McDonalds and many supermarkets offer vending machines in their stores that rent new movie releases for as low as $1.00 per day provided that they are returned in 24 hours before incurring a late fee

How can Netflix and Blockbuster compete against this type of service? Or is their something else going on there that doesn't first meet the eye?

Patrons who may take advantage of the $1.00 movie rentals were already buying a burger or doing their groceries. The opportunity cost to them is quite low to simply swipe their credit card and take their movie on the run. Netflix and Blockbuster may not necessarily be competing for the precisely the same customers. Netflix customers are willing to wait for their movies to arrive in the mail and Blockbuster customers apparently don't mind making the special drive over to the store to pick up their favorite movie. In either case the Netflix and Blockbuster customer did not choose to make a movie rental on a whim as the McDonalds and supermarket customer most likely did. In addition, the rental agreements are very different. Blockbuster and Netflix customers might also enjoy the convenience of being able to view the movie at their convenience. The supermarket video vending machines offer a lower price but tighter terms of service since the movies need to be returned in 24 hours.