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Blockbuster and Netflix stop suing each other

Will secret 'sweetheart' deal stifle the competition?

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Blockbuster and Netflix have ended their patent litigation battle, Blockbuster revealed today. No terms have been announced, but in an SEC filing the video retailing giant said the settlement would not affect financial performance.

Twelve months ago Blockbuster filed a counter-claim, accusing Netflix of using deceptive practices to obtain patents and monopolise the online rental business. Marshall Grossman, of Alschuler Grossman, Stein & Kahan, the firm representing Blockbuster, said at the time that Netflix claiming exclusive rights over subscription movie rentals was "like a fast-food restaurant trying to patent selling hamburgers through a drive-through window".

Netflix, America's biggest online video retailer, had earlier sued Blockbuster for alleged infringement of its business method patent.

Could the two rivals use their secret pact to stitch up others? According to the Associated Press, U.S. District Judge William Alsup in San Francisco, who dismissed the case yesterday at the companies' request, "refused to oversee the settlement because Netflix and Blockbuster wouldn't provide him with a copy of the agreement".

Scott Kamber, a New York lawyer who is suing Netflix seperately over alleged patent abuse, thinks the accord could stifle competition. "We are very concerned," he told AP business writer Michael Lidtke. "One thing is for sure: This isn't going to be good for consumers if they don't want this settlement to see the light of the day."

We shall find out soon enough if Blockbuster and Netflix are up to no good.

In the meantime they are fighting tooth and nail for the North America online video rental market. Netflix dominates this market - it pulled in almost $1bn in revenues in 2006 and currently claims almost seven million customers. But margins are thin - around five per cent net. Blockbuster's arrival on the scene as a serious competitor will ensure that they won't get any fatter. From a standing start, Blockbuster is growing rapidly, gaining three million customers by the end of Q1 this year, on the back of cut-price deals for people who place their orders over the internet.

But growth has come at a price and Blockbuster is feeling the strain. In its SEC filing today, the company said it is seeking to change a credit agreement so that it can get away with lower earnings requirements.

In the first half of the year, it has spent a lot of money on its Total Access online video rentals program - and it wants to carry on spending to bring the customers in. According to reports, analysts had expected Blockbuster to raise online rental prices by now. But the company doesn't want to do this until the end of the year, when it will make changes to the "offering that it believes will strike the appropriate balance between continued subscriber growth and enhanced profitability".

Netflix meanwhile can carry on not being bought by Amazon and figure out how it can turn a profit from video download rentals. ®

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