel for trumpeting the online service. The very stores the online subscription service was thought to render obsolete, are in fact the marketing trump card Blockbuster never seemed to realize it held in its hand. Indeed it’s these very stores, and their employees, that deserve the credit for Blockbuster Online’s Q4 resurgence: 58% of Blockbuster Online members enrolled in-store, rather than online, during Q4.

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Total Access has also had a significant impact on Blockbuster’s online churn, or the percent of all members who cancel each month. Netflix reports this closely watched industry statistic, while Blockbuster has yet to. Using Compete’s data and Netflix’s online churn formula (Subscriber base at start of the quarter + new enrollments – cancellations, divided by 3) Compete calculates that during Q4, Blockbuster’s online churn dropped by nearly a third to 7.0%. Although this still pales in comparison to the 4.1% Netflix is likely to report later this week, it’s a far cry from the 9.5% churn Blockbuster Online averaged during the first nine months of 2006. Still, if Blockbuster had been able to match Netflix’s churn in Q4, it would have netted an additional 240,000 subscribers.

Netflix greeted 2007 with the unveiling of its long-anticipated movie download service which happens to counter Blockbuster’s newfound immediacy advantage. While Total Access helped clot some of Blockbuster’s membership hemorrhaging in Q4, Netflix’s continued innovation proves Blockbuster has much work left to do

Source: Total Access Gives Blockbuster Credibility To Compete With Netflix