Blockbuster Verses Netflix: Multichannel Forensics

Blockbuster's PR folks are doing a good job getting the word out that they are gaining ground in their battle with Netflix. A series of articles are circulating the press, including this one from Forbes. Blockbuster claims to have 2.0 million paying online subscribers, compared with the 5.7 million that subscribe to Netflix.

Financial documents from both Blockbuster and Netflix tell us the story of online and retail sales, during the third quarter of 2006 verses 2005. Some of these numbers may be a comparison of apples and oranges, especially given retail closures associated with Blockbuster. They can still be used for illustrative purposes.

Comparison of Rental Income, Online and Retail
Blockbuster Verses Netflix, in Millions
Third Quarter Results
	2006	2005	Change
Blockbuster Retail	$676.0	$726.5	-7.0%
Blockbuster Online	$64.7	$41.0	57.8%
Netflix Online	$256.0	$172.7	48.2%
Totals	$996.7	$940.2	6.0%
Blockbuster Total	$740.7	$767.5	-3.5%
Netflix Total	$256.0	$172.7	48.2%
Blockbuster To Netflix Ratio	2.893	4.444	-34.9%

Blockbuster claims that retail rental revenue decreased due to expense management associated with closing poorly performing real estate locations.

Between the two businesses, total volume increased by six percent in the third quarter, suggesting an expanding market, or suggesting that Netflix is taking market share from other competitors.

Multichannel forensics come into play for Blockbuster when evaluating the growth of the online subscriber base. If these subscribers are simply retail customers who are converting to the online channel, Blockbuster may have a series of additional future challenges.

By offering in-store dropoff and pickup of online movies, Blockbuster may stem loss of customers to Netflix. This strategy may allow Blockbuster to slow the rate at which Netflix is growing its customer base via customer acquisition. Given that Netflix likely has an annual customer retention rate of around seventy percent, Netflix must really amp-up the customer acquisition activity in order to continue the torrid growth rate Netflix has achieved.

If, however, Blockbuster is simply shifting its own retail rentals to an online subscription channel, then a very interesting set of dynamics shift into play. Can Blockbuster drive more visits to the store under this model? Management seems to think so. If this results in fewer visits to the store that result in a purchase, fixed store costs may not leverage as well, requiring Blockbuster to make a series of decisions about the true incremental value of the online initiative. It is possible that sales decrease in all stores, resulting in the eventual closure of underperforming stores. This could eventually lead to a more profitable business model, assuming Netflix doesn't clobber Blockbuster during this period of transition.

Stay tuned. Both companies appear to be moving their chess pieces around the board. Both executive teams must be feeling the stress of this multichannel verses online pureplay battle. Who do you think will win?