Netflix Versus Blockbuster Versus Video-On-Demand

Netflix versus Blockbuster versus Video-on-Demand

Case Analysis by Ken Akerman

Strategic Issues in the Case

Founded in 1999, Netflix is an online DVD rental service whose strategy and market success were predicted on providing an expansive selection of DVDs, an easy way to choose movies, and fast, free delivery via postal mail. The company’s strategic intent was to be the world’s largest and most influential movie supplier. The goal of the company was to make it a lot easier for customers to select and rent movies and to eliminate the hassles involved in picking up and returning them. Its strategy incorporates customer convenience and a wide selection of entertainment selections. Netflix provides extensive information to its customers to help them make good selections and identify films that they may like to rent in the company’s vast library.

Netflix’s growth strategy comprised three primary strategic issues. First, Netflix continued to pursue its reputation for innovation and to maintain the high quality level of service that its customers expected. Second, Netflix intended to use its preeminent position in the industry to lead the transition to high-definition DVD’s and eventually to digital downloading of movies on the Internet. Third, Netflix focused on rapidly expanding its subscriber base to maintain its market leadership and to realize economies of scale that will drive down costs.

Netflix’s strategy was to create a blue ocean of uncontested market space within the video rental industry, an industry dominated by Blockbuster for over 20 years. Blockbuster was the world’s market leader in the videocassette, DVD, and video game rental business, earning about a 40 percent share of the $13 billion industry. Blockbuster generated most of its revenue from rentals at its company-owned and franchised brick-and-mortar stores throughout the United States and internationally. As of 2004 it still rented and sold videocassettes but revenue from rentals and sales of tapes for VCRs was falling sharply as increasing numbers of households were converting from VCRs to DVD players. In that year Blockbuster earned more than half of its revenue from DVD rentals with the remainder of its revenue generated from DVD sales and the rental and sales of video games and videocassettes. In 2002 Blockbuster had announced a strategic vision of becoming the complete source for movies and games in both the rental and sales markets. However, from 1999 to 2005 Blockbuster was a troubled company, with stagnant sales revenue and reported net losses in six of those seven years. Blockbuster’s parent company, Viacom, split off Blockbuster in October 2004 as a result of its poor financial performance.

The online rental industry is growing as more people obtain broadband Internet access at home and become more accustomed to ordering products online. Two other companies that were competing with Netflix to provide videos or DVDs online are Movielink and GreenCine. Movielink, a joint venture of five major movie studios, was the leading broadband video-on-demand (VOD) service. It did not require a subscription or membership and charged per rental, beginning at $1.99 or higher per movie. Movielink thus provides formidable competition in the area of digital movie downloading. This competitive strength is further enhanced with Movielink’s partnership with telecommunications giant Verizon to launch a co-branded movie downloading service for Verizon Online’s consumer broadband subscribers.

GreenCine was an online DVD rental company that also offered its subscribers the option to download movies via two different formats. GreenCine had a smaller inventory than NetFlix and only one distribution center, so most of its customers would have to wait two or three days to receive their orders in contrast to the one-day delivery that most NetFlix customers could expect. GreenCine differentiated itself by offering a more off-center and eclectic selection of movies with a wide variety of international, independent, documentary, and classic films, plus adult movies that Netflix did not offer.

As the leading company in the field of online video rentals, it was wise for Netflix to develop a strategic alliance with the largest retailer overall, Wal-Mart. Netflix’s business model is well-suited for success in renting DVD’s but it is more difficult for Netflix to attain success selling DVD’s using this model. Selling DVDs could be highly profitable but requires more precise inventory control and presents greater risks. The company could be caught short-handed if it has insufficient inventory of very popular titles but could be stuck with excess inventory that it would need to unload at a loss if it orders too many titles of a DVD that turns out to be less popular than expected. Wal-Mart is noted for its mastery of inventory control and supply chain management so it is the ideal company with whom to partner with to sell DVDs online, and Wal-Mart has numerous large brick-and-mortar stores in all regions of the USA where people can buy most popular titles right away. Partnering with Wal-Mart also eliminates a prime competitive threat and puts the tremendous resources of Wal-Mart in partnership with Netflix.

Alternative Courses of Action

Among the alternatives for Netflix to consider would be to build NetFlix stores, adding a brick-and-mortar component to its online business. This would enable people who prefer visiting and renting from traditional video stores to go out to such stores and pick up the DVDs that they want, without waiting for mail delivery. However, opening their own stores would require the investment of a great deal of capital and would present many operational difficulties. Also, as we have seen with the troubles observed at Blockbuster, the number of people who are visiting traditional video stores is declining as more customers are favoring the convenience of home ordering and delivery. Thus, we can conclude that this course of action is not advisable.

Enabling customers to order DVDs from their computers and delivering it to their homes by mail is convenient but it does suffer from a major disadvantage: a significant lag between the time