The coming year could witness the decisive battle for market share in the online DVD rental business, with IT providing the competitive advantage.

In one corner, with 3.5 million customers and 36 distribution centers: Netflix. In the other, with 1 million online subscribers and 5,700 retail stores: Blockbuster.

For Netflix, a crucial weapon for maintaining its market share (estimated at two-thirds of online DVD rentals) is new, homegrown software that improves upon the Oracle database the company uses to automate the DVD distribution process.

The software consults the database to match customer requests with the movies in inventory. Based on algorithms devised to maximize delivery time by mail, the application decides which distribution center will fulfill each movie. The program then generates a "pull list" for workers at each center to fulfill the orders and ship them out. "The whole idea of this system is to get discs in and out faster and to lower cost," says Tom Dillon, Netflix vice president and COO.

Blockbuster is attacking with similar technology to orchestrate DVD delivery by mail from the chain’s stores. Central to the Blockbuster strategy is the integration of 28 systems into one that feeds data about online orders to retail locations quickly. Shane Evangelist, senior vice president and general manager for Blockbuster Online, says he expects the rollout of this system to be completed by the end of 2006. "The hard part was getting the data to the stores," he says.

Critics are skeptical Blockbuster can win. Tom Adams, president of Adams Media Research, notes that inventory at retail stores is small in comparison to inventory at distribution centers. Therefore, when one Blockbuster store doesn’t have a video in stock, the system will pull the video from another store, which could prolong the delivery time. "Even with the best technology on Earth, it’s difficult to play catch-up," Adams says.