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VOL. 122 | NO. 4 | Friday, January 5, 2007

Blockbusted! Local franchisee sues Blockbuster Inc., alleges Dallas company 'undercut' its business

By Andy Meek

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MADE FOR TV: Dallas-based Blockbuster Inc. is the subject of a lawsuit in which a local franchisee claims the company undercut its business. -- Photo By Andy Meek

Fred Montesi III, a member of the well-known Memphis grocery family, was one of the first Blockbuster franchise holders in the United States.

He opened the video rental company's first store in Memphis in the late 1980s, later growing his Blockbuster franchise operation into one of the largest in the country.

But Southern Stores Video Inc., Montesi's local company that pays Dallas-based Blockbuster Inc. $2 million a year under an exclusive license agreement, now is embroiled in a legal dispute with the video rental giant. A partnership representing Southern Stores has filed suit in federal court claiming that because Blockbuster now allows customers to buy and rent videos online, the group's local franchise agreement has been undercut.

Kind of like Netflix ...

In late 2004, Blockbuster began selling and renting videos via the company's Web site, www.blockbuster.com, and customers now are able to complete their transactions online and return or exchange rented videos at participating Blockbuster stores.

The Memphis- and Nashville-area stores, which are operated by the Southern Stores group, are not participating in that arrangement.

Thus, Southern Stores officials are worried that some of their customers will become frustrated by the inability to drop off videos at the local stores and will forgo visiting them entirely.

From Southern Stores' point of view, this is not the first instance in which it has claimed programs and promotions by Blockbuster's corporate entity have had a negative reaction locally.

"There is evidence of the loss of customer good will and damage to reputation that prior nationwide marketing campaigns, such as Blockbuster Online and No Late Fees, have caused to Southern Stores," Tom Barzizza, vice president of marketing for Southern Stores, said in an affidavit filed last month.

Chasing the bucks

Blockbuster began dramatically slashing and dropping late fees charged to customers across the country more than a year ago, with the new No Late Fees policy going into effect at company-owned stores and some Blockbuster franchise stores.

As of Dec. 31, 2005, 4,617 Blockbuster-owned stores and 1,079 franchise-run Stores operated in the United States, according to the company's latest annual report.

"I just need to tell you that at this time we're not at liberty to discuss the lawsuit."
- Fred Montesi III
Owner of Blockbuster franchise operation Southern Stores Video Inc.

Memphis was one market that didn't participate in the No Late Fees program, causing some confusion among local customers who would cite the splashy TV commercials announcing the end of late fees at the video chain and then demand the local stores honor that offer.

The online program apparently is causing the same mix-ups among customers now. Court documents include an internal e-mail from a Southern Stores representative who recounted such an incident between a customer and a manager on duty that took place at the Blockbuster store at 1645 N. Germantown Parkway in November.

"This was a new manager and I could tell she was struggling, so I stepped in and apologized to the customer and asked if we could offer him one of his movies free tonight to try to diffuse the situation," the email reads.

"After he left and I was speaking to the (manager on duty), she thanked me for stepping in and said she had a gentleman come in the night before and get so angry that he started spewing expletives and threw something at her."

No comment

Blockbuster's online program was launched in 2004, the No Late Fees campaign began in 2005 and a new nationwide marketing campaign, Blockbuster Total Access, was launched Nov. 1. Under Blockbuster Total Access, online customers are given the option of returning their DVDs through the mail or exchanging them at participating Blockbuster stores for free in-store movie rentals.

The new program, which is an enhancement of the company's Internet-based subscription arrangement, lets customers bypass waiting for new arrivals in the mail and lets them essentially double the number of movies they can watch each month.

Attorneys for Blockbuster Inc. could not be reached to discuss the suit, and the local franchise group declined to comment on the court proceedings.

"I just need to tell you that at this time we're not at liberty to discuss the lawsuit," Montesi said.

Quite the head-scratcher

It's not complicated to imagine where Blockbuster got the idea for some of its latest corporate-sponsored gimmicks, such as the online rental service.

The chain's most recent annual report cites figures from Kagan Research LLC, which show consumer spending for in-home movie viewing rose from $25.5 billion in 2004 to $28.2 billion in 2005. That figure is expected to climb further still, to about $37 billion by 2010.

Buried in those numbers, though, lies an important clue about how consumers are choosing to solve an important video industry calculus. Take the year 2005: Ignoring pay-per-view, satellite, and other viewing options, the retail home video industry generated about $26.8 billion in revenue in 2005, according to the Kagan numbers. Of that total, about $18.7 billion came from the sale of movies - while only $8.1 billion came from rentals.

Meanwhile, an attorney involved with the local Blockbuster-related litigation, who declined to be identified, said the matter is still in the early stages. That may be because some of the information central to the case is still guesswork at this point.

For example, Southern Stores officials have expressed difficulty in putting a dollar value on the estimated loss of business they'll sustain from not participating in Blockbuster's Internet-based offerings. Barzizza's affidavit also includes this conjecture: "As the Blockbuster Total Access campaign proceeds, a number of the 'brick and mortar' Southern Stores may be forced to close and employees may be laid off," he said.

Attorneys representing Blockbuster Inc. belong to the Houston-based international law firm of Vinson & Elkins, regarded as one of the largest and most successful law firms in the country. Some of its notable clients in the recent past have included Halliburton Energy Services, Viacom and Enron, prior to its collapse in 2001. Alberto Gonzales, the current U.S. Attorney General, is a former partner of Vinson & Elkins.

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