Netflix vs. blockbuster case analysisReed Hastings has already been a success for beginning new companies. He first made a

name for himself by going public with Pure Software in 1995. After the development of this

company he began to obtain several other companies and made Pure Software one of the

50 largest public software companies in the world by 1997 until they sold to Rational

Software in 1997. From there Hastings moved on to others projects. He noticed that there

was a demand for the ability to rent movies. With a large customer base he figured there

was no question that his company could fail. Since the internet was booming, Hastings

sensed the opportunity for online movie rentals. This began the only movie rental industry to

a large audience. With one company becoming successful, it wouldn’t be but a matter of

time before others began to catch on and begin to reap the benefits of someone else’s idea.

Back in 1985, David cook wanted to fill a niche market just like Hastings. He wanted to load

a market for customers who wanted to rent an assortment of VHS movies. By selling off his

existing oil and gas software business, Cook subsidized the first store. By 1986, an initial

public offering was started in order for the need to raise capital to fund further expansion.

However, a harmful news article delayed this offering. Running into liquidity problems,

Blockbuster had an ending result in a $3.2 million loss. In 1987 cook sold a one-third stake in

the company to a group of investors. In conclusion, Cook was forced to turn over future

control of the company, and eventually left the company. 2003 was the most interesting

year for Blockbuster. The company placed a net loss of $845.2 million, which shifted

Blockbuster to make some important decision for the company’s future.

The five forces model is a tool used to diagnose the competitive pressure of the industry.

From these five different areas of the market, this model evaluates the power and

significance of each pressure. The strongest of the five forces comes from rivalry among

competing sellers. Firms will use any resource or weapon available to gain a better position

in the market. Many marketing experts say that rivalry refers to the jockeying of market

share by firms. There are two main types of players in the video rental industry: Traditional

renters, such as Blockbuster, who operate physical store locations, and mail-order renters

such as Netflix. Competition for market share is brutal for the traditional renter. As this type

of renter, Blockbuster has positioned itself with a profound fixed cost communications

venture in retail store locations. Due to this high fixed cost, by spreading the cost over many

rentals will be the only way Blockbuster can lower its average cost per item. As in any

industry, if competition takes market share away from a company it is possible for the cost

to increase. Blockbuster will eventually find itself competitively disadvantaged if this were to

happen. Therefore, Blockbuster fiercely competes to maintain its market share. This can be

seen via several recent Blockbuster promotions, most of which were aimed at the

competition from Netflix. Tactics such as the Blockbuster game or movie pass, which is

limitless game or movie rentals for a flat per month fee, were designed to come from the

loss of market share. In order for Blockbuster to remain cost competitive overall, Blockbuster

will regain some market share through these passes, even though they do not generate as

much revenue as per rental fee.

Mail order firms such as Netflix have a different cost structure in contrast to the traditional

renter. Netflix’s distribution centers, inventory, and website maintenance are primarily

Netflix’s fixed costs. These fixed costs in total are far lower than the fixed costs a chain such

as Blockbuster acquires. In isolation, the fixed cost per rental element for Netflix is lower,

and Netflix can reach a competitive average cost at much lower rental amount. This allows

them to offer flat fee rentals, while maintaining a lucrative margin. In order to steer clear of

rising cost average costs, Netflix may not need market share as desperately as Blockbuster.

However, Blockbuster will be placed at a price disadvantage if Netflix recognizes that it can

steal enough market share away from them. Thus, this leads to intense competition and firm

rivalry as well.

Because the industry is stagnant, there are many other factors influencing firm rivalry in the

video rental industry. The only real alternative for growth is to increase market share, since

the size of the market is not expanding. This obviously intensifies competition. Furthermore,

movie/game rentals are an extremely undifferentiated product. A rental from Blockbuster is

exactly the same as a rental from Hollywood video or Netflix. There are little or no switching

costs for consumers to move between firms. This strengthens price competition for

consumers to gain market share. Finally, there are strong exit barriers for companies such

as Blockbuster. As a result, Blockbuster will continue to match prices with Netflix or others

as it struggles to survive, increasing the competition even more. Prior to the explosive

growth of the internet in the late 90’s, a strong dispute could be made that there were high

entry obstacles in the video rental industry which restricted competition. This would include

the relatively large economies of scale required to operate retail locations which did not

operate at a cost disadvantage relative to Blockbuster. Another entry barrier was the high

brand loyalty enjoyed by Blockbuster, which was the place to go for movie rentals. Lastly,

new firms would also face entry barriers in the form of needing to generate sufficient volume

in order to gain access to revenue sharing agreements with the studios similar to those

which blockbuster had in place.

With the evolution of the internet, all of these factors changed. However, the retail location

entry barrier disappeared as technology allowed companies such as Netflix to reach a

nationwide audience without a physical appearance. Blockbuster had alienated many of its

customers by not keeping enough copies of popular movies in stock, among other reasons

mentioned prior. Therefore, the brand loyalty barrier was overcome mostly by chance. The

barrier of needed to have enough volume to negotiate profit sharing agreements with

studios simply became debatable. DVDs has replaced VHS, and DVDs were priced for retail

sale less than $25.00, unlike VHS which was rental priced in the 70-90 range. This meant

that Netflix did not have to negotiate revenue sharing like Blockbuster did in the days. As a

result, competition has amplified further because there are now few entry barriers in this

industry. Video rentals are bountiful with substitute products. This includes items such as

pay-per-view, VOD, and streaming on-line videos. As these are all feasible alternatives, the

threat of substitutes plays the role of yet another intensifier in delivering a nearly identical

product. Suppliers in the video rental industry yield minimal power when addressing this

force in Porter’s model. An input such as games and DVDS is nearly identical for all

suppliers. As mentioned above, there is a wide availability presence of substitutes and also

virtually no ability to price discriminate. These factors erode the supplier power while at the

same time intensifying the position of buyers. Therefore, the dominant trend in the future

will result in intense competition with falling prices because when all five forces are

combined it will be apparent that firms will have a strong desire to compete on price within

the video rental industry.

It is important to analyze potential profitability with a firm using a SWOT analysis. First,

Blockbuster will be analyzed internally and externally followed by strategic

recommendations. Strengths of a company internally are very important when analyzing

growth and potential profitability of a company in a given industry. Blockbuster has roughly

8,000 stores worldwide. Therefore, Blockbuster products have a huge distribution channel

relative to all these locations. This in turn puts Blockbuster is a good position for distribution

and access to the world. Over 2, 600 store locations are outside stores. This distribution

available through Blockbuster also increases their bargaining power with studios. With the

presence of movie stores, there is an added convenience for their mail-order and internet

customers. Customers are able to return videos and rent new ones by mail and any store

location. This requirement results in a valuable database that may be used for tracking who

is renting and what they want to see or play. In turn, this allows Blockbuster to custom fit

store inventories to the members each store serves. This enables Blockbuster to implement

more effective marketing to its customers with such a strong database. All these locations

have helped make the Blockbuster brand identical with movie and game rentals. Therefore,

Blockbuster has various strengths including a strong brand loyalty with existing customers

and still being the face of movie and game rentals.

While analyzing the case it is believed that Blockbuster has many weaknesses in the

industry. Because Blockbuster was the leader in this particular industry, it shifted heavily

with them loosing money strengthening the intensity of rivalry. They tried to go online but

couldn’t keep up with competition. Therefore, one strong weakness overall is upholding a

store versus a warehouse. With all these weaknesses being profound it appears that

Blockbuster has 3 vital weaknesses such as memberships, inventory, and availability.

Because only members may rent from Blockbuster this weakness is perhaps true throughout

most of the industry. It puts consumers into a position that they are forces to choose, which

can result is many outcomes. Inventory is also a profound weakness. Because Blockbuster’s

inventory is limited and stores have limited space it provides weak spot for new movie

releases that are being released throughout the year. Stores must make the choice to bring

in more new releases or eliminate older movies that are less frequently rented. As a result,

this may put a strain on members who are looking for older movies or games that are hard

to find forcing them to go to a competitor. Lastly, availability of movies is another obstacle

Blockbuster needs to overcome. Consumers are in search of instant gratification today more

than ever before. For example, if a movie comes to the mind of a consumer that they want

to see they want it instantly. Therefore, if he/she cannot have it that day, then they may not

rent. Blockbuster’s opportunities can be tackled to exploit their weaknesses within which in

turn can be very beneficial to their company.

Moving on with the SWOT analysis, opportunities are very vital to a firm. Blockbuster has

many opportunities that can be foreseen for the future. One of the most important

opportunities that Blockbuster has encountered is transforming the movie rental business

through its mail order system. There are many competitors in the industry such as Red Box

and DVD play kiosks that people may rent with a credit card for one dollar a night with no

membership required. As a result, these kiosks have provided a strong opportunity for

Blockbuster. Blockbuster can still penetrate this market with its own DVD kiosks by

capitalizing on its own name. Blockbuster can also use its bargaining control as an industry

giant to bargain rights to provide PPV streaming of video, music and games. Also, the use of

digital media allows Blockbuster to offer a larger selection of films, music and games while

potentially reducing its physical inventory. Therefore, as a result, it will allow Blockbuster to

offer legal instant gratification to consumers, which is very important for an industry to

realize and capitalize on.

There are many threats that could be imposed on Blockbuster is this vigorous competitive

industry. As well as any other industry change in technology and shifting consumer

preferences is an ongoing threat. Due to new technology and marketing practices, new

policy and procedure awareness will be the main driving force of a company’s success, and

in turn, how well one adapts and adopts is vital. With other companies offering different

service, Blockbuster has encountered immense competition within this industry. For

example, Movie Gallery which provides the same features and attributes as Blockbuster and

the powerful Netflix. Netflix proposes flat rate rentals by mail and online streaming.

Consequently, movie stores and distribution is slowly moving towards a direct model where

consumers can access movies on demand. Some other important threats are that

consumers can still buy movies or choose to go out and do other things. Blockbuster is also

more expensive due to their business model. Therefore, if Blockbuster wants to stay afloat in

this highly competitive industry they will have to alter some aspects within their model.

There are many strategic recommendations that Blockbuster can benefit from. The first

recommendation for Blockbuster would be to close some of their locations within close

proximity of each other. This level of overlapping coverage may be unnecessary. This would

provide an alternative to reducing operations expense and ultimately fixed store costs would

go down. Furthermore, Blockbuster should not focus most of their attention on their stores.

They will not keep up in the ever changing industry trends in technology and peoples

preferences. Blockbuster also got rid of late fees with is good for consumers but bad for

revenues. With that said, they reversed it, which reversed their strategy. In addition,

Blockbuster should put rentals online that are no longer available in stores. This would

answer one of the problems of them not having a deep stock of movies for people that want

to view older movies. Blockbuster could also partner with other retailers such as giant eagle.

This would reduce their fixed costs and enable them to benefit by gaining access to the

grocer’s customers, opening up cross-promoting opportunities which could drive additional

revenues. Another important recommendation Blockbuster could consider is having a better

marketing strategy. If a costumer isn’t aware that a specific channel exists, then there is

virtually no change they will use it. Blockbuster could open the door to many ideas and

implement to improve brand awareness while maintaining their market share. For standing

locations, a loyalty program can be designed. All of these marketing ideas will provide

Blockbuster to achieve the utmost effectiveness.

To sum up all these recommendations, as more people become accustomed to the

alternative methods of video purchase, Blockbuster will need to meet the consumer’s needs

where they want to do business. By designing a strong database of viewing customer

preferences, they could have a potential marketing tool. Therefore, an effective marketing

tool would help to ensure and maintain a aggressive edge in this ever changing industry.

Moving away from the traditional renter, the mail-order industry will now be evaluated.

Netflix is the world’s largest movie rental service with over 6.3 million members and a deep

collection of many movies. There are known for both their excellent customer service and

their convenient and user-friendly interface on their award winning website. New technology

has enabled Netflix to provide high quality streaming videos directly to their subscriber’s

computers. Netflix has entered the VOD market, providing them to maintain their superior

position. By entering this powerful market, Netflix will be able to differentiate itself from its

competitors, and reduce the likelihood of price competition. In the long run, after movie

streaming has increased to become popular, Netflix can separate the DVD rental and

streaming movie services, offering different plans. Therefore, the SWOT analysis will be

analyzed to foresee how profitable Netflix is and will become.

Netflix has a lot of strengths making them the leader in this industry. The number one

strength for Netflix is having a strong competitive advantage. The advantage is the first

mover advantage in online rental. Netflix also by chance had great entry timing. They

entered the market for DVD rentals at a time when there were few other competitors,

allowing them to establish their brand name and image for providing a unique service.

Netflix was the first to offer DVD rental by mail and this allowed them to offer a greater

variety of DVDs to consumers. Therefore, the early entry of Netflix has allowed it to maintain

a high market share in the DVD industry and have strong brand recognition by being a first

mover. Netflix also has high customer satisfaction, which is the stem of a successful

company. Without customers, a company does not exist. Netflix is smart because they

understood the weakness of competitors. They understood what irritated many video rental

store customers: late fees. While costumers rush to return the movie on a certain day this

may impose late fees comparable to the price of the rental. In turn, Netflix provides no due

dates, late or cancellation fees. Because Netflix enables the customer to keep the DVD as

long as they want, this provides freedom to return the movie at ones convenience. Another

strength Netflix incurs is its Award winning website. Their website allows predicting what

movies one would want based on their previous rental history. It also enables Netflix to plan

future rentals and allow customers to rate movies that they have previously rented. This

proves to show that Netflix has a large selection at affordable pricing that may not be

offered in stores such as Blockbuster.

Blockbusters total access is probably the best thing that ever happened to Netflix, providing

plentiful opportunities. Even though a few years ago Blockbuster jumped into a brutal price

war with Netflix trying to swipe their customers away, it did Netflix a favor. It provided them

with several opportunities. The total access pitch of returning DVDs to a physical store got

immediate flow, but backfired. Dozens of Blockbuster movies were being pirated, enabling

customers to make copies before returning them. Even though Netflix is highly successful,

they also incur weaknesses. Netflix often has trouble providing enough copies of new

popular movies. As a result, a main cause of customer dissatisfaction is Netflix’s inability to

completely satisfy the initial rush for a new movie. However, the company knows that it

would be unprofitable in the long run to buy more copies just to serve the rush when a

movie first becomes available because the copies will not be rented with nearly as much

frequency soon after the rush. Netflix also doesn’t have a direct connection to any movie

studios so it must purchase its entire media through the consumer market. As Netflix

integrated the streaming industry it has comparatively small movie availability to stream.

One big disadvantage Netflix has encountered is that customers have to wait for the next

movie to arrive in their mailbox. By the time the subscriber receives the movie, he or she

may no longer be in the mood to see it. This may enable the costumer to leave their home

and go and rent a movie.

Another disadvantage with mail-order rentals is the lack of control of DVD return time since

customers have control of the movie for as long as they want. The DVDs can also arrive

scratched or broken during the mailing process. One opportunity that Netflix could foresee is

product line expansion such as video games. They could also expand downloadable movie

offerings and print third party advertisements on their mail-order envelopes. Lastly, the can

expand on partnerships and technology providers. The clearest threat to Netflix is

Blockbuster and other established rental businesses. Beyond this, costumer’s satisfaction is

the only aspect of this business that can make or break a company. Netflix also many not be

able to retain enough of the market to survive if they were to lose its wholesome, reliable

image. Also, bigger companies such as Apple could impose a potential harm to Netflix. There

are bigger competitors in the streaming and video market and Netflix is less suited to

compete with hardware innovations because it has little or no experience in this area. Just

like Blockbuster, Netflix has threats of people going out and buying DVDs and also going out

and doing other things. Also, Netflix has DVD competition from Red Box and Blockbuster and

the everlasting staying power of DVDs.

Some strategic recommendations for Netflix are they should continue to market their

services effectively. Their subscriber base will grow steadily and will be able to collect more

personalized data. Netflix should also suggest to make its streaming services available

under a separate subscription plan of its own. Also Netflix should increase their streaming

video library since they are in strong competition. Netflix should also continue to reach to

the less technological savvy consumers. This will provide an advantage over other firms in

the future of this rising market.