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Dish Launches Blockbuster Movie Pass, but Faces Serious Hurdles
Anyone who thought Netflix got negative publicity, wait and see what happens to Blockbuster.

Dish Networks announced today that it will use the Blockbuster name and Blockbuster's large number of premium content rental agreements with major studios to launch what it calls "a stream come true" online streaming service.

Dish hopes to compete with the likes of Netflix and other online streaming services and will make the Blockbuster announcement in the backyard of Netflix -- Silicon Valley -- a far cry from both Dish's Colorado roots and the L.A. studio jungle that gives Blockbuster the 28-day window, a potent weapon in its battle for content delivery dominance.

The planning for Dish's Blockbuster online movie rental announcement has been in the works for several months, but the timing couldn't be better: earlier this week Netflix stumbled for the second time in as many months, first raising prices and then suggesting that it will spin off its DVD mail-order service as Qwikster, while Netflix focuses exclusively on streaming delivery.

Yet Blockbuster, both as a brand and as an all-inclusive premium content distribution solution, has its own share of problems. Here are just three hurdles the Blockbuster name will face in online video delivery: brand dilution, service expectations, and online delivery limitations.

Problem 1: Brand Dilution

Blockbuster has a problem, inherent to well-known but faltering brands, that lingers for many years: negative brand perception.

The negative perception started when Blockbuster began shuttering local Blockbuster stores several years ago, after making a concerted push into DVD-by-mail delivery to offset losses to Netflix. Customers in suburban areas scrambled to find alternate locations, driving two to three times the distance they normally would to return DVDs or games.

Blockbuster had done a fantastic job putting other movie rental stores out of business, so brick-and-mortar alternatives were scarce. At the same time it was closing stores, however, the Redbox phenomenon was kicking in: Redbox offered movie rentals at 30 percent of the price of a Blockbuster in-store rental and was increasing its footprint at Walgreens, 7-11 and Walmart stores across the country. NCR, of cash-register machine fame, chose to use the Blockbuster name to compete against Redbox, for whom NCR had helped create automated kiosks but had negotiated NCR out of the revenue sharing mix.

The addition of a Blockbuster online movie delivery service, which Dish is pinning its hopes on, is another potential step in the brand dilution process.

Problem 2: Inconsistent Service Expectations

One of the selling points of Blockbuster's DVD-by-mail offering was the ability to return a DVD to a local Blockbuster store, which would then mail the DVD back to the fulfillment center. Why was this a selling point? When returning the DVD to a local Blockbuster, the mail-order subscriber was allowed to choose another DVD from the local store completely free of charge.

The model worked too well, and Blockbuster was forced to curtail the offer. At the same time, it was accused of being slow to mail DVDs to unlimited DVD-by-mail service subscribers, in much the same way that Netflix has been accused of this throttling process.

The expansion into DVD kiosks, such as Blockbuster Express, also proved initially successful, but NCR was unable to keep up with Redbox's growth and has lagged in terms of both geographic and market penetration.

The inconsistency of service offerings under the Blockbuster name, be they DVD-by-mail or kiosk or online delivery, will invariably hinder any service that uses the Blockbuster name as none of the service offerings are combined together for consumer simplicity-the hallmark of Netflix, at least until this week.

Blockbuster's shuttering of brick-and-mortar stores leaves a perception that the brand is dying, so Dish might have been better off using Blockbuster's powerful 28-day-window contracts but jettisoning the Blockbuster name, so that the new service isn't tainted by brand dilution or negative perceptions. Word on the street, though, is that the name and the contracts are inexorably linked, meaning that Dish is saddled with a name that consumers have forgotten about (at best) or actively despise (at worst).

Problem 3: Delivery Limitations

An issue that both Netflix and Dish face, even when they don't want to admit it, is the inconsistency of broadband connectivity across the United States.

We've covered this topic multiple times, as recently as a month ago when covering Apple's soon-to-be-released iCloud solution and as far back as early 2009, when Netflix CEO Reed Hastings telegraphed the intent to focus on streaming-only delivery.

"The inclusion of streaming in our service has broadened the appeal of Netflix and is driving growth," said Netflix CEO Reed Hastings in an early 2009 earnings call where the company beat estimates and raised its outlook for the rest of the year. "Essentially, both Netflix and Redbox are growing at the expense of video stores."

During that call, Hastings noted that Netflix subscriber rates in Silicon Valley had more than doubled the number of Netflix subscribers elsewhere in the nation. Hastings attributes the growth spurt to streaming capabilities, saying that the tech innovation factor around streaming is very high [in the San Francisco Bay area] and we believe the Bay Area is a leading indicator of Internet behavior elsewhere in America."

Yet the overall U.S. market's broadband connectivity hasn't kept pace, as noted in our article last December on the "nation of have-nots." The average consumer isn't yet equipped for a streaming-only solution and, since Dish doesn't have control of the DVD-by-mail or kiosk solutions, it risks gambling on streaming-only delivery and losing out to the status quo rather than to Netflix specifically.

Those who've followed Blockbuster's history ought to know this technical limitation well. Blockbuster famously attempted at the 1999 Streaming Media East show, to launch a major online movie delivery solution, bringing together its very strong brand with a not-yet-infamous name: Enron Broadband Services.

Blockbuster saw the potential for online delivery to be a differentiator from other brick-and-mortar movie rental stores, but was hindered by the broadband limitations of the day as well as a partner-Enron Broadband Services-that proved to be almost as much smoke and mirrors as its parent company, which famously imploded. 

Looking back at documents from the initial foray, long before Netflix even existed, I was struck by how similar the "pitch" was in 1999 to this week's set of events, so it's up to Dish to solve the Blockbuster problem that it faces even before its new service launches. It will be interesting to hear what technical solutions Dish suggests to address the inconsistency of broadband experiences across the United States.

"The melody lingers on..." is the ending line in a famous song, but sometimes it's just better if the music stops.

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