May 02, 2007

Blockbuster Versus Netflix

Blockbuster, the retail movie rental king, is increasingly challenged by Netflix, the online movie rental king.

So, Blockbuster implements an online rental program, leveraging retail stores as a key component in the new program.

And then the financial results come in, and they look awful. Forbes magazine has a headline that says "Online Service Costs Blockbuster". Forbes also lists an article that says "Blockbuster Gains On Netflix". Forbes also mentions "Netflix Losing Ground". Which article is "right"?

First, one needs to consider that Blockbuster executed a $35,000,000 advertising campaign to educate the public about the new program. If we assume that the advertising campaign was executed in an effective manner, it is highly unlikely the program will pay for itself in the short term. It may never pay for itself in the long term.

The article states that Blockbuster added 800,000 new subscribers, bringing their total to 2,800,000. Netflix added 481,000 subscribers, bringing their total to 6,800,000 --- but more important, new subscribers were dampened by about 200,000 verses prior quarters.

In other words, Blockbuster may have dramatically over-spent (as is evidenced by the cost of the advertising campaign, directionally similar to the increase in loss verses last year) to acquire new customers, and cannibalize Netflix business.

Also, pay attention to comments that Blockbuster retail sales decreased significantly verses prior year. Only Blockbuster knows if the online business is cannibalizing their own retail sales.

This is where Multichannel Forensics can be applied both within and across businesses, with the advantage going to Blockbuster. Blockbuster has retail and online channels, and has competitive data provided by Netflix. Management can use Multichannel Forensics to forecast long-term changes in retail and online growth, and can incorporate Netflix information into the simulation. Over the next few years, Blockbuster management can see the long-term financial impact of their decision (which will hopefully be better than what is being reported today), and can project the potential damage inflicted upon Netflix.

What a wonderful, real-life laboratory we have in Blockbuster and Netflix. We see that multiple channels can be better for the customer, expensive for the multichannel brand, and can erode the growth of the online pureplay. I look forward to seeing what Netflix does to compete against this multichannel intrusion into their space.

If you were Netflix, how would you compete against Blockbuster?

2 comments:

  1. Interesting. I honestly don't know what I would do if I was in Netflix's p0lcae. i have o admit that I'm not an expert on Internet advertising and that I have a lot to learn. Anyway, the competition between the two companies certainly offers a lot of useful information.

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  2. Anonymous9:40 AM

    I was a Netflix fan for a long time, and then I switched to Blockbuster. I loved the ability to turn you movies into the store to get new ones right away. Unfortunately Blockbuster has put a cap of 5 exchanges on it now. Here is a poll: Blockbuster or Netflix http://www.apopularitycontest.com/display_poll.php?ID=4669

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