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Netflix (Nasdaq: NFLX) on Tuesday filed a patent infringement suit against Blockbuster alleging the bricks-and-mortar movie rental chain illegally copied its ideas. Netflix is seeking a court order that would force Blockbuster to change its online rental processes and pay patent royalties.
The complaint was filed in U.S. District Court in San Francisco. At issue are the online wish lists that help customers prioritize their DVD selections. Netflix also alleges its patents cover the option of renting a DVD for an unlimited time without ringing up late fees.
Netflix introduced the "no late fee" option seven years ago. Blockbuster finally followed suit last year by giving customers a pass on belated returns to its chain stores, marking a major shift in the revenue stream of a company that generated hundreds of millions of dollars each year from late fees.
"Blockbuster has not yet been served or had the opportunity to review the suit, so it would be inappropriate for us to comment on it," Blockbuster spokesperson Randy Hargrove told the E-Commerce Times.
Heated Competition
Blockbuster Online subscribers can choose from several rental plans, starting at US$9.99, with the $17.99 three-movie-out plan being the most popular. Netflix has a similar pricing model. With both services, movies are sent directly to subscribers' homes by mail. Subscribers return the DVD in a postage-paid envelope and the rental houses automatically send the next movie on the customer's 
wish list.
The competitors also have similar delivery models, but Netflix has 4.2 million subscribers to Blockbuster's 1.2 million. Netflix has been blamed in part for Blockbuster's $585 million loss last year, and the chain has been closing stores in the face of the Internet-based delivery trend. Meanwhile, Netflix earned $42 million last year.
Blockbuster launched its Internet service in 2004 after watching many of its customers migrate to the Netflix model. Blockbuster struck back last year when it began offering to Netflix online rental subscribers two free months of service, a free retail DVD of their choice and the opportunity to subscribe to Blockbuster Online at their current Netflix price for one year if they agreed to switch over to Blockbuster's service.
Exploring the Patents
Netflix's first patent, granted in 2003, covers the method by which its customers select and receive a certain number of movies at each shipment. The second patent, issued Tuesday, "covers a method for subscription-based online rental that allows subscribers to keep the DVDs they rent for as long as they wish without incurring any late fees, to obtain new DVDs without incurring additional charges and to prioritize and reprioritize their own personal dynamic queue ... of DVDs to be rented," the lawsuit said.
After the patent suit drags out for years, Blockbuster will emerge victorious, predicted Wedbush Morgan analyst Michael Pachter, who also is an attorney. In his view, the patents are only enforceable as to the actual processes, not the ideas of renting movies via the Internet through the mail.
"My professional opinion is really more colored by Netflix's repeated public comments about how inferior the Blockbuster online offering is," Pachter told the E-Commerce Times. "If Blockbuster stole Netflix's process, then the two offerings would be identical."
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