Business · Won't hurt to know

The rise of Netflix and the fall of Blockbuster

The media giant, Netflix had a spectacular entry in the media space and ousted Blockbuster from its roots, slowly and effortlessly. The rise of Netflix and simultaneous fall of Blockbuster was particularly interesting for me, to read. What I take away from this is that disruptive forces are not going to flash alarms and red lights when they enter. Blockbuster, not paying heed to Reed Hastings(CEO of Netflix) and his ability to steal Blockbuster’s market was enough to see its demise.

Blockbuster:

Blockbuster was a DVD rental store, most popular in the USA in the 1990s. It had stores all over the country. Yes, you had to approach a store and rent DVDs out back in the day if you wanted to watch a movie(before Torrents, Netflix and other OTT platforms came into the foray). Blockbuster was the household name for movies in the USA. Following a row of declining profits and reduced investor confidence, it shut shop in 2013.

Blockbuster’s business Model:

Blockbuster had made huge investments in its inventory for all its stores. But, obviously, it didn’t make money from movies sitting on the shelves; it was only when a customer rented a movie that Blockbuster made anything. It therefore needed to get the customer to watch the movie quickly, and then return it quickly, so that the clerk could rent the same DVD to different customers again and again. It wasn’t long before Blockbuster realized that people didn’t like returning movies quickly, so it increased late fees so much that analysts estimated that 70 percent of Blockbuster’s profits were from these fees.

Netflix:

Enter Netflix. Set against this backdrop, a little upstart called Netflix emerged in the 1990s with a novel idea: rather than make people go to the video store, why don’t we mail DVDs to them? (Infact, Reed Hastings the founder of Netflix returns the DVD of Apollo 13 to Blockbuster six weeks overdue, and is dismayed by the $40 late fee) Netflix currently has almost 100 million customers worldwide and is valued at $43 billion.

Netflix’s business model:

To avoid the hassle of late fees, Netflix introduced a monthly subscription model. Pay a monthly charge of a few dollars and order as many DVDs as you would like, one at a time (return the first and order the second and so on and so forth). Hence, some users would borrow one movie a month while others would borrow 10 but both users would pay the same subscription charge per month.

netflix-vs-blockbuster-revenues

The classic case:

Though users initially complained about not being able to physically browse and choose from a collection, (Netflix did not have retail stores) the nominal charge and convenience of doorstep delivery was motivating enough for customers to subscribe to Netflix. Netflix could buy huge quantities of DVDs cheaply, It set up a great computer system so people could order their DVDs, and its process for delivering and collecting DVDs was well-engineered. Blockbuster, on the other hand, continued its operations as is, without paying much heed to the potential implications of Netflix’s expanding business. In 1999, In 2000, Hastings proposed a sale of Netflix to Blockbuster at a mere $50 million(Netflix is now worth $43 bn) but John Antioco(CEO and founder of Blockbuster) refused the offer multiple times. By 2002, Netflix was showing signs of potential. It had $150 million in revenues and a 36 percent profit margin. Blockbuster investors were starting to get nervous—there was clearly something to what Netflix was doing. Many pressured the incumbent to look more closely at the market. Blockbuster did sign up with Enron to stream online content but Enron was caught in its accounting scandal, just 9 months later. With a few consolations from the board, investor confidence gradually reduced.

Netflix expanded its customer base in 2 ways-1. Existing Blockbuster customers who saw the worth in Netflix and transitioned to it. 2. New customers who found the worth in the process of ordering online and having DVDs delivered to their doorstep.

Blockbuster slowly lost its customers to Netflix and declared bankruptcy in 2011 while Netflix had 24 million customers in 2011 (Netflix now has almost 100 million customers worldwide).

Netflix used the internet to receive DVD orders and is now using the internet to run its business

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What went wrong for Blockbuster?

Clayton Christensen, the Harvard professor who is credited with coining the term ‘disruptive innovation’ in his book – ‘How will you measure your life’ says that Blockbuster’s ignorance and laziness was its own undoing. Netflix began serving a ‘niche market’ and slowly began to take over Blockbuster’s entire market. Blockbuster was hesitant in making a bold move/imitating Netflix’s model for the fear of conveying a confused business model. However, in its efforts of maintaining a focused business offering, it lost all its customers to Netflix. Blockbuster, being so huge when Netflix entered the space could have started delivering DVDs or could have just bought Netflix to ensure its longevity in the market. However, it did none of that and the rest is history.

It’s only fitting that the final film rented from Blockbuster on Nov. 9 2013 was “This Is the End.” (Link)

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