Blockbuster is struggling to reinvent itself as an entertainment retailer, emphasizing (WSJ: requires subscription) sales instead of just rentals.

Last year, in a major shift, people spent significantly more on movie purchases than rentals. While retail sales for films rose 19% to $12.26 billion, rental spending slipped 3%, to $9.92 billion, according to Adams Media Research of Carmel, Calif. And in December Blockbuster's stock plunged 32% after the company disclosed that its fourth-quarter revenue would be weaker than expected, which it blamed on consumers snapping up low-priced DVDs and videos at discount retailers.
Now the 53-year-old Mr. Antioco, who took over Blockbuster in 1997, is steering the company into the retail market -- and onto a risky collision course with discount chains such as Wal-Mart Stores Inc., Target Corp. and Costco Corp. A bit player with only a 3% share in video sales, Blockbuster hopes to triple that share by 2006.

...Mr. Antioco last summer announced plans to plunge Blockbuster into the retail market. It revamped store layouts: Instead of scattering shelves of movies for sale throughout the store, it grouped the shelves together under huge "Buy This" signs hanging from the ceiling. Used tapes and discs, called "pre-viewed," were put in separate racks from new movies.

To ensure that customers can't miss the products for sale, stores are arranged to steer them past racks of for-sale product before they get to the rental wall that usually runs along the perimeter. Blockbuster has also created similar zones dedicated to selling video games.

Blcokbuster's predicament did not come about accidentally. As it's market share grew to 40% it exerted significant bargaining power over the studios which looked for a way to strike back:

Worried they had become too dependent on Blockbuster, some studios cut prices on DVDs in the hope that a thriving retail market would weaken Blockbuster, whose expertise was in rentals. Last year, Warren Lieberfarb, then chief of home video for AOL Time Warner Inc.'s Warner Bros., complained that Blockbuster had used its market share "to increase their margins at the expense of the studios." Mr. Lieberfarb, who left Warner in December, led a drive to offer cheap DVDs to train the public to buy rather than rent them and, he says, to create "an antidote to Blockbuster's dominance" without hurting the studio's profits.

We've seen this kind of tug-of-ware before (for example, Nike vs. Footlocker) between vendors and retailers that get too powerful. Becoming the market leader brings its own set of new risks and challenges.