Late Fees are Dead; Long Live Late Fees

Following my post about Netflix, a new story about Blockbuster came to my attention. Blockbuster has announced that it will no longer charge late fees, or at least that’s how everyone is reporting the policy change. Putting it this way is a little misleading.

They are using this necessary change to their business model as a way to promote their own business. The growing popularity of Netflix (and even their own similar service) has demonstrated a strong consumer interest in being able to retain videos for an extended amount of time. Getting burnt by late fees once or twice is enough to drive any consumer to another system. Additionally, the way in which late fees were assessed made little sense. My roommate in college rented a movie and didn’t return it for three weeks. When he finally went to return it, they charged him in excess of $20. This is obviously more than the video cost to begin with and he didn’t even get to keep it. The fees weren’t based upon what it would cost to replace the copy of that movie, but instead based upon the amount of profit lost due to being unable to rent it to another member. Obviously, this was a broken system.

In order to add their own spin, Blockbuster supplied revenue numbers for their late fees. Late fees earned them appoximately $300 million. What is missing about this information is its relevance to the situation. That money shouldn’t be counted separately from its rental fee income as it is meant as compensation for that to begin with.

The new policy doesn’t change “due dates” for movies, but instead institutes a week long “grace period”. Let’s examine that a little further. You are entitled to keep that movie until the due date by virtue of paying your rental fee. If you can not return that video by the proposed date, you are allowed to keep it up to a week longer at no penalty. Because there is no penalty, the “due date” loses all significance. It is nothing more than a suggested return date. The real due date becomes the end of the grace period. It’s not going to take more than a month for consumers to figure that out.

The second part of their new policy is that following that week long grace period, you are not charged a “late fee” but you are charged that remaining cost of the video and it becomes yours. At least they recognized the problem with the old system. However, that charge is a fee and it’s assessed if you keep the video later than the grace period allows. How is this not a late fee? Well, the only functional difference is that you get to keep the movie. It is still a late fee. A change of nomenclature doesn’t mean that you’ve actually elimintated late fees. They’re just collecting them in a different way.

The next question is what if the renter doesn’t want to pay the (probably inflated) price for the movie. Blockbuster has you covered there too. Customers whom keep movies beyond the grace period may recoup that money by returning it within 30 days. The catch here is that you will be charged “restocking fees”. There is no functional difference between late fees and restocking fees. In both cases, you are paying money for keeping the movie too long and you don’t get to keep it afterward.

Is Blockbuster eliminating late fees? Not really. They’re eliminating it by changing the nomenclature. They can now advertise “No Late Fees” both in stores and on television. The sad thing is some people will be taken in by this and buy it hook, line, and sinker.