64-Blockbuster vs. Netflix…Again

Blockbuster is under pressure, and has been for a number of years. It is closing hundreds of stores. Still, it continues to operate over 3,900 stores in the U.S. and nearly 2,000 outside the U.S. The reason for its struggles is simple: Netflix. Netflix beat Blockbuster by offering a better business model to the American consumer. Eventually, Blockbuster copied the Netflix business model. But by then, Netflix was a powerful competitor. Blockbuster has been unable to unseat Netflix from its position of movie rental leadership.

These two companies are about to square off again.

Blockbuster recently introduced a television set top box to deliver movies on-demand over the internet. Netflix also offers a similar service. We will use the Customer Buying Hierarchy (i.e. Function, Reliability, Convenience and Price) to analyze the two services and declare a winner before the battle starts. (See the Perspective, “How Customers Buy”, on StrategyStreet.com.)

Function refers to how a customer uses the product. With internet downloading, the key Function is number of movie titles available. Blockbuster offers 2,000. Netflix offers 12,000, though many of those are older movies, independent films and T.V. shows. The Function advantage, though, clearly goes to Netflix.

Reliability refers to the way a company delivers on the promises made or implied to its customers. Such benefits as product quality, warrantees and on time delivery define Reliability. The Blockbuster service offers something called “progressive downloading” in order to ensure that the consumer receives DVD quality on the movies downloaded. Netflix offers its internet video with standard streaming quality. Streaming quality can be variable, depending on the bandwidth and the type of connection used. With fast connections, standard definition content approaches DVD quality. The advantage on Reliability goes to Blockbuster.

Convenience refers to the ease with which a customer may purchase and install the service. Blockbuster offers a proprietary set top box produced by partner firm, 2Wire. Once the proprietary set top box is on the consumer’s television set, it takes a few minutes for a downloaded movie to begin playing because of the progressive downloading feature. The Netflix service does not require the proprietary set top box. In fact, it operates with a large number of hardware items, many of which are already attached to consumer televisions. Netflix connects through both TiVo DVRs and Microsoft’s Xbox360, for example. More consumer electronics manufacturers will add the Netflix streaming feature to their set top boxes in the future because it is likely to be popular. This implies that the cost of the hardware required to play Netflix movies is either low, because the consumer already has the product, or will fall in the future as more hardware competitors pile into the market. In addition, the standard streaming feature allows the downloaded movie to play within a few seconds of the initiation of the download. The Convenience advantage rests with Netflix.

Pricing refers to the final cash payment the consumer makes to the seller of the product. Blockbuster has a two-part pricing scheme. In the first part, the company offers the set top box for $99, which includes 25 movie credits with the initial $99 purchase. In the second part of its pricing scheme, Blockbuster plans to charge $1.99 to $3.99 per movie. Netflix, on the other hand, is taking a very aggressive stance toward online downloading. It is piggybacking its online service on its existing DVD by mail service. In the cheapest version of its DVD by mail service, a consumer pays $8.99 per month. But with that payment, the Netflix consumer pays nothing extra for as many online videos as he cares to download in the month. Clearly, the Price advantage rests with Netflix.

Netflix has already proven that its fixed price per month pricing model is more attractive to consumers than is the video on-demand payment model that Blockbuster uses in its new online service and in its stores. Consumers clearly prefer the Netflix approach. So, why try the Blockbuster model again with this new online service?

In summary, Netflix wins on Function, Convenience and Price. Blockbuster wins on Reliability. In the new online service, as long as Reliability is acceptable, Netflix is the clear winner.

Posted 12/15/08

Update:

At its peak in the late 90s, Blockbuster controlled more than 9000 video rental stores in the United States.  But Netflix destroyed their business model.  Netflix was founded in 1997 as a DVD by mail rental service.  In 1999, Blockbuster passed on an opportunity to buy Netflix for $50 million.  Instead, the company teamed up with Enron to create a video on demand service.  The service was successfully built and tested with customers, but Blockbuster was so focused on its video stores that it devoted little time to the video on demand business.  It took Blockbuster 5 more years to introduce its own DVD by mail service and even then it kept late fees, which Netflix did not charge.  In 2009 Netflix posted earnings of $116 million.  In the same year, Blockbuster lost over $500 million.  Blockbuster filed for bankruptcy in 2010 and was liquidated.

Netflix is Next Leader product. There are two types of Next Leader products, Reformers and Transformers. Netflix is a Transformer product. HERE is more explanation on Price Points.

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THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.