REWINDING A VIDEO GIANT

This business wasn't so complicated when Blockbuster opened its first store in 1985. Founder David Cook's idea was to offer a well-stocked, uncluttered, porn-free and family-friendly alternative to mom-and-pop video stores. Wayne Huizenga, who'd already made millions founding Waste Management, bought the 20-store company in 1987 and built it up to 3,600 locations and $2 billion in sales before selling out to Viacom in 1994. From there Blockbuster began to lose focus. In one ill-fated move, the company hired a Wal-Mart executive who filled stores with T shirts, movie posters and other merchandise. As profits fell, in 1997 Viacom chief Sumner Redstone hired Antioco, a retailing veteran of 7-Eleven, Pearle Vision and Taco Bell, to fix the mess. As an unhappy Blockbuster customer himself, Antioco immediately recognized the chain's biggest problem. "I'd quit going to Blockbuster on weekends because I could never get the movie I wanted," he says.

To boost inventories, Antioco persuaded movie studios to sell VHS movies to Blockbuster for a fraction of the usual price, in return for a share in the rental revenue. To promote its deeper selection, he launched a Guaranteed In Stock program, in which customers who couldn't find the movie they wanted got a rain check for a free rental. The plan worked, and revenue started rising again.

But as Antioco and his Viacom overseers celebrated, new threats were emerging. By 1999 Reed Hastings, a Silicon Valley veteran, had created Netflix, partly out of anger when Blockbuster charged him $40 in late fees on his overdue rental of "Apollo 13." Its biggest selling point: customers could return movies by mail whenever they wanted, with no extra charges.

Hollywood presented other challenges. By the late 1990s, studios were buying into the vision of Warner Home Video chief Warren Lieberfarb, the so-called father of the DVD. Since DVDs cost less to manufacture than videotapes, Lieberfarb convinced studios that instead of selling copies mostly to rental chains for $50 or more (as they'd done with VHS), the studios should sell DVDs directly to consumers for $20 or less. His plan caught on. By 2002 Americans were spending more to buy movies than rent them, mostly at places like Wal-Mart and Best Buy. For Blockbuster, which was slow to jump on the DVD bandwagon, the shift has hurt badly. Its stock recently traded below $10, a third off the price of a year ago.

Blockbuster's attempts to fight these trends haven't come cheap. Advertising the End of Late Fees program, for instance, has cost $50 million. To see how this spending is playing out, stroll up to the Blockbuster store in the Detroit suburb of Plymouth, Mich. In one window hangs a yellow banner: WELCOME TO LIFE AFTER LATE FEESwelcome to life after late fees. Store manager Matt Penhollow says the program has caused a spike in rentals (as it has at most Blockbuster locations). Inside, to the right of the entrance, is a large, segregated part of the store called Game Rush, its shelves lined with videogames. Blockbuster plans to incorporate it as a subsection of many stores. While the walls of the store are lined with new DVDs, as in every Blockbuster location, a growing section of the interior aisles sells used DVDs. Many of those films were traded in by customers, who get $3 and up for each title. Blockbuster hopes to sell them at double or triple that price.

Along with the online program, that means there are now many different ways to take a movie home from Blockbuster. In a sense, the company is trying to become customers' entertainment concierge, in a strategy similar to how stock brokerages evolved from processing trades into serving as clients' financial advisers. Antioco articulates Blockbuster's strategy as wanting to serve customers regardless of whether they choose to buy, rent or trade movies--and whether to do it online or in a store.