#34. The Streaming Wars
Part 2: Netflix vs Blockbuster.
Announcement: It is official Netflix would create a new ad-supported tier plan instead of relying completely on subscriptions. This is important and was a hypothesis behind this series that for long term competitive advantage, Netflix would need to take this step. This is a similar model to YouTube. Glad to know our business predictions are right 😊. Read more.
This is the 2nd article in the series: The Streaming Wars.
This series is based on Netflix and its evolution from DVD mailing service to global streaming giant with over 212 million global subscribers, and the fierce competitions (with Blockbuster and other players) it had to overcome on the way to global success. The goal of this series is to provide practical steps and lessons with which you can apply and succeed.
In the last article we introduced this series, learnt about Netflix and the changes it had wrought in the movie industry. But that was only the beginning.
In this article, we will introduce Blockbuster, the early giant to Netflix’s David, and their battle with Netflix for who would win the streaming wars.
Blockbuster was founded by David Cook in 1985 as a video rental store. When Netflix launched in 1997, Blockbuster was the undisputed giant of the video rental industry, operating several brick-and-mortar video stores.
Between 1985 and 1992, Blockbuster grew from its first store (in Dallas, Texas) to over 9,000 stores in the United States and had 65 million registered customers.
At the store, customers were charged a fee to rent a film for a set number of days, plus late fees for late returns. These late fees comprised a significant portion of a store’s revenue. In 2000, Blockbuster earned $800 million in late fees.
Two years later, Blockbuster was acquired by Viacom for $8.4 billion. Blockbuster was a giant in comparison to Netflix.
Netflix vs Blockbuster is the basis of The Streaming Wars.
A business war that would last for 8-years and exact significant losses on both parties. Blockbuster would eventually file for bankruptcy with over $900 million in debt.
Netflix vs Blockbuster — Competitive Landscape
The late fee charged by Blockbuster was very profitable, but this ruined the customer experience.
This business model at Blockbuster was known as ‘Managed Dissatisfaction’ — this meant that as along as you give a consumer enough of what they want, they would ignore the fact that they are not always getting what they want.
So rather than looking for ways for customer to avoid late fees, Blockbuster started to prioritise ways to optimise the late fees revenue.
Customers felt trapped, and with smaller video stores squeezed out, Blockbuster was their only option.
Netflix launched in 1997 offering customers the option to order up to three DVD discs for an unlimited amount of time. This was innovative as it leveraged the new DVD disc technology compared to bulky VHS tapes used by Blockbuster.
Instead of going to a store and settling for a bad customer experience, you could order up to 3 DVDs from the comfort of your home online and receive them in a red envelope through the post.
You also had the option to order the movies you wanted instead of the ones you had to settle for. Netflix had a diverse catalogue compared to Blockbuster’s which focused on new releases.
Lastly, Netflix had no late fees. Netflix’s business model was based on a subscription service priced at $19.95 per month rather than late fees.
This combination of great customer experience, no late fees, an expanding catalogue of movies available to rent (from 900 in 1998 to more than 5000 in 2000), grew Netflix’s subscription.
By 1999, Netflix’s subscriber count was about 300,000, and by the end of 2004, its service had grown past 2 million subscribers.
Compared to Blockbuster (a $6 billion dollar company) at the time, Netflix was not big enough. The likelihood of winning against them was slim.
Realizing that it was easier to work with Blockbuster than against them, Netflix CEO Reed Hastings approached Blockbuster’s CEO John Antioco with a proposal: That Blockbuster would buy Netflix for $50 million and let the Netflix team run Blockbuster’s online platform, while the Blockbuster team ran the stores. This was a classic business school strategy — Synergy. $50m was nothing for Blockbuster.
Despite the proposed merits, Blockbuster rejected the deal. Blockbuster’s CEO Antioco considered Netflix to be insignificant and figured he could launch his own service.
Blockbuster — Copy Everything, and Total Access.
In 2004, Blockbuster launched a Netflix-like online DVD rental platform, and even discontinued late fees. He launched a website and service called Blockbuster Online that looked like Netflix, except the colours: instead of Netflix’s characteristic red, it was replaced by blue and yellow of Blockbuster.
By 2006, subscribers for Blockbuster’s online service had grown to over a million, but Netflix subscribers continued to grow reaching 6.3 million in that same year.
Subscription businesses need a lot of marketing dollars to grow, and both companies were spending hundreds of millions on marketing to grow their subscription.
No one knew yet if there were enough customers to sustain two companies, so it was a fight for who would grab the most subscribers and win.
Then Blockbuster turned the tables.
In 2007, Blockbuster launched Total Access a service that allowed subscribers to rent a DVD online through Blockbuster Online and receive a new movie for free when they returned it to a Blockbuster store.
This bundled strategy for the first time stopped Netflix’s growth and doubled Blockbuster’s online subscribers to 2 million in 6 weeks. To really compete Netflix would need to replicate Blockbuster’s distribution network of 9000 stores.
But the service was very expensive, every free movie offered to the customers cost Blockbuster $2, but the thinking was that it would attract enough new subscribers to cover the loss.
Both companies were haemorrhaging cash and it was a fight to the bottom for who would go bankrupt first.
In our next article, we would see how competition between Netflix and Blockbuster takes a new turn, and just when Blockbuster appears to be winning, the entrance of a new player would give Netflix a reprieve.
But would they take it?
Bye for now.
Thanks for reading and see you next week.
You can catch up with the past article in this series: Part 1. I previously did a strategic analysis on Netflix. You can use this framework to analyse other companies.
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Racing Towards Excellence.