The following analysis is about Netflix and Blockbuster. Two successful companies with similar target market but at the same time with very different strategies which can make the difference of success in the future or contrary go down. First of all we need to clarify what is the specific situation of each one. Blockbuster is a rental home video company that has been leading the market during many years, since the VHS cassette till the appearance of the DVD and the expansion of the internet.
They have had a well-designed strategy which let them growth significantly being the leaders in the market, having in 2006 more than 5000 locations within the US. They basically offered a huge number of in-store movie rental. As it is said in the text their financial success is based on the maximization of the days that a movie is rented. Also it is important to mention that a big part of their revenues came from the ‘’late fees’’ (10% of the total revenues in 2004). But as the times were changing, the customer’s needs were changing too and Blockbuster was in the need to adapt his business to the market.
Netflix, being so visionary ten years ago, was launched as a personalized DVD movie rental using USPS to deliver DVDs to its subscribers and using a pricing model similar to the one used by video stores. The following analysis focuses on how those two companies that cover the same needs, they have totally different strategies and by analyzing both strategies we will see how a good strategy and a good knowledge of the market can make the difference and take a company to the success. Basing on the data and information in the case, Blockbuster would be ‘’short’’ and Netflix would be ‘’long’’.
Blockbuster has an old-fashioned strategy, they focused all their efforts in differentiate from Netflix by integrating online and traditional in-shop services and by copying Netflix’s strategy of no late fees. Despite their attempts they had significant operation losses and they just grew 5% (they expected a bigger growth by suppressing late fees). Contrary, Netflix would be ‘’long’’ because from the beginning they were visionary, and they were offering what customers needed while the times were changing. Because of that their net income has been growing significantly.
As inferred in Exhibit 1 in the case, net income multiplied in just two years (in 2004 was 21595$ and in 2006 the net income was 49082$). It is important to take into account what jobs did Netflix and Blockbuster for consumers. Blockbuster was the leader in the market by offering consumers in shop movie rent. They perfectly covered the need of watching the latest movies at home. They were very successful and so they expanded by opening new locations with the objective that at least 70% of the population have a Blockbuster very close.
Netflix though, offered movies but unlike Blockbuster, they deliver the rented movies to the customer’s houses. They changed the concept of traditional movie renter. Netflix was created as a new concept, but covering the same need that Blockbuster was covering. Over time, Netflix grew more and more thanks to this competitive advantage that made the difference from Blockbuster. About their profit models, Netflix reached profitability by investing capital in opening more distribution centers producing more subscriptions thanks to the improved delivery service.
As showed on Exhibit 2 in the case, the increase on the number of subscribers was very significant with 107 in 1999 to 6316 subscribers in 2006. Netflix based its strategy in the concepts of convenience and selection and they showed it by introducing the prepaid subscription based model where customers had to pay a monthly fee instead of the old per rental charge model. With this strategy they were be able to have better customer retention. On the other hand, Blockbuster was primarily focused on making the company profitable by expanding geographically, opening new locations so that they can increase the market share.
Blockbuster focused the strategy on the concept of ‘’movie night’’, it means that their market is a specific niche in which customers make an impulsive decision and rent a movie when they get in the shop. That’s why they only have high-demand movies (unlike Netflix that apart from high demand movies, they also have old or independent movies). The Netflix success is due to a series of different steps that the company has had to face from the beginning till nowadays.
The changes in the customers’ needs and in the society led Netflix to a constantly changing strategies. They launched the platform in 1997 like an alternative way to the traditional movie renters, to provide home movies services better satisfying customer’s needs. They took advantage of the latest hit in the new technologies, the DVD. And they acted like early-adopters of the DVD focusing their efforts in attracting owners of this new device. They were being successful, but they started losing customers so they were in the need to make some changes.
And they did. Netflix totally changed the pricing strategy from the traditional pay-per-rent to the subscription model which allowed customers unlimited movies a month. They came up with the recommendation system as they needed to differentiate from the traditional video rental stores offering something that they didn’t offer. To increase the quality and number of offered movies, they created business relationships with the major studios so that they reach customer’s needs. As a consequence of this growth, they increase the distribution channel with USPS.
But apart from that, Netflix was having a huge problem. They were constantly losing customers. To solve these problems they thought different: attract the old customers that have canceled their subscriptions. To reach this goal, they changed the unsubscribing policy and instead of trying to retain them, they made the cancellation process as easy as the subscription one. Probably many of the customers that left before will come back to Netflix when the platform will earn more awareness or when just decided that they want to reopen their accounts.
So if all those processes were easy for them, the impression of the brand on the customer’s mind will be positive. At this point Netflix was doing well, the numbers of subscription were increasing and their net income was increasing too. What would be next? The new technologies market is a constantly growing and changing market. Something that is being a hit now, in one year could be completely forgotten. With the expansion of the internet many in-shop services will be affected.
Services that can be offered via internet will replace the traditional commerce. And this will be the case in the video rental. The traditional video rental services whether in-shop or delivery will tend to disappear because of the following reasons or assumptions: -Internet is growing more and more. Many improvements are being made to improve the quality. -The number of people who have internet at home is also increasing. -Customers are adapting to the new era and they are adapting to new technologies and regulations.
So basing on that, as Netflix already did years ago, they should be innovative again and take the risk to change in order to keep profitability for the company. They can’t avoid the new trends, if they don’t follow the changes and they don’t adapt to them, they will disappear because customers will change to those brands that cover their actual needs. Netflix was offering what customer’s needed, but this is changing with the appearance of VOD, and so by covering the same need, they should adapt to the times by changing their strategy.