Sunday, November 9, 2008

Netflix Vs Blockbuster

Traditional video rental market is dominated by Blockbuster. Blockbuster's strategy was to cover a large geographic area and increase market share. Blockbuster relied on new releases as it represented 70% of the market. On the other hand Netflix went through an iterative process to refine its business model and create the online video rental market. They developed a recommendation system to ensure customer demand for lesser know titles. To speed up delivery (both ways) and increase customer satisfaction it negotiated deals with the US post office.


Key difference between these industries is their strategy. Traditional industry has limited shelf space, which they have to utilize effectively. Thus, they generally stock new releases and keep limited amounts of other titles. In the online industry the key focus is on effective utilization of the existing inventory. Thus, they have wider selection of titles to choose from.


To increase awareness of the titles available, Netflix tried to recommend other movies based on customer's preference. This recommendation became successful and promoted lesser known films which the customer would not have known about. The success of the lesser known films also encouraged independent film studios to partner with Netflix.


Another difference is since customers have to wait for the movies when they order online, therefore, online industry has to provide compelling value for customers to make switch. This manifests itself as subscription based model with no late fees and unlimited rentals (with 3 movies at a time). The "late fees" were a significant source of revenues for Blockbuster ($600 million).


As these industries evolve the smaller players will find it difficult to compete with the respective leaders. Blockbuster has tried to challenge Netflix in the online market. However, Netflix's biggest advantage is its recommendation system. Though Blockbuster can replicate the delivery model it will have to invest in technology system to create such system. While Netflix relies on high volume customers (as they are the only ones willing to pay for subscription service) Blockbuster's biggest advantage is its appeal to impulse customer (renting 3 to 4 times a month) looking to watch latest release at home. Netflix cannot effectively serve these types of customers.


Video-On-Demand (VOD) poses a significant threat to both the industries. VOD appeals to both casual customer (important for traditional market) and the high volume customer (important for online market). Therefore, to survive these industries would have to diversify and offer some form of VOD service. The technology to deliver these services, however, is still in its nascent stages. Moreover, they would be competing with traditional Cable & Satellite TV providers, who already provide limited VOD service. Just like Netflix's entry in online video rental, entry into VOD service will require refining business model over a period of time.

Five Forces – Traditional Video Rental


Barriers to Entry:

  • Barriers to entry for new players have been raised by the presence of Blockbuster
  • To compete effectively at national level would require huge capital investment in terms of number of stores and video titles per store
  • Most "mom and pop" outlets can be opened with relatively little investment. They would require investments only for the store and to build a video library. However, they would have to compete with Blockbuster to grow beyond their local region



  • Home video market is a big source of revenue for the studios. Thus with economies of scale (as Blockbuster has) video acquisition cost could be lowered by negotiating with studios
  • Small stores rely on distributors to acquire the movie on DVD. However, the distributor power is limited by the fact that discount retailer (Walmart) would be carrying the titles as well



  • There are plenty of substitutes available: online video rental, watching a different movie at movie theater, buying it at discount retailer, video on demand etc



  • Buyer's generally rent on impulse and usually would have to rent it at Blockbuster
  • Once they decide to rent they do not have much power. This is probably the reason that Blockbuster could charge "late fees", "rewind fees" etc.
  • However, since they have lot of substitutes Blockbuster has to be careful not to price so high so as to discourage impulse buyers



  • The industry is dominated by Blockbuster with no major rivals to it within the industry
  • The industry as a whole faces competition from online video rental market, video on demand, video kiosks



  • The video games titles can also be rented out along with movie titles at a store



Five Forces – Online Video Rental


Barriers to Entry:

  • Ability to serve the market by ensuring customer gets the video soon. This barrier is raised further by the fact that Netflix can deliver within 1 business day to 90% of its customer
  • Unlike traditional rental market, which requires little capital investment to serve needs of a local community, the online video rental industry needs economies of scale to succeed



  • Like traditional video market with economies of scale (as Netflix has) video acquisition cost could be lowered by negotiating with studios
  • Additionally, postal office is integral to delivering product to the customer. Here too economies of scale can help with a better rate and delivery (both ways)



  • There are plenty of substitutes available: traditional video rental, watching a different movie at movie theater, buying it at discount retailer, video on demand etc



  • To rent online buyers would generally have to go with Netflix
  • However, just as in traditional video market, the presence of substitutes acts as a deterrent to Netflix
  • Moreover, Netflix customer satisfaction rating is applicable for the whole company. Unlike, traditional market, where it can be difficult to assign 1 customer satisfaction rating to all Blockbuster stores. Thus as a result buyers can demand and expect a better service



  • The industry is dominated by Netflix with no major rivals to it within the industry
  • The industry as a whole faced competition from traditional video rental market, video on demand, video kiosks



  • The independent studios can produce movies exclusively for this channel. Success of Hotel Rwanda is testament to the fact that this can prove successful


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