Blockbuster Vs Netflix in the video rental space
For so many years, Blockbuster dominated the market of video rentals. When the company started opening stores around the country, there was hardly any competition. The company had the tools and the financial backing to expand rapidly into cities and towns. Blockbuster offered its customer a large selection of recently released movies and old ones too. The company developed an automated system to track the status of movies such as how many copies of each movie is available, who rented each copy, and the date and time it is rented. The company employed the latest technologies at the time to make the transactions as efficient as possible. The company implemented its own rules regarding the rental agreement. Customers were allowed to rent the movie for only two days. When the customer did not return the movie before midnight on the second day, he or she got charged late fees. The next time the customer came in to rent another movie, the fees got automatically added to his total. If the customer declined to pay, he got denied the opportunity to rent a new movie until the late fees are paid.
Blockbuster had a lot of leverage when assessing these fees. The competition was very weak and it did not offer the same selection of new movies as Blockbuster. Blockbuster had its way of making the rules and customer did not have a better alternative. Since Blockbuster had strong ties with production studios, it almost had a monopoly on the video rental business, especially for newly released movies. In the beginning this model was very successful. It was so successful that Blockbuster opened thousand of stores worldwide. “In the 20 years since its founding in 1985, Blockbuster Inc. has opened 9,100 stores in 25 countries” says Janet Rae-Dupree of CIO insight. Blockbuster made a lot of money from late fees. Late fees amounted to the same fees paid for the two day rental. What made the company successful is the fact that it adapted to changes in technologies and changes in the marketplace. In recent years and with development of the DVD technology, Blockbuster was quick to embrace the new technology and offer it in its stores. It was a great move, because the new technology was cheaper and had better quality than VHS tapes. Now days, the company is again jumping on the new technology bandwagon. It will be offering high definition DVDs with Blu- ray technology. The company will only offer Blu-ray DVDs and will not offer any movies from the other format. Blu-ray is one of two competing high definition formats. Blu-ray technology is developed by a consortium lead by Sony. This is a gamble by the company executives to offer one technology and not the other. This means that the management feels that the Blu-ray technology will be more popular than the HD format and people will buy equipment with Blu-ray technology.
In recent years, there have been a lot of technologies that emerged. The most significant technological advances happened in the IT world and the biggest of them is the invention of the internet. The internet opened a lot of new avenues for sales and marketing. It created virtual shopping malls and plazas without the need for bricks and mortar. These new shopping stores sprung to compete with traditional stores. Off course the online stores had the advantage of low overhead cost and no taxation. At the tie, Blockbuster was dominant in its domain as a traditional business. But when the internet flourished, it presented a new competition for the company in the form of online video rental. The biggest rival was Netflix which started offering movie rentals by mail. The convenience of ordering online and the unlimited rental for a fixed monthly price enticed a lot of people to sign up for the service. This new service took a direct stab at Blockbuster’s market share. The loss of market share to online movie rental concerned the management team. They had to find away to compete on the same level with the new companies. They had to employ the new technology to regain what they lost in revenue. But the company could not just shutdown its stores and converts its business to online business only. It had to find a balance to compete with the online companies and gain customer for its online business while trying to lure the same customers to its existing stores. This is extremely challenging and difficult to accomplish. Blockbuster went head to head against Netflix the biggest online movie rental company. They offered cheaper online membership and incentives for consumer to come to their stores. The company offered free movie rental redeemable at one of its stores with each online rental. The idea was to keep the customer coming to the store in hope that the customer will not only rent one movie but pickup additional movies while in the store. While the company was trying to compete online, it was also trying to keep the customers coming to its stores by offering new services. Blockbuster started offering an in-store monthly subscription service that offered customers discounts on movie rentals. It offered monthly subscription for games too. The online competition created a headache for Blockbuster executives and put them in dilemma. They were not used to this type of competition in all their years in business; one that is growing rapidly. In response, Blockbuster had to create a separate business unit for its online movie rental. This meant that each unit can compete for the same business against the other unit. Also, financial resources are split to finance each arm of the business. This way the resources are diluted and are not very effective. According to Ed Oswald of BetaNews, The online rental industry is expected to grow by 43 percent this year. This is a tremendous increase in a short amount of time and it can have a great effect on Blockbusters’ traditional business.
The changes happening at Blockbuster are the reaction of the company due to the changes happening in the marketplace and the need to catch-up with the emerging technology. Typically reactionary moves are not very successful and decisions taken are not well thought. Blockbuster saw that its market share is dwindling and it was getting a lot of heat from a virtually unknown company with a brand new business model. When it saw the success of that business model, it wanted to copycat that model to compete with it head to head. It allocated a lot of money for its IT department to try to catch up with the new technology. On paper that might sound very good, since Blockbuster had a well established business model and it has a lot of experience in the movie rental business. But Blockbuster was not going against a traditional competition. Netflix did not have stores to compete with Blockbuster. When Blockbuster went ahead with the online venture, it did not have a good strategy to grab a good portion of the online business while protecting its traditional business. One of the biggest decisions taken was to eliminate the late fee, which used to generate million of dollars each year for the company, about “16% of the company’s profit” (Backbone, January 19, 2006). This huge revenue the company lost in order to entice the customers to keep coming back to its stores. It also tried to gain more business by expanding the areas dedicated for higher-margin video games and dedicated a large portion of the stores for selling movies. Time will tell if the lost revenue from late fees is going to be made up by offering online movie rental or any increase in in-store sales. Blockbuster missed the boat when the internet became the hottest outlet for business. Blockbuster could have been a premier player in the online movie rental. This way it could have established a name for itself and management should have seen the old business model changing with the change in technology. Management did not have a long vision for the future. They were in a comfort zone with the lack of strong competition for a long time.
It’s hard to say what the future will hold for Blockbuster. It seems in the short run, Blockbuster will survive using the existing business model, but it will not have the same dominance as it did before. As a result, revenues will drop and profits will decrease. Technology is evolving rapidly and people are getting lazier by the minute. Customers want convenience and less hassle. That’s why online banking is a big hit. People hate to write checks any more and they hate getting checks even more. They don’t want to go down to the bank and stand in line to deposit that check. This can be true for everything else. People like to shop on their own time and pace and with the maximum amount of comfort. That’s why online food ordering is becoming very popular. Therefore; in the long run, brick and mortar movie rental stores will be obsolete. The competition to the traditional business of Blockbuster doesn’t come only from online movie rental. Cable television providers and Satellite providers offer high definition broadcasting and On Demand Movies. You can’t beat comfort and convenience. Winter month in cold climate states can be a very good indication of what will the future hold for Blockbuster stores. Why would someone get out of the warmth of his or her house to get a movie and risk getting injured when he or she can have the movie delivered to their mail box or better yet to their screen with a click of button on the remote control! Another important competition for Blockbuster will be the sales of DVDs. DVDs are very cheap to produce which will entice people to buy the movie instead of renting it. Also, there are a lot of online outlets like EBay and Amazon that sell old movies for very little money. Currently, Netflix is testing a new service that offers its customers the opportunity to download movies online. If this gets the same reception and fanfare as the Ipod and iTunes, it will blow the video rental and videos sales away. Having said all that, why would the consumer pay money to rent a movie in the future! Why would the consumer sacrifice convenience when he can do everything from the comfort of the couch! As a result, Blockbuster will not be able to survive with its old business model. Blockbuster will have to evolve with the technology to be able to survive. It will have to reinvent itself and take advantage of new technologies in order to survive as a company.
1. “Blockbuster: Movie Business Remains a Moving Target”, By Janet Rae-Dupree, CIO Insight, August 10, 2005
2. “Hollywood’s New Zombie: The last days of Blockbuster”, By Edward Jay Epstein, Slate Magazine, January 9, 2006.
3. “Blockbuster Challenges Netflix Service” Associated Press, New York Times, June 13, 2007
4. “Blockbuster favors Blu-ray DVDs to HD DVD”, By Reuters, June 18, 2007
5. “Can Blockbuster evolve with the industry?”, By Jessica Wolf, Home Media Magazine, April 21, 2006
6. “Blockbuster takes on Netflix with mail-rental plans”, Gina Keating, Reuters, June 12, 2007
7. “Struggling Blockbuster Eliminates Rental Fees”, The Onion, September 25, 2006.