Blockbuster_Paper

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					  Sarah Johnston
    Case study
September 22, 2007
   BUS 340-01
                                                                        S. «GreetingLine»


                        Blockbuster: Innovative or Outdated?

Introduction

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




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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.



Product Diversification

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,




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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




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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.




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