Competition in the Movie 1 Running Head: COMPETITION IN THE MOVIE Case Study: Competition in the Movie Rental Industry in 2008: Netflix and Blockbuster Battle for Market Leadership Emilsen Holguin Excelsior College
Competition in the Movie 1
Running Head: COMPETITION IN THE MOVIE
Case Study: Competition in the Movie Rental Industry in 2008: Netflix and Blockbuster
Battle for Market Leadership
Emilsen Holguin
Excelsior College
Competition in the Movie 2
Table of Contents
I. Overview ..................................................................................................................... 3 II. Diagnosis of Strategic Issues ...................................................................................... 4 III. Application of Techniques of Strategic Analysis ................................................... 4
A. Competitive Forces: The Five-Forces Model of Competition ............................... 4 1. Suppliers ............................................................................................................. 4 2. Buyer Power........................................................................................................ 5 3. Threat of Substitution ......................................................................................... 5 4. Threat of New Entry ........................................................................................... 5 5. Competitive Rivalry ............................................................................................ 5
B. Market Position: Strategic Group Map ................................................................... 6 C. Industry Key Success Factors (KSFs) ..................................................................... 7 D. Netflix’s Competitive Strategy ............................................................................... 7 E. Netflix SWOT Analysis .......................................................................................... 9 F. Blockbuster SWOT Analysis ................................................................................ 10 G. Financial Ratios .................................................................................................... 11
IV. Analysis and Evaluation ....................................................................................... 13 A. The Rental Movie Industry and Netflix’s Position ............................................... 13 B. Inside Netflix ........................................................................................................ 14 C. Inside Blockbuster ................................................................................................ 15
V. Recommendations ..................................................................................................... 17 A. For Netflix ............................................................................................................. 17 B. For Blockbuster ..................................................................................................... 18
VI. New Developments: 2010 Update ........................................................................ 19 Reference .......................................................................................................................... 21
List of Figures
Figure 1. Strategic Group Map Application for Selected Movie Rental Services .............. 6 Figure 2. Netflix SWOT Analysis ...................................................................................... 9 Figure 3. Blockbuster SWOT Analysis ............................................................................ 10 Figure 4. Comparative chart: Operating profit ................................................................. 12
List of Tables
Table 1. Comparative table: Financial Ratios (December 2007) ...................................... 11 Table 2. Comparative table: Financial Ratios (December 2009) ...................................... 20
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Case Study: Competition in the Movie Rental Industry in 2008: Netflix and
Blockbuster Battle for Market Leadership
I. Overview
Since founded in 1999, Netflix has grown to become the world’s largest online
movie rental service. In the beginning of 2007, Netflix surpassed 6.3 million subscribers.
With a catalog that includes more than 100,000 titles, Netflix is leading the movie rental
market (Thompson, Strickland & Gamble, 2009).
Netflix’s subscription-based business model was a disruptive innovation in the
movie rental business. By using the internet, Netflix focused on providing convenient and
affordable prices for an entertainment industry that was already highly popular. Based on
a product that consumers already loved, Netflix’s business model was profitable because
it improved the consumer’s rental experience. The company aimed to become the best-
cost provider. As part of its competitive advantages, Netflix has an intuitive website (easy
to use), personalized movie recommendations, and excellent customer service. Netflix
has been rated No. 1 in online retail customer satisfaction by Neilsen Online for the past
3 years and for nine consecutive periods by Forsee/FGI Research (Netflix, 2009).
Netflix’s strategy for success has included providing a comprehensive selection of
movies; an easy way to choose movies, fast delivery, a no-late-fees policy and a
convenient drop-it-in-the-mail return system. These strategies ensured a competitive
advantage to Netflix and threatened to make the traditional video store obsolete. A
combination of its business model and strategic approach carry out the mission of the
company: “Our appeal and success are built on providing the most expansive selection of
DVDs; an easy way to choose movies; and fast, free delivery” (Briki Media, LLC, 2007).
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II. Diagnosis of Strategic Issues
Netflix’s main competitor, Blockbuster, was losing the battle until 2007, when a
resurgent Blockbuster started to take over market share and forced Netflix to reduce
subscription prices. This reaction raised a red flag and caused a drop in Netflix’s stock
price.
In addition to Blockbuster, other competitors are increasing their presence in the
market (i.e., Redbox) and new technology innovations (i.e. VOD and DVR) are changing
the business environment. Netflix’s business model was a disruptive technology, but its
competitors’ strategies for damage control and recovering market share are starting to
affect Netflix’s competitive advantage. The market conditions for Netflix have changed
and the company needs to adjust and react to new developments.
III. Application of Techniques of Strategic Analysis
A. Competitive Forces: The Five-Forces Model of Competition
1. Suppliers
Netflix acquires its content from movie studios and movie distributors.
Although they offer a unique product and there is no chance of
substitution, the relationship between Netflix and its suppliers is
symbiotic. They need each other. Movie studios and movie distributors
make their revenue by selling its content to the largest number possible of
viewers. Netflix acquires content by buying DVDs, paying on a fee-per-
DVD basis, paying a fee to license content and signing revenue-sharing
agreements (Thompson et al., 2009, p. C104).
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2. Buyer Power
Netflix sells its subscriptions to those who prefer online-only browsing
and mailbox delivery. By July 2008, Netflix had 8.4 million subscribers
(Thompson et al., 2009, p. C102). Individually Netflix’s customers have
little buyer power; however, with no fees for canceling the subscription,
there is virtually no cost for switching to other provider.
3. Threat of Substitution
Netflix competes for customers by offering almost any kind of movie
broadcasting, movie rental or movie distributor. Netflix’s subscribers
easily find ways to watch movies. They can watch movies from cable
companies, online services, movie theaters, DVD vending kiosks and
rental stores. The substitution of Netflix subscription is viable and easy.
4. Threat of New Entry
Netflix’s economy of scale and distribution systems place a high barrier
for new entries to this market. New entries to the online rental movie
business would face high costs and require state-of-the-art technologies to
compete effectively.
5. Competitive Rivalry
In 2007, the movie rental business accounted for a $9.5 billion market in
the United States. Movies can be rented in-stores ($5.8 billions), via mail
(2.0 billions), on-demand (1.3 billions) and vending machines (400
millions). The main movie rental competitors for Netflix are Blockbuster
Competition in the Movie 6
and Redbox. Netflix’s competitors offer the same products for almost the
same price. (Thompson et al., 2009, p. C99).
The five-forces model of competition for the movie rental industry shows that
supplier power, buyer power, and the threat of new entries do not represent a
strong force against a company’s market position. However, the threat of
substitution and the threat of competitive rivalry can affect a company’s ability to
make sustainable profit in the movie rental business.
B. Market Position: Strategic Group Map
Industry competitors - Netflix, Blockbuster, Movie Gallery and Redbox - are
evaluated here in terms of added value (instant movies, personalized recommendations,
number of queues, etc) and market coverage (online, stores and vending machines). The
size of the circle is representative of market share relative to others in the industry.
Figure 1. Strategic Group Map Application for Selected Movie Rental Services
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The strategic group map (Figure 1) illustrates that the closest rival for Netflix is
Blockbuster. Also, it reveals that although Netflix’s customers receive more value for
their money, Netflix has less coverage because it limits its coverage to internet users.
Blockbuster has a strategic advantage by offering rental movies through stores, internet
and vending machines, but its customers receive less value for their money.
The strategic map also reveals the presence of a new player in the business game:
Redbox. Although the company is relatively new (first market test launched in 2004 in
Denver, CO), the company is growing its market share rapidly. The Redbox business
model is focused on fully automated kiosks that holds approximately 630 DVDs and are
placed in strategic locations (such us major groceries stores, pharmacies and restaurants)
(Redbox, 2009).
C. Industry Key Success Factors (KSFs)
The key success factors that affect movie rental players the most are:
• overall low costs
• market coverage
• large selection of movies
• updated catalog (new releases in stock)
• ability to provide fast and convenient service
• customer-centered approach
• state-of-the-art technology and distribution systems
D. Netflix’s Competitive Strategy
Netflix applies a best-cost provider competitive strategy. Movies are an affordable
entertainment that almost everyone loves. Netflix offers a large range of subscription
Competition in the Movie 8
plans to meet their consumers’ needs and added “convenience” to offer customers more
value for the money.
• A Netflix customer has a broad selection of subscriptions plans starting at $5.99
up to $47.99 – from two movies per month to unlimited numbers of movies
anytime (Thompson et al., 2009, p. C101). Movies are delivered and returned by
mail. Netflix has no due dates or late fees. Subscribers can watch “instant movies”
on the internet, all for a fixed price.
• Netflix adds value in many ways. It provides each account with as many as five
separate rental queues (with ratings-based parental controls), offering separate
viewing choices to individual family members. Based on one’s ratings, the
Netflix system learns one’s taste and offers personalized lists of
recommendations. Users can invite each other to join a “friends list,” so they can
see each other's rental queues and make additional viewing suggestions (Netflix,
2009).
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E. Netflix SWOT Analysis
Figure 2. Netflix SWOT Analysis
As shown in Figure 2, Netflix has a long list of strengths and opportunities. This
puts the company in an advantageous position to continue gaining market share.
Netflix’s customers are used to state-of-the-art technology and they probably welcome
novelty in delivering formats such as VOD. However, the company needs to move fast to
keep up with technology and innovations.
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F. Blockbuster SWOT Analysis
Figure 3. Blockbuster SWOT Analysis
Although Blockbuster has a good list of strengths and opportunities (as shown in
Figure 3), its challenges are greater because the company is losing reputation and is
already behind in using technologies and distribution systems. For a company that is in
recovery mode, conditions such as slowing numbers of movie DVD rentals and an
economic slowdown can be highly detrimental.
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G. Financial Ratios
Ratios Netflix Blockbuster
Working capital 203.9 30.7
Debt to Equity 0.50 1.96
Long term debt to Equity 0.008 1.015
Return on Assets 0.10 -0.031
Assets turnover 1.862 2.027
Operating Profit 0.075 0.007
Table 1. Comparative table: Financial Ratios (December 2007)
The financial ratios above are based on financial data from 2007 fiscal year
(Thompson et al., 2009, p. C106, C110). Netflix is highly liquid and has more than
enough solvency to cover expenses. Netflix’s debt-to-equity ratio is only 0.50 which
shows that the company is creditworthy and has a strong balance sheet. This is confirmed
with its very low (0.008) long term debt to equity ratio. The company shows
considerable capacity to borrow additional funds if needed. In addition, Netflix generates
$1.862 sales for each dollar of assets.
From Blockbuster’s perspective, its working capital is very low (only 30.7). This
can represent a significant challenge to cover its operating expenses. In addition,
Blockbuster’s debt to equity ratio (1.96) indicates excessive debt and a weak balance
sheet. High long-term debt equity undermines the company’s capacity to borrow
Competition in the Movie 12
additional funds. Blockbuster generates $2.027 sales for each dollar of assets, which is a
good indicator; unfortunately, its operating profit is very low.
The chart below compares operating profit ratios for Netflix and Blockbuster
from 2002 to 2007. The operating profit margin or return on sales shows the profitability
of current operations (not including interest charges and income taxes). The operating
profit ratio is best used to compare a company’s results over time to reveal trends. The
chart shows a rapid decline in Blockbuster’s operating profits from 2002 to 2004,
followed by a recovering curve until 2006. At the time of this analysis, Blockbuster’s
operating profit trend was falling in negative direction. In contrast, Netflix’s trend over
time is upward. According to the 2007 notes in Netflix Annual Report, its flatten out of
operating profit during that period was “primarily the result of an increase in personal-
related costs due to the growth in headcount and expenses related to the development of
solutions for the Internet-based delivery of content” (Netflix, 2007, p. 47).
Comparative chart: Operating profit
-0.35
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
2002 2004 2005 2006 2007
Year
Ope
ratin
g pr
ofit
BlockbusterNetflix
Figure 4. Comparative chart: Operating profit
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IV. Analysis and Evaluation
A. The Rental Movie Industry and Netflix’s Position The five-force model of competition shows that in the rental business the main
threats are substitution and competition. A movie rental business competes with any kind
of movie broadcasting business (cable, theaters, movie rentals, streaming videos, etc). A
company that wants to succeed in the movie rental industry must apply strategies to keep
customer satisfaction high and to promote consumer loyalty.
In the Strategic Group Map (Figure 1), the competition for market share with
Blockbuster is evident. Although Movie Gallery and Redbox together have a significant
presence in the market, they do not represent a direct threat to Netflix. In contrast,
Blockbuster has a large market share and has a wide geographic coverage. If Blockbuster
implements strategies to add value to its customers, Netflix can face a significant
challenge that could harm the direction of the company.
Success in the rental movie industry depends on seven factors. Netflix is
especially good on most of the key success factors for the movie rental business:
• overall low cost (an upward trend on operating profits),
• large selection of movies (with a catalog of more than 100,000 titles),
• updated catalog (Netflix offers new releases the same day they are
available in the market),
• ability to provide fast and convenient service (Online instant movies and
mail delivery),
Competition in the Movie 14
• customer centered approach (Netflix policies are customer friendly. its
intuitive website allows customers to make all transactions; in addition,
Netflix offers phone help available 24 hours a day) and
• state-of-the-art technology and distribution systems (Netflix system learns
to customer taste and personalize recommendations. Movies arrive within
one business day).
• Netflix’s market coverage is limited to internet users.
According to Internet World Stats, the percentage of penetration of the internet in
the North American population in 2009 was 74.2% (an increase of 134% since 2000).
This rate indicates that Netflix could reach 74.2% of the American populations, which
adds market coverage to Netflix’s list of key success factors (Miniwatts Marketing
Group, 2009).
B. Inside Netflix Netflix has been successful in applying the best-cost strategy. It has been able to
offer additional benefits to its customers while controlling its expenses, keeping low
levels of debt, and continuing to increase net income. Netflix is a very profitable business
that has built on its first mover advantages and created a business model that promotes
customer satisfaction and technology innovation. Although it only provides online rental
services, the rapid increase of internet users will help the company to convert this
weakness into an opportunity.
In 2007, Netflix’s most significant weakness was the lack of stores and the
difficulty for subscribers to have immediate access to movies. Although “instant movies”
were available, the titles were limited and the movies had to be watched on a computer
Competition in the Movie 15
screen. In addition, competitors had emulated Netflix online services, making the war for
market share more competitive. The biggest threat for Netflix is to overcome the business
cycle of its model. Netflix’s business model is at its peak, competitors are getting close
enough to force Netflix to lower the price of its subscriptions. Netflix needs to take
advantage of its opportunities to continue its growing trend and avoid a contraction cycle.
Its most attractive opportunity is the growing awareness of video streaming technology
and its promising partnerships with gaming console manufacturers to offer video on
demands.
Netflix’s financial ratios confirm the financial health of the company. Large
amounts of working capital, low levels of debt, high rates of asset turnover and a positive
trend of operating profit makes the company attractive for investors and ensures financial
stability.
C. Inside Blockbuster The main problem with Blockbuster is the lack of a defined strategic approach.
Blockbuster used to set its own price standards until Netflix came aboard. Since 2003, the
company has been losing money. In its effort to recover its market share, the company
tried to add value to its memberships. This initiated when Blockbuster launched an ad
campaign that communicated their value proposition: “Get 4 movies by mail and trade
them for in-store movies, as often as you like for $20 a month” (Steele, 2009, para 1).
However, the company did not persist in a clear strategy; instead, customers were
surprised by changes to the rental policies and new promotions each time they visited the
stores. The policy changes were frequent to the point that store employees delivered
Competition in the Movie 16
negative and confused messages to customers. Employees and customers were puzzled
about what the current policy was.
Blockbuster is subject to the same list of key success factors as Netflix. However,
in Blockbuster’s case, the company is weak in maintaining overall low costs; it has seen a
decrease in customers’ satisfaction and has struggled with efficiency in its distribution
systems. In its favor, Blockbuster has a reasonable selection of movies, an updated
catalog (although movies are not always in stock), offers convenient access to movies
across multiple channels (stores, online and vending machines) and has a global presence.
Blockbuster’s diversified delivery channels is the company’s strongest
competitive advantage. Blockbuster is the only company to make media entertainment
available across multiple channels. The company promotes that the fact that “the same
customer may choose different ways to access media entertainment on different nights”
(Blockbuster Corporate, 2009, para 4). A consumer can rent movies at traditional stores,
by-mail, vending or digital download. In spite of this advantage, Blockbuster has lost
reputation and has dealt with high operating costs that make it a difficult to challenge a
strong competitor like Netflix. In addition to its internal difficulties, Blockbuster’s
recovery efforts are being slowed down by the country’s economic recession and a
consumer trend to rent fewer DVDs. However, the company counts on its infrastructure
to take advantages of opportunities such as a growing market for game rentals, a strategic
alliance to deploy Blockbuster-branded DVD vending machines for movies and video
games and a video streaming technology.
Blockbuster’s financial ratios reveal a poor financial performance. A low amount
of working capital, high levels of debt and negative trends of operating profits make it
Competition in the Movie 17
difficult for the company to attract investors. Its high ratio of long-term debt to equity
(1.015) makes it difficult for Blockbuster to find external funding to support its new
strategies.
V. Recommendations
A. For Netflix The market environment for Netflix has changed and the company needs to adjust
its strategies in order to avoid a contraction cycle. The company enjoys key success
factors needed in the movie rental business, but to keep its leading position in the market,
Netflix must continue improving customer satisfaction rates and customer retention rates.
The following recommendations can help Netflix keep its front running position in the
market:
• Design a marketing campaign to raise awareness of the advantages of
video streaming technology, which allow customers to instantly watch TV
episodes and movies streamed from Netflix.
• Increase the number of digital content movies available in its catalog (in
2007, only 12,000 full-length movies and television episodes were
available for streaming over the Internet to computer screens.)
• Take the first movers’ advantage of digital technology broadcasting.
Netflix should aim to download its digital content directly to TV screens.
Partnerships with TV and game consoles manufactures can give Netflix a
new distinctive competence.
• Continue to increase its number of titles available and seek to include
music digital content.
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• Design annual memberships to reward loyal customers. Netflix should
offer a discount price for loyal customers who want to pay for annual
subscriptions.
• Design a referral program. Netflix sells “gift subscriptions” and sends by
mail “free-trial” coupons, but it fails to reward its customers for helping
the company in its marketing efforts. A free-month or a special discount in
membership prices would motivate customers not to trash those “free-
trial” coupons.
• Increase awareness of the company’s social responsibility. Netflix could
create special programs (contests or collections of points) to allow schools
to receive free subscriptions. These kinds of program are powerful ways to
build a company brand and to ensure future loyal customers.
B. For Blockbuster On the other hand, Blockbuster continues working in a recovering mode.
Although some of its strategies have been working and the company saw a small
recovery in 2006 with a modest profit of 39.2 millions, the boost did not last long and the
company went negative again on 2007 (registered a loss of 85.1 million). The conditions
for Blockbuster are more challenging because of its weak financial situation and damaged
reputation.
A priority for Blockbuster must be to become profitable. The company needs to
reduce its operating costs and to design an effective distribution system. It can do this by:
• Building a business model that is sustainable and has the flexibility to
adapt to competitive threats without eroding value.
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• Identifying appropriate strategies and creating company policies to ensure
that employees deliver consistent and reliable information to its customers.
• Taking advantage of new technologies to reduce its operating costs and to
improve customer service.
Blockbuster should quit fighting Netflix and focus on creating a new niche
market. Blockbuster took too long to fight back Netflix’s strategies and currently the
company does not have financial resources to compete against this giant rival. However,
Blockbuster’s global infrastructure provides the company with unique geographic
markets where Netflix is not present. In addition, Blockbuster offers rental of video
games, another market where Netflix does not compete and that is growing in numbers.
Movie rentals could become “the added value” for video game rental consumers.
Investing efforts and resources to build distinctive competitiveness in markets where
Netflix is absent gives Blockbuster a better chance of recovering its competitive
advantage.
VI. New Developments: 2010 Update In September 2009, Blockbuster announced a major store closing initiative that
could result in the elimination of 22% of its current freestanding store bases (Pardy, 2009,
para 1). Also, the company continues promoting its "Total Access" program, which has
only 1.6 million current subscribers.
Redbox has become a major player with more than 19,000 kiosks placed
nationwide by the end of 2009. This represents a significant threat to Blockbuster’s
network of kiosks (only 497). Redbox does not have late fees and customers have up to
25 days to return their DVDs. In addition, Redbox’s system offers online reservations,
Competition in the Movie 20
allowing customers to choose their favorite titles online and pick them up immediately at
the preferred Redbox location (Redbox, 2009).
By January 2010, Netflix’s base of customers was about 10.6 million subscribers
and the company was launching a strong marketing campaign to promote its “instant
movies” that could be downloaded directly to TV screens (with the help of several
devices such as game consoles, blue ray players and HDTVs.)
The table below summarized the main profitability ratios and profit information
for Netflix and Blockbuster as of December 31, 2009 (Yahoo! Inc., 2010).
Ratios Netflix Blockbuster
Return on Equity 38.66% -119.14%
Return on Assets 20.29% 4.15%
Profit Margin 6.79% -10.70%
Operating Profit 11.01% 3.31%
Net Income 107.68 M -452.80M
Table 2. Comparative table: Financial Ratios (December 2009)
It is clear that Netflix continues to maintain a strong position in business, while
Blockbuster continues to get worse.
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