Competitive Threats of Blockbuster to Netflix
Movie rental business has developed fast simultaneous with the fast-changing technologies, from VHS in the 1970s to DVDs in 2000 up to the present.1 In 1985, Blockbuster is the leading company in traditional video rental retailer with 9, 000 stores domestically and internationally. However, there are many competitors that existed such as the other retailers who rent, sell, and trade movies or video games. Additionally, the fast developments in technology have added more competitors to the traditional movie rental such as Netflix, the leading online movie rental website.5
Netflix was established in 1998by founder Reed Hastings, which is now the largest online DVD rental service to one million customers, offering 15, 000 titles. DVD format costs 37 cents in shipping that is why Netflix uses only this format unlike the VHS format which costs $4. Netflix uses the Internet and the postal system in managing subscription and delivering DVDs for $19.95 per month where there are no late fees and no due dates. Each member can get three titles and get delivered through first class postal service to his house or up to eight titles for the higher subscription rate. The members fill online forms and Netflix will wend them the first three selections. Upon finishing the movie, it will be placed in a pre-paid envelope and drop in any mailbox and Netflix will process the movie on the list.1
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The lower cost of purchasing and unlimited services allow Netflix for purchase of deeper copy depth and meet the demand for a title. However, the selection in Netflix is limited since it only offers movies on DVD format unlike in Blockbuster. The original Star Wars trilogy, for example, is not yet available in DVD format. Also, the higher rental rate in Netflix will increase film rentals and will result to more revenue sharing costs since the typical revenue sharing requires payouts.1In 2004, however, Blockbuster decided to modernize and go on Internet for consumer movie rental. The company allows customers to rent movies via mail through the Internet and will be sent from a closer Blockbuster retail outlet. Blockbuster already owns these movies in its retail business and thus reducing the cost of goods, delivery time. This modernization is due to the growing competitive threats on video-on-demand market. As a result, Netflix has to reduce its subscription rate in order to compete with Blockbuster. After Blockbuster employed mail-order, the number of their customers increased such that 50 % of mail-order customers were not Blockbuster renters.3
Netflix began at $4 per movie DVD rental service in 1999 offering unlimited service and low subscription rate. In 2002, its subscribers increased to 100, 000 earning $750 million. However, when Blockbuster (and Wal-Mart) developed their own DVD mail-order services, Netflix ensure a patent for its basic features. The operation of Blockbuster is almost the same as that of Netflix. As a result, Netflix’s subscription price has decreased. Hasting did consider this as a major threat but he was confident of the market history of Netflix and the efficiency in shipping with one million movies per day. In order to distance from the competition, Netflix partnered with TiVo to work in Hollywood studios for securing content in digital distribution. However, the services offered by Blockbuster and other similar movie rental companies are cheaper. Netflix could lose it customers but Hastings insisted on $21.99 premium price. The firm has no choice but to lower it. Hastings planned on investing more money to customer acquisition but the investors still are not confident.4 The competition became intense and Netflix filed lawsuit against Blockbuster for copyright infringement. Blockbuster, on the other hand pursued antitrust counter-claims. 2
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