DALLAS – Five years ago, during Netflix Inc.’s live phone call with analysts to review year-end results, founder and CEO Reed Hastings and Chief Financial Officer Barry McCarthy mentioned much-bigger rival Blockbuster 22 times.

Hastings and McCarthy were speaking from a conference room in their funky two-story former headquarters in Los Gatos, Calif. The building had no elevator, and windows overlooked old picnic tables in the parking lot.

Netflix’s annual sales had reached $500 million for the first time in 2004, and the pioneer of renting DVDs by mail had posted its second profitable year since its founding in 1997.

That success turned Blockbuster management, led then by longtime CEO John Antioco, into believers. The DVD-by-mail business was no longer just a niche online venture for early technology adopters in the San Francisco Bay area.

In August 2004, Blockbuster Online countered with its own by-mail service, enticing customers with coupons for free in-store rentals. Blockbuster did away with late fees and signed on 2.1 million customers to its new in-store subscription program.

More important, Blockbuster Online added almost as many subscribers in 2004 as Netflix.

In downtown Dallas, Hastings’ voice echoed through the hallways of the 32nd floor of Renaissance Tower. Blockbuster executives had their doors open and were listening to the Netflix call on speaker phones.

“In the last six months, Blockbuster has thrown everything but the kitchen sink at us,” Hastings told analysts.

A day later, Hastings received a heavy box from Texas.

Inside was the kitchen sink.

For the next two years, Blockbuster gave Netflix a run. In 2006, when it launched Total Access, which let subscribers return by-mail movies to a store in exchange for a free rental, it nearly doubled its online subscribers. the end of that year, Blockbuster had 2.2 million subscribers — a rapid accumulation, considering it was years behind Netflix.

the second quarter of 2007, Netflix had lost 55,000 subscribers from the previous quarter.

It was the last time Blockbuster put a lid on Netflix’s growth.

Today, Blockbuster is struggling to keep its stock price above $1, a minimum threshold that’s threatening to knock it off the New York Stock Exchange. It finds itself in an all-out fight for survival, warning investors earlier this year that bankruptcy is a possibility.

Would the kitchen sink era symbolize Blockbuster’s last heyday?

Blockbuster turns 25 in October. It’s still the largest renter of movies.

It won the brick-and-mortar battle well before its largest store competitor, Movie Gallery Inc., filed for bankruptcy in February for the second time. Movie Gallery is closing its remaining 2,414 stores, which include Hollywood Video outlets.

As in the 1990s, when Blockbuster won revenue-sharing agreements from the big movie studios, the chain remains a critical link to consumers for Hollywood.

Blockbuster struck deals this year with three studios — Fox, Sony and Warner Bros. — for exclusive rights to rent new-release DVDs for the first 28 days. For studios, it preserves the higher price that box office hits traditionally fetch when they initially move to DVD. That had been threatened by Redbox’s $1-a-day rental kiosks.

For Blockbuster, it’s a competitive advantage over Netflix and Redbox, becoming the exclusive source of new-release DVD rentals. New releases account for up to 80 percent of Blockbuster’s revenue.

Blockbuster still has 25 million customers who come through its 4,000 U.S. doors at least once a month, preferring to browse the shelves when they have time for a movie.

But last year’s $6.7 billion rental market is way below its 2002 peak of $8.3 billion, and stores now share more than half that revenue with kiosks and by-mail rentals.

DVD rentals still dwarf the $1.4 billion that consumers spent in 2009 for video on demand, said Tom Adams, president of Adams Media Research.

“Ironically, by-mail subscriptions and kiosks assumed the Darth Vader role for stores, not video on demand,” Adams said.

The overall number of U.S. video stores will fall to fewer than 5,000 by 2014, Adams said. That’s down considerably from the 2002 peak of 26,000 and last year’s total of 14,000.

“Blockbuster is still a potent brand name. Like Apple, there’s a small group of dedicated users getting it through its near-death experience,” Adams said.

Last year, its revenue fell $1 billion to $4.06 billion as it closed stores and lost market share. It posted a $558.2 million loss and is struggling to persuade lenders to renegotiate $1 billion in debt.

Technology is the new competitor. Netflix boasts that it’s reaching the on-demand world faster; more than half of its nearly 14 million subscribers stream video.

Consumers are more quickly adapting to watching movies in a variety of ways — through cable and satellite TV, over the Internet or on-demand through video game consoles, smart phones and web-enabled televisions. The latest example is Apple allowing Netflix to stream movies to its subscribers who buy the hot-selling iPad.

Netflix says more than 50 million households are equipped to watch its video-on-demand with Xbox 360 and Wii consoles.

Blockbuster and Netflix are also seeing nontraditional competitors enter the fray, ranging from Apple and Amazon.com to Wal-Mart, which earlier this year acquired Vudu, a streaming movie rental service.

Redbox, with 22,000 kiosks, said revenue grew 70 percent in the first three months of this year as consumers took to its $1-a-night rentals.


Only subscribers are eligible to post comments. Please subscribe or to participate in the conversation. Here’s why.

Use the form below to reset your password. When you've submitted your account email, we will send an email with a reset code.