REWINDING A VIDEO GIANT

For customers who want to buy new DVDs, though, Blockbuster executives admit they'll have a hard time matching Wal-Mart's prices. Because of that, it appears much of the chain's new strategy rests on their belief that some customers will shift back from buying to renting DVDs. By year-end, Americans will own 3 billion DVDs, the chain says. Consumers really do watch some of them--like "The Matrix"--over and over. But some viewers can't help but wonder whether that $18 investment in "Legally Blonde 2" was really a smart move after all. Over time, Blockbuster suggests, this accumulated buyers' remorse will lead people to realize that renting offers better value. "You'll eventually see a slowdown in the number of DVDs consumers buy," says Antioco, suggesting that will boost rentals.

Outsiders are skeptical. "When you have seven years of [rising DVD sales] data, that suggests a pretty strong trend," says Lieberfarb, the former Warner Home Video chief. He says that for busy families, in which not everyone can watch at the same time, buying DVDs will remain more appealing. For years Lieberfarb has been saying Blockbuster is doomed, and despite all its new marketing initiatives, his opinion hasn't changed.

Bigger issues lie ahead. Video-on-demand provided by cable companies may one day be the home-entertainment industry's killer app. Blockbuster is unfazed. It believes that because studios can earn more from DVDs than video-on-demand, the studios will have a vested interest in supporting the older technology. If video-on-demand really catches on, however, it's hard to see how Blockbuster would compete.

Some investors, including Icahn, see the current challenges as an opportunity. "With a lot of companies, the time to buy is when people don't like them--that's what I've done all my life," Icahn told NEWSWEEK. Just a month ago he was lambasting Blockbuster's management over its failed merger with Hollywood Video and Antioco's $54 million compensation package. (Blockbuster says that figure mostly represents future bonuses that assume big stock increases; his cash compensation last year was $7 million.) But now that Icahn is a director, his views have softened. He even offers measured praise for Antioco's strategies.

And though the company seems like an endangered species, Jennifer Illes, a Harvard Business School researcher who has coauthored case studies on Blockbuster, refers to the classic '80s song "Video Killed the Radio Star." "I still listen to radio all day long," she says. Sometimes even obsolete technologies survive longer than you think.

WITH RAMIN SETOODEH

© 2005