September 22, 2007
Blockbuster: Innovative or Outdated?
For some future generations, Blockbuster, Inc. (Blockbuster) may sound like the name
of an extinct dinosaur, but top management at Blockbuster are trying to prevent that.
Since the emergence of Netflix, Inc. (Netflix) in 1998, and its new business model
(online movie rental), Blockbuster’s 22 year-old traditional business model of in-store
video rental continues to struggle. In its first 20 years of business, Blockbuster opened
9,100 stores in 25 countries and reported a 40% share of the video rental market in
2004. However, as of 2005, a new service - online movie rental - has presented
competition and affected Blockbuster in negative ways. In 2005, Blockbuster reported
record unpredicted losses. A long-term goal of Blockbuster is to return to the top
position in its industry; however online video rentals continue to threaten the movie giant
from more than one angle.
Video Rental Industry
One key to Blockbuster’s success in the video rental industry is its size. Traditional
business models can survive the threat of newcomers to the market if existing
enterprises grow to be the size of a corporation. Blockbuster’s size provides access to
abundant physical, financial, and human capital. Technological advances also assisted
Blockbuster’s initial market growth. Prior to the early 1990s when Blockbuster started
opening stores internationally, competition was manifested in the form of sole
proprietorships. These small businesses did not have the resources to keep up with the
point-of-sale systems and transaction processing software that Blockbuster started
using. By linking their many stores and archiving details about purchases that could be
used for making future business decisions, Blockbuster continued to increase its share
in the market. With every new store that Blockbuster opened, it increased its ability to
access more videos and products. Suppliers and vendors knew there was less risk
when losses could be spread among many store budgets.
Then, technology took a turn that Blockbuster executives were not anticipating –
customers started renting movies from home. Netflix recognized a trend of increasing
internet use and introduced a new service to the pre-existing industry where demand,
existed but barrier of entry was virtually non-existent.
In Blockbuster’s attempt to keep up with the competition, senior management identified
future threats from online competition and began to improve in-store marketing and
video availability. An incentive program called Blockbuster Rewards was rolled out that
involved a customer appreciation card (a very popular tactic today among retailers). The
Rewards program rewarded customers by offering free rentals on specific weekdays,
buy-one-get-one free deals after a certain number of rentals, and discounts for frequent
renters. Management implemented this system using information technology that
tracked transactions and processed raw data into usable marketing information.
Blockbuster diversified its services also by offering video game rentals, movie sales,
and food and beverages that are complimentary products to movies. Then, to make a
bigger splash in its efforts to attract new customers and retain existing customers,
Blockbuster introduced its “No More Late Fees” program, which turned out to contribute
to its demise. “Blockbuster did measure an increase in in-store rentals after eliminating
late fees, but early returns did not suggest that the increase offset the $250 million in
annual late fee revenue that was no longer being collected.”
The Solution That Became the Problem
The “No More Late Fees” program also created bad public relations marketing for the
company as well. The receipt that accompanied in-store rentals measured
approximately 12 inches in length and included fine print with restrictions of the policy
that few customers took the time to read. Another flaw in the plan came in the lack of
uniform participation among the 9,000 plus stores. Some customers received this new
incentive, while others did not. Blockbuster’s information systems could not support the
program initially and the supply chain faced challenges with maintaining inventory.
Thus, sales and marketing had to launch a new campaign and finance and accounting
were challenged with creating new capital to support a program that did not produce
revenue. Financial analysts report that Blockbuster will never recover its loses from the
“No More Late Fees” program. As a result, its business objective became survival, and
Blockbuster joined the online video rental industry to compete for some Netflix’s
estimated $3 billion revenue for 2009.
Competition Continues to be a Future Factor
The e-commerce boom is infiltrating homes globally with a concentration in progressive
countries like the United States, where Blockbuster is headquartered. Blockbuster must
monitor the progress of video on demand, online video sales, online video rentals, and
the dropping prices of in-store video sales. In addition to Blockbuster, other companies
are trying to earn online revenue. Emerging companies such as GreenCine.com and
CafeDvd.com are marketing to the independent, anime, and non-main stream movie
watchers. One thing Blockbuster does that Netflix does not is to give the viewer the
option to buy. If the numbers work out, that may mark a competitive edge. If Blockbuster
continues to sell videos and video games from its brick-and-mortar locations at a gain,
future generations may be discussing which location to visit as opposed to which
website to surf.