This report aims to study the business model of Netflix and Blockbuster. We analyze why Blockbuster failed even though it has become a vast multinational business and the role Netflix played in the downfall of Blockbuster. Moreover, we also discuss the business model and strategy adopted by Netflix, which are responsible for the continued success it has earned over the years. Through our findings, we were able to conclude that the main reason for the decline of Blockbuster was it’s of lack innovation along with changes in culture and technology. Conversely, Netflix was successful because it has been innovative and disruptive from the start.
As technology progresses, business models that previously held value face complete downfall if they fail to upgrade their business strategy according to the demands of the consumers. Even future expectations need to be kept under close consideration while planning and executing the business strategy. Failure to do so has led some of the most prominent and well-established companies to the ground while others replaced them quite successfully. One such example is of Blockbuster, which was a CD/video rental service provider. During the 1980s and 1990s, it was all extremely in demand and hence, one of the top business models. But approaching, the mid-2000s, when Netflix was founded, Blockbuster got replaced effortlessly, and today it is no more than a historical entity in the world of business and movie lovers. Certain strategic failures led to the demise of Blockbuster and similarly, some strategic success which allowed Netflix to replace it and reach the top in the entertainment business. In this report, we will discuss the strategic model and paths taken by both Netflix and Blockbuster and analyse their differences which led to one’s success and the other’s fall.
Historical and cultural analysis of Blockbuster and Netflix and their path dependencies
Video rentals became common in the early 1980s. Soon in 1985, David Cooks opened the first blockbuster store. At the time, there was a lot of potential in this business venture. It was expected to spread rapidly like fire across America. Which is why investor Wayne Huizenga, who precepted the business to be nothing short of a sort of McDonald’s, decided to invest in and became the CEO. Blockbuster’s lifespan was almost the same as the lifespan of the industry of video renting. Down the lane, the company had other financial and competitive issues as well apart from Netflix. By 1993, Blockbuster had 3,600 stores across America, and by 1994, Huizenga sold the company to Viacom. Blockbuster was facing serious competition by 1995 by Hollywood video which wanted to make an even larger physical footprint than Blockbuster. This may be seen as the first hit Blockbuster took as the next year in 1996, the company issued its positive net income which was to be the last in the coming decade. Soon in 1998, Netflix launched its subscription service, but it hadn’t yet become the company’s serious competition as opposed to Walmart, Target and Best Buy, which had high DVD sales in 2003. By 2005 Blockbuster fails to overcome Hollywood Video and sales decline even though the company launched the online business a year before. Still, there was also late fee which was despised by most customers. After some other failures and hits, Blockbuster finally files for Chapter 11 Bankruptcy with hopes to reorganize and continue. Dish Network buys the company out of bankruptcy in 2011 but is forced to close down all of the company-owned stores in 2013 (Green, 2015). Other franchised stores close down as well with a single Blockbuster store left open in Bend, Oregon in 2019.
Netflix started in 1999. Their pricing model was entirely different. Instead of charging rent per movie, Netflix was offering monthly subscriptions where customers could pay a monthly fee and then rent as many movies as they wanted. Another perk unlike Blockbuster was that there was no prescribed return date for the movies, and hence, there was no issue of late fee nor was it used to generate revenue. However, to rent more movies, one had to return the previously held ones. Blockbuster did not cut back on late fee immediately, which cost it a lot of loyal customers and market share which Netflix took over (Halal, 2015).
Strategic position analysis
Blockbuster realized its mistakes too late. It decided to launch its online business in 2004, but it was still a lot behind Netflix. Moreover, it also decided to finish late fee, but that again caused a huge dent in the revenue for the company. At the same time, Viacom took its leave from Blockbuster further weakening, and to properly establish the online business, the company needed around 200 million dollars. With all this and Netflix on the rise, Blockbuster lost 75 per cent of its market value from 2003 to 2005. Soon after, it went bankrupt with all the stores closing let alone one in Bend, Oregon(Olito, 2020).
Blockbuster also tried to make the following changes. Blockbuster adopted a by-mail service which allowed customers to get CDs delivered to their homes. The company’s website also allowed customers to download and watch movies on their computers. Moreover, Blockbuster partnered software developers to make apps that customers could download on their mobiles. They also got into a joint venture with IBM to develop a unique distribution channel which would replace inventory with digital files (ACM, 1993).Moreover, they implemented a short-range scheduling model which eased shipping operations and made them efficient, and also reduced labour and transportation costs (Chung, Dawande, et al, 2011).Despite of all this, the company wasn’t able to withstand competition. The chief restructurer officer at Blockbuster gave five main reasons for the revenue decline of the company. “Increased competition in the media entertainment industry; technological advances that changed the landscape of the industry; changing consumer preferences; the rapid growth of disruptive new competitors; and the general economic environment” (David, Higgins, 2013).
Blockbuster was also drowning in debt which further led to bankruptcy. The competitors were using channels that were more attractive to consumer demands, and hence, they earned greater market shares and market value as well as replacing Blockbuster. There was also economic recession during 2009-2010 which further worsened the situation for Blockbuster. Unemployment was on the rise; thus, consumer spending had considerably decreased, which faired negatively for the business. As a result, the company had to reduce a lot of its administrative expenses and shut down a lot of underperforming stores. It was fighting a lot of financial problems in the meanwhile, Netflix expanded and loomed all over the business(David, Higgins, 2013).
Ever since the beginning of Netflix in 1999, it has taken the right business moves, which have helped Netflix reach the place it has today. Started with DVD leasing services, then it moved on to streaming and finally became a global TV network. Netflix was able to recognise that streaming services are the “new beasts” (Fagerjord, Kueng, 2019).The business model continued to skyrocket and be constructive. The company’s organizational structure was such that it did not become stagnant and continued to change through time and hence, was also effectively able to face competitors. As of 2017, Netflix amassed 11.7 billion dollars in revenue with 175 million subscribers. Today, Netflix produces its content as well, which is not only limited to Hollywood but amasses other countries’ cinemas as well. It has won awards for various contents (Teece, 2010).
The current business model of Netflix allows subscribers to a huge variety of things, including movies, tv shows, documentaries et cetera on various internet-connected gadgets. Customers have to buy membership subscription and pay monthly for it. They can subscribe to different packages according to their need and price preferences. The key partners for Netflix are content creating studios from whom Netflix buys content from to stream to its subscribers. The business also makes use of aggressive marketing strategies to increase the number of subscribers. Money earned from subscriptions is used primarily to purchase more content and also to produce its own, which comes under key activities for the business. Netflix also makes a profit through strategic product placement which is another smart business move. This implies that many products are highlighted in the shows as a way of advertisement. The Netflix business model makes effective use of its resources (Teece, 2010).
Even though Netflix also started as a DVD distribution service, it did not stop there like Blockbuster. The company rightly believed in the power of data analytics and used it to its advantage profusely. It was able to build a recommendation engine using the best possible data science algorithms. So, the system could now predict DVD requests more efficiently. This made them even better than Blockbuster and other video rentals. Netflix always believed in disruption via innovation as a business strategy, and it was successful in implementing that (Osur, 2016).
Strategy in action
Netflix also targets consumers very smartly. The main target audience includes young adults to middle-aged males and females. That is a huge segment of people. It also implies that instead of focusing on demographics, Netflix focuses on psychographics to lure people in. Hence, Netflix targets individuals who are too busy or broke to go and buy movies, and they want easy, cheap fix for entertainment. Thus, the value proposition is extremely important in the business model for Netflix. The company has been able to earn so many subscriptions because it is affordable for the majority. Secondly, the services can be availed on any range of internet-connected devices, making it convenient to use. Thirdly, there’s a huge variety of genres and shows that an individual can choose from. Every user gets personalized recommendations of shows and movies, which essentially makes most people hooked to Netflix for hours on a stretch. This is because of the algorithms they use. Binge-watching has become increasingly common on Netflix as entire seasons are released at a time instead of single episodes. Moreover, the absence of ads is a huge attraction for the majority as they can stream without any interruptions. Since Netflix is investing a lot of money in making original content, this allows them competitive advantage (Osur, 2016).
Any company’s financial conditions are the most important in predicting the future success of the company. Looking at Netflix’s financial conditions for three years between 2013 to 2015, it can be concluded that the business is doing well in terms of liquidity, profitability, and its assets. The company has up to a billion dollars in cash and equivalents, which can be immediately used for investments. An organizations ability to handle short term assets to pay off obligations is determined by liquidity and it has increased for Netflix in this time interval.However, it is dependent more on inventory rather than liquid assets. Debt to equity ratio shouldn’t be too high ideally, and Netflix has a small number of 1.07. Profitability ratios show the firms capacity to make a profit in terms of revenue and assets. Data shows that Netflix is very stable and balanced in this area. This can be attributed to the company’s international expansion and the creation of original content. Shareholders’ equity has also only increased in the case of Netflix since 2013. The company has been able to control costs effectively as well. “High working net operating profit implies that the organization has a great cost control and that sales are increasing faster than costs, which delineates a profitable solution for a company.” This is not in favour of Netflix, however. The company’s costs are expanding at a faster rate than its income. Revenue and net profit also decreased in 2015 in comparison to the previous two years as Netflix had a lot of expenses due to upgrades in content quality. Efficiency calculates the generation of sales revenue in a company using its assets. A high ratio shows that the company is effectively using its assets to generate revenue. In the case of Netflix, asset turnover has been decreasing even though there is an increase in total revenues from assets. This is because Netflix is spending a lot on expanding and on creating content, thus incurring huge costs (Mazzolini, Bozzolan, 2016).
However, overall, the company is doing very well and has been able to maintain continuous development and a good level of profit. The challenge for Netflix is to maintain an increase in rates of return. If profits grow smaller, it will become harder for Netflix to fight against competitors who have a more capital and financial backup. As of now, Netflix seems to be on the right track with its international expansion and newer content coming in. Netflix has to hold more content as well so that companies such as HBO and Amazon can’t outsource it for content. Failure to do this would lead to significant losses in subscriptions and ultimately, revenues which are why their original content apart from what is coming from their clients is a great help (Mazzolini, Bozzolan, 2016).
Blockbuster was a huge hit in the limited, give or take, twenty-year period. Firstly, because at that time there was no other way to enjoy movies unless one bought the VHS tapes, so rental stores were naturally a huge hit. Then the investors that pooled in money into the business in its early years took Blockbuster to the top in a short period and the business had a total of 6000 stores worldwide in 1944. It was dealing with billions of dollars. But all this did not last long. The late fee had aggravated a lot of people. In fact, Blockbuster earned 16 per cent of its revenue which makes for 800 million dollars just by the late fee. Netflix founder Reed Hastings is reported to have said that he founded Netflix because he was frustrated by the late fees at Blockbuster. So, in its early days, Netflix would deliver DVDs right at homes for monthly subscriptions and no late fees. This was, of course, a much welcome change to entertainment consumers, so they replaced Blockbuster. Another faulty move by Blockbuster was that the company never acted on its decision of buying Netflix when it was new. They were to buy it for 50 million dollars but never did so. The company seriously underestimated its competition because it was doing well at the time with 9000 stores globally and 60,000 employees and earned 5.9 billion dollars in revenue in 2004 (Olito, 2020).
The Netflix founder, Reed Hastings, went to the CEO of Blockbuster, John Antioco, in 2000 to propose a partnership but he was laughed out. At the time, Netflix was new. Fast forward to the future, Blockbuster failed miserably, and Netflix became a 28 billion dollars company, many times more worthy than Blockbuster ever was. The biggest fault of the company, however, seems to be the late fee. It is what truly drove customers away. Penalizing its customers for profit, was a faulty move in the business model for Blockbuster. Netflix’s popularity grew by word of mouth. More and more people fell in love with the services it provided. It became trendy. This behaviour is called threshold model of collective behaviour. Plus, it helped Netflix in the coming years that online networking became easier and popular through sites such as Facebook and Twitter. Both of these were not available to Blockbuster or were ignored by the company. The organization had a very tight internal network only and this also adversely affected it (Satell, 2014).
Discussion (Strategy Choices)
Netflix has promising plans for the future as well. There are two main projects that the company is expected to pursue which catch the eye. Firstly, Netflix television and secondly, the High Dynamic Range (HDR). Netflix television would emerge via partnerships with cable TV companies such as RCN, Grand Communication and Atlantic Broadband. The advantage of this business project would be that a new market segment could be tapped. There are a lot of people who aren’t avid internet or gadget users so, they would be able to avail Netflix services via television. However, there are also complications related to contracts, licenses and permits. So, for this project to be applicable and successful, Netflix would have to acquire rights from various cable TV studios. On the other hand, Netflix is trying to develop the feature of HDR, which is a new standard for image quality. It has invested quite a lot of capital in making this feature. This essentially provides an even better watching experience than HD. If this were to be successful competitors would face a blow (Mazzolini, Bozzolan, 2016).
In order to be successful in the future as well there are some strategic choices that Netflix can make. First of all, they always need to be aware of the changing trends in consumer decision making. Hence, Netflix should look into consumer technology such as IoT systems so that they can compete with companies such as Amazon. Secondly, Netflix needs to create something that is unique to their brand and adds to consumer experience like Alexa or Siri. Many companies such as Disney are collaborating with others to create something entirely different. This is so that Netflix sticks in the life of the consumers. Hence, Netflix needs to build up a strong collaborative strategy.They can partner with these companies to set up boxes or gaming consoles (Winter, 2011).Netflix should continue keeping its subscription price low and streaming quality high so there are minimum barriers to entry and more and more people continue to join. This way they can fight off competition (Fagerjord, Kueng, 2019).The company also needs to acquire more content on the basis of what consumer demand. For example, a lot of famous movies and tv shows are still not on Netflix and other companies such as Disney and Warner Bros are coming up with their own streaming channels which could cause Netflix to lose viewership with increased competition (Snyman, Gilliard, 2019).
Netflix has a platform business model. It has four main components which are producers, consumers, providers and owners. Advantage of this model is that it is not heavily dependent on physical assets, unlike the Blockbuster business model. The focus is on digital assets instead. Digital assets comprise of data by users. Access to this data has allowed Netflix to “build a state-of-the-art customer-centric business” which is another perk in this business model. This also aids in the reduction of costs such as store maintenance and other related costs. Thus, the efficiency of the company increases. They were easily able to innovate too, unlike Blockbuster, which had zero “innovative disruption” and hence, was driven out of the market (Brunetta, Turner, Ciccone, 2017). A platform business model does not acquire other businesses or fixed assets but instead makes links with more and more user networks(Fagerjord, Kueng, 2019).Lack of innovation leads to Blockbuster’s failure (Grshon, 2013). All this and the analysis done above shows how Netflix will be able to dominate in the industry of content streaming thanks to its malleable business model.
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