The Home Video War between Blockbuster and Netflix
Product Matrix By the end of 2006, the home video war was in full forward mode between Blockbusters and Netflix who were the significant competitors vying for the average consumer’s entertainment business. Though Blockbuster boasted of having a store within 10 minutes of most consumer homes, an impressive 5,194 locations, its in-house stock was limited to new releases totaling 2,500 video options bringing their total video stock to about 12,985,000. At the same time, Netflix had built up its mail order business to over 70,000 movie viewing options on 55 million DVDs. In this comparison, Netflix held the market on variety and availability over Blockbusters DVD inventory offerings. Competitor Comparisons Over time and through trial and error, Netflix was able to provide the same type of DVD home entertainment products to customers that Blockbuster did but with more benefits and more extensive variety.
For a monthly subscription fee of $17.99, customers could rent up to three movies at a time and keep them indefinitely or return them and receive three more picks. For a total yearly subscription cost of $216., a Netflix customer had unlimited access to 70,000 movies versus Blockbuster’s in-house limit of 2,500 options at a fee of $3 to $4 per DVD rental plus additional cost for late fees. When comparing Blockbusters lowest rental cost to Netflix’s subscription fee, Netflix corners the market on price value because of the unlimited opportunity to rent more movies a month verses Blockbusters cost per video rental. Profit Model Comparison and Strategy Blockbuster’s profit growth depended on opening many brick and mortar locations to either acquire new customers or retain more of the old ones which helped increase their portion of the home video market share. At every location, Blockbuster also depended on high volume rental of new releases to help hold the product share in their favor, and this strategy worked well for several years. Blockbuster lost its profitable edge when they did not foresee the marketing value of the online movie rental opportunity that was emerging from the internet. Blockbuster lost its completive edge when advancements in technology started moving ahead of the company and customers became savvy internet shoppers. By the time the firm realized its mistake, it was too late and too far behind its competitor Netflix, to pull itself out of the downhill economic spiral.
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In December of 2013, Blockbuster closed the doors for good. In the early years of development, Netflix focused its efforts on value, convenience, and selection gearing most of its advertising efforts on the emerging DVD player industry. Appealing to the new age computer savvy customers who shopped online for deals, the company created a Web portal that catered to each customers preference and offered suggestions when new releases were available. By analyzing the cost of securing new customer business than losing that business to slow service delivery, the company knew process changes were needed if they were to succeed. By reviewing customer feedback, Netflix implemented a reduction in rental prices and increased rental quantity. The company also worked out a new processing system with the Post Office to increase delivery time and the product return process. By continually moving forward with emerging technology, willing to make changes where needed, Netflix has secured its share of profit from the home entertainment boom. Netflix’s Strategy Assumption Shift When Netflix entered the home rental market, the company adopted the same working model that their competitors used and assumed that customers would take advantage of the convince of shopping from home versus going to the video store. When this process did not increase the customer retention rate, the company owner suggested implementing a prepaid subscription service and increased the product rental number to four movies per rental period. This shift in cost and product availability was a significant move for customer acquisition and retention. When Netflix change the subscription pricing and offered unlimited rentals, it acquired a new set of customers that where avid movie enthusiasts which ultimately helped increase the company’s market share. The primary assumption that Netflix held on to and vigorously promoted was their belief that they could offer customers more value for their dollar, convenience by using the internet order process, and a wider variety of home movie products.
By the trial and error process of what did and didn’t work, the continuous effort to keep moving forward to resolve new issues, and the ultimate need to satisfy customers, Netflix’s turned their belief into a profitable enterprise. Netflix Growing Pains Even though Hastings first business strategy did not work into a profitable matrix, it did provide the foundation for Netflix to move into the new home entertainment market. From this point on, the growth of the company became an exercise in several strategic revisions to achieve the overall goal. Like all new businesses, there is a period where implementing new ideas could produce profitable outcomes with the right process plan in place. Finding that magical mix of what works and don’t work, took many revisions to Netflix’s original business plan and evolved over several years. From 1997 to 2006, there were more than fourteen different advertising or processing shifts from the original baseline product matrix. From 2006 until the present, that number has considerably doubled for the company to retain its foothold in the market and move forward into the global sector. According to The Street report, Netflix has already earmarked a content budget of $7 to $8 Billion for 2018. Its focus will be centered on kids programming, acquiring more licensed movies, initiating new bundling deals, and expanding its customer base into the Asian Market. Customer Focus Strategy As every company CEO knows, customers are the driving force for product sales and sustainability. The Netflix idea was born because Reed Hastings was frustrated with paying high fees for an overdue video rental. His dissatisfaction turned into a profound thought that there had to be a better way to acquire a less costly home movie service for customers.
Netflix was born from one customer’s costly oversight but continued to grow due to its focus on always evolving to meet customer satisfaction. Even in the fledgling years, Netflix used customer feedback to analyze its marketing and distribution processes to meet its costumers wants and needs. When slow revenue return overshadowed the cost of building the firms DVD library, the company knew it had to find alternative ways to acquire the product to meet the customers wants and keep the prices point stable. With these two goals in mind, the firm began to focus its energy on acquiring the product at a reduced cost by establishing fee base contracts with vendors. This move increased the firms market value because now it could offer more copies of new releases to its customers at substantial savings. This change is only one example of the firm’s many strategic shifts that were generated by costumers needs or wants. Management Directive The driving force for most of Netflix’s product shifts came from customer wants or needs, but changes were generated from the top management level and worked its way down the company. From the startup point of this fledgling company, Hastings always had his hand on the wheel directing the focus to customer satisfaction. As the company grew, the focus encompassed employee talent that worked in connection with management to expand its products and increase the customer base. Like Netflix, most startup companies begin with a one-man operation and increase its employee talent pool as the business grows. This growth can take several years to develop, and many changes can materialize from the increase in the workforce and customer demand.
For a small company, the shift in a business plan is quicker to implement with less personnel to educate but, when company growth extends to more facilities, sometimes the upper management loses sight of an opportunity and not implementing changes can be costly to a firm’s future growth. Case in point, Blockbusters continuously implemented changes to retrieve its lost market share from Netflix but, eventually lost that battle and finally went out of business at the end of 2013. Planed and Unplanned Directional Change In most cases, when Netflix management team initiated a process change that did not return the expected potential promptly, they quickly learned to identify the issue and set a new plan in place to put the firm back on track. An example of directional shift occurred with its recommendation system that was available to all internet users. At the time, the focus was on “offering price comparison and theater tickets” which was not profitable. Though the Web portal was attracting customers, it was not generating the revenue return needed to sustain the company. This forced management to take a closer look at the emerging DVD market and realizing that a shift to DVD rentals was needed to support the company customer base. Though this new direction was quickly adapted, it became the catalyst for Netflix’s new pricing structure along with its no-late-fee-subscription model and gave birth to their unlimited DVD rental matrix. By changing the pricing structure and eliminating the time limit on rentals, Netflix was able to secure a whole new customer group that helped move its product forward. Along with handling the daily operations of Netflix, Hastings also had his eye focused on the future via Video-on-Demand (VOD). Although he knew there were still hurdles to overcome when it came to merging the idea into a usable product, he viewed this new path as another investment opportunity in the making.
In 2006, Hastings dedicated $10 million to invest in this new venture with another $40 million earmarked from 2007 profits. Hastings wanted to make sure that the Netflix brand name stood out and by generating customer awareness for the up and coming product, he insured Netflix’s market advantage over other competitors. Netflix Today As state previously, Netflix’s focus was geared to provide the customer with home entertainment products that were both convenient and inexpensive. In order to increase customer satisfaction, the company established three goals that started with providing value, included convenience and ended with a wide verity of product selection. All through the company’s growth process, the firm continuously looked for ways to improve its product line, delivery process, and product acquisition to meet the customer’s demand. In today’s home movie entertainment market, Netflix has become a household name along with its rival, Disney studios. According to May 18, 2018, Forbes article entitled “Netflix Is Uninvestable” the company had reached a revenue base of $11.7 billion in 2017.
Even though the article’s title misleads the reader, the content reveals an impressive growth matrix when compared to its first-year startup investment that began at a -$11,081. With its current focus now center on the streaming aspect of the entertainment business and its expansion into the Asian market, Netflix has set a new goal to increase its movie library and acquired additional bundling deals from carriers. Though its home-based subscription market has slowed, its overseas market has just begun to grow which could ensure more profitable years ahead for this forward-thinking company.