Netflix Versus Blockbuster Versus Video-On-Demand

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Executive Summary

A new phenomenon emerged recently in which companies like Netflix and Blockbuster give DVDs on rentals to their customer on a monthly subscription basis. It seems quite appropriate to use the SWOT model for analyzing the potential of Netflix, Blockbuster, and Video-on-demand. Developing proprietary software technology by Netflix called Cinematic, enabling consumers to personalized movie recommendations.

The marketing of DIRECTV system equipment by Blockbuster in its U.S. stores poses a threat to the market share of Netflix.

Netflix has changed the video store rental industry forever and has shown no signs of slowing. Recently, Blockbuster has been in liquidation mode, they closed 131 stores. It helps bring online customers back into the store and offers Blockbuster an opportunity for their online subscribers. If Netflix wants to raise prices, Blockbuster would like to follow, but Netflix has hinted that they might go the other direction. Freeberg (2006) notes that Blockbuster had begun mailing DVDs from their retail stores, but Netflix also began work on their secret strategy. Netflix did indeed compete successfully on price. Blockbuster’s overhead is twice this amount, but the difference between Blockbuster’s overhead (around 50% of sales) and Netflix’s (around 35%) isn’t that great. If Blockbuster can increase store efficiency (smaller footprint), it becomes more competitive.

Background

The introduction of sound and color were two important technological developments for the film industry. Recent developments in technology – Imax, satellite transmission, fiber optic cable, VCRs, DVDs, pay-per-view systems, digital signal transmission and compression, interactive multimedia systems, Internet delivery, and high-definition television add alternative distribution mechanisms. These developments are lengthening the post-release earnings profile of a film while encouraging more varied production. The DVD represents a quantum leap over video technology in portability, capacity, robustness, and cost, and has resulted in a sequence of vertically differentiated releases. The DVD makes the alternative of marketing some films directly to the public even more attractive.

Situations Analysis

Organizations and contracts adapt to technology. As video rentals and sales increased in value, the video release window was split into two – a video rental window and then a video sell-through window. To encourage video rental stores to offer more copies during the rental window, a sharing contract was developed. Before these changes could be fully absorbed and exploited, aggressive DVD pricing increased the importance of sell-through and decreased the attraction of sharing for rental outlets. New developments may facilitate separating sell-through and rental audiences.

A new phenomenon emerged recently in which companies like Netflix and Blockbuster give DVDs on rentals to their customer on a monthly subscription basis. It has become one of the most popular subscription entertainment choices ever. In the past, DVD consumers seemed willing to spend more money for buying movies than they ever did rent them. But the rental subscription option changed the whole scenario. The rental subscription method was initially dismissed by market gurus, but when Netflix started it in 1998, it became very popular soon.

Environment Analysis

The dynamic and rapidly growing DVDs market greatly owes its rapid growth to the enormous production of movies. Increasing interests of consumers to watch movies and cultural norms of our society to watch movies frequently provided an impetus to this DVDs rental business.

Various models and methods have been evolved by scholars of management and the corporate field for analyzing the external and internal environment of the company. It seems quite appropriate to use the SWOT model for analyzing the potential of Netflix, Blockbuster, and Video-on-demand.

SWOT analysis

It is important to employ a SWOT analysis model for comprehensive evaluation. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. It broadens the perspective and gives the complete picture. Every organization has some strength to depend upon, certain weaknesses to overcome, certain opportunities to be utilized, and certain threats to be careful of.

Strengths & Opportunities

Developing proprietary software technology by Netflix called Cinematic, enabling consumers to personalized movie recommendations.
A wide range of Netflix 37 regional shipping centers across the United States.
Total Access, the reason behind this success, is a program that lets online customers exchange their online movies for free in Blockbuster stores.
Introduction of sophisticated software to track its inventory and minimize delivery times.
Investment in R&D provided opportunities to appeal to changing consumer mindsets.
The idea Video rentals were successful because consumer disliked going to the video store frequently.

The opportunity to shop for their rentals online and have them delivered by mail proved very attractive. It offered convenience compared to traditional rentals. Netflix was quite successful in its strategy and by offering a monthly subscription plan.

Weaknesses & Threats

Trends in societies are continuously changing. Changing technologies and the social attitude of consumers have shortened the life cycle of a product in the consumer market.
The marketing of DIRECTV system equipment by Blockbuster in its U.S. stores poses a threat to the market share of Netflix.
Blockbuster customers can choose from 25,000 titles, ranging from classics to new releases.
Video-on-Demand can kill the market by its internet access to a wide range of movie collections.
It can be if materialized as TV companies and major movie studios were considering strategies to release movies through VOD cable services the same day that the DVDs were available in retail stores and rental outlets.

Core competence

Netflix has changed the video store rental industry forever and has shown no signs of slowing. Video on demand will be an issue for the company, but Blockbuster will not be immune to the same issues. Netflix’s management team has allowed them the flexibility to move very quickly in an emerging market, but this not the case with Blockbuster. Recently, Blockbuster has been in liquidation mode, they closed 131 stores. For every store that goes out of business, it creates a tremendous opportunity for Netflix to expand into their market. It helps bring online customers back into the store and offers Blockbuster an opportunity for their online subscribers. Blockbuster Online has become an essential strategy for the company, but Blockbuster is running out of time, if they closed every store it would take millions of subscribers to replace the shrinking in revenue that they make each year. The video store business model will fail because of simple economics. They have a high fixed cost and Netflix and VOD have a flexible cost to their business. Since the launch of Blockbuster’s online DVD rental program in August 2004, they have added 1.3 million customers, but over the last 6 months alone, Netflix was able to add almost as many subscribers.

Evaluation of the strategy

Success Criteria – Suitability, Acceptability, and Feasibility

It is the responsibility of planners to identify success criteria that may be used to develop goals, objectives. It is acknowledged that there are many fundamental types of commercial success standards that may be used to set goals and objectives: financial and competitive. A method using suitability, acceptability, and feasibility as criteria is used here for assessing the success of Netflix.

Suitability

Now Netflix has taken a great step to reinvent itself as an online delivery service. All Netflix customers will have access to the service now. As mainstream consumer adoption of online movie watching will take many years due to content and technology hurdles, the time is right for Netflix to move on.

Acceptability

If Netflix wants to raise prices, Blockbuster would like to follow, but Netflix has hinted that they might go the other direction. With Blockbuster is not able to compete on price, Netflix’s brand name gives them a huge advantage over the negative long-term image that consumers associate with Blockbuster’s brand.

Feasibility

Freeberg (2006) notes that Blockbuster had begun mailing DVDs from their retail stores, but Netflix also began work on their secret strategy. As video store margins continue to deteriorate, Blockbuster will have no option but to continue to close their stores. Each store closing will reduce Blockbuster’s revenue and will make their debt payments more and more difficult to make. The only way that I can see Blockbuster expands revenue, but increases store closings would be for them to negotiate the rights to do burn on-demand DVDs at kiosk locations nationwide. Blockbuster has explored kiosk relationships in the past but has never committed to a strategy.

Freeberg (2006) observes that Netflix is a subscriber-based business, and analysts tend to value subscriber-based businesses according to their number of subscribers, and a measure of “churning”. Here we have two definitions of churning to keep track of: the first churning is related to the behavior of investment bankers. The other churning definition is related to the rate of customer turnover in subscription-based accounts. In the case of Netflix, it seems that both definitions of churning are relevant.

Future strategy options and Recommendation

According to Freeberg (2006), the online DVD rental market is a growing market and Netflix will gain customers regardless of what Blockbuster tries, but Blockbuster, on the other hand, is sitting on a one billion dollar time bomb that will have to be dealt with further down the road. Netflix did indeed compete successfully on price. If Blockbuster revenues fell, they would face a credit crisis. As to one-year price targets, you’re right. Netflix has a cost of delivery (postage and fulfillment), and that cost is quite high. Blockbuster’s overhead is twice this amount, but the difference between Blockbuster’s overhead (around 50% of sales) and Netflix’s (around 35%) isn’t that great. If Blockbuster can increase store efficiency (smaller footprint), it becomes more competitive.

If Blockbuster could implement BOD at their retail stores, it could still be a powerful force. Right now Blockbuster has to make important purchasing decisions and if they misread demand it impacts them directly. I would also use the technology as a way for Blockbuster to increase the prices they charge for rentals. If customers want to come into the store and get one of 2,000 DVDs, they can do that but for $1 more you could let them burn any TV show or movie. It will be a big threat for Netflix, but because of Blockbuster’s fixed costs, they have less flexibility than Burn on-demand technology exists today. If Blockbuster can figure out a way to bring all 60,000 movies that Netflix has to every single video store, it would go a long way in preserving their sales (if not increasing them.) If it buys the company time to solve their debt problems and to come up with a long-term VOD solution, then it would be a good investment on Blockbuster’s part.

According to Freeberg (2006), Netflix comes faster for the newer releases, but not as fast as using the free in-store coupons at Blockbuster that you get once a week with Blockbuster Online. When comparing Netflix with Blockbuster Online, there are so many similarities that it may seem like a toss-up. Both programs allow us to pay a monthly fee, for which we receive DVD movies sent through the mail. Netflix used to have the clear edge here, but expansion to include more distribution stores has brought Blockbuster up to par. Still, for those who rent less, Netflix “ramps” the movies to these higher priority customers, pushing the heavier renters further down the list.

Netflix has more experience with online DVD renting, both in regards to time and sheer mass of customers. Blockbuster, as mentioned before, has superior and more responsive customer service. The more human aspect of Blockbuster makes it the choice.

Conclusion

According to Freeberg (2006) Hellweg also notes that Netflix CEO Reed Hastings indicated the company’s willingness to forgo profits in the next five years to grow market share. Hastings later claimed he was misquoted. Nevertheless, the targets a goal of 20 million subscribers in the next five years. That won’t happen without stealing a large number of customers away from Blockbuster.

Freeberg (2006) notes that there is at least one major weakness in the Netflix model: executive compensation. In the fiscal year ending 2004, the top four Netflix officers received a combined total of approximately $7,910,000 (in pay and exercised options). I’d say that’s out of line with living wage standards, even in the Bay Area. Sure they have a popular product, and they need to retain talented leadership, but there are other ways to promote loyalty at the top.

Freeberg (2006) notes that Netflix stands to benefit by taking a proactive stance on issues related to recycling. Netflix does reuse a portion of their packaging, and I’m convinced that they could do more. There is no reason why Netflix shouldn’t be able to offer a durable and 100% reusable and biodegradable form of packaging for their hundreds of millions of shipments every year. In the short term, they could offer this premium option to households that value having an environmentally responsible choice. The net result would be less paper expense to Netflix, and increased revenues related to the premium packaging option.

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