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Netflix Sues Blockbuster, Citing Patent Infringement

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Netflix shut Wal-Mart out of the online DVD rental market without using its hallowed patent on DVD-by-mail distribution. A number of clones exist, most notably the Blockbuster service, each adding a few tweaks on the convenient web-based rental service pioneered by Netflix.

Netflix Inc. sued Blockbuster Inc. for patent infringement in a California court today, asking for damages. The Blockbuster service differs in minor aspects, for example, offering two in-store rental coupons each month. It’s tried to compete by under-cutting price, but that has been countered for the most part by Netflix, and Netflix’s DVD selection is unbeatable. Reed Hastings, the CEO of Netflix, recently noted that “Blockbuster is as big as Google,” and that video rental stores were not going away any time soon.

“Blockbuster has been willfully and deliberately copying Netflix’s business methods,” Netflix spokesman Steve Swasey said. The core of the complaint is the technique of using a queue or wishlist for automatically shipping DVDs as previously viewed ones are returned.

The Netflix Patent 6584450 reads in part:

According to one aspect of the invention, a method is provided for renting items to customers on a subscription basis.

According to the approach, customers provide item selection criteria to a provider provides the items indicated by the item selection criteria to customer over a delivery channel.

Netflix patented the process for managing DVD wish lists — the famous queue — in June 2003. Netflix was issued a second patent Tuesday that covers an even wider range of automated interaction with its customers. This may have triggered the lawsuit.

It remains to be seen how this may play out. Netflix recently reached a class-action settlement on accusations of throttling frequent renters. They determine the number of copies of a movie to order using formulas similar to picking stocks. Crash, for example has 250,000+ copies, whereas a lesser movie might have under 100. They may also introduce a download-rental service soon, according to an SEC filing.

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