Over the weekend, I was doing some industry analysis for a client. She had a great idea, and a novel one at that. Well, it turns out that there was one other company in the same niche. A direct competitor…that has the early mover advantage. This reminded me of David vs. Goliath the story of Netflix vs. Blockbuster.
So what do you do when you’re the new kid on the block? Like anything else, with lots of hard work and a great deal of luck. Let’s look at the case of Netflix vs. Blockbuster for guidance.
In 2004, Blockbuster was the proverbial Goliath with about 9,000 stores globally and revenues of over $6 billion. Netflix was David and had started just 7 years prior. Fortunately, it had several things going for them:
1. Hard work
- Competitive Advantage – Netflix’s algorithm takes user ratings on movies they rented and then makes recommendations for other films that they might like, including movies that the viewer may have never heard of. This rating-based recommendation is very commonplace now (seen everywhere from Pandora to Amazon), but in 1997, Netflix’s algorithm was a competitive advantage. Viewers get recommendations they really enjoy, customer retention & satisfaction increase, and money comes in.
- Constantly Improve – One of Netflix’s criticisms is that DVD delivery is often slow. Creating a logistics and inventory management system that receives orders and quickly sends out products, in addition to receiving returns and repackaging for reshipment, was key to customer retention & satisfaction. Netflix is still staying current by moving from DVDs to streaming VOD.
2. Lots of luck
- Competition was Flat-footed – Blockbuster kept the same mentality of a 1985 video rental shop. They held on dearly to their late-fee revenue source, and its high fees and strict enforcement soured customers’ views of the business. The late-80s/early-90s business model put them behind. All they did was immitation. In 2005, they finally did away with late fees. In 2009, they introduced Blockbuster Express, a DVD rental kiosk designed to compete with Redbox. By now, customers are streaming videos and renting DVDs at kiosks, while Blockbuster is trying to offload their many stores.
- Additionally, Blockbuster did not consider the rapidly expanding prevalence of broadband internet in US homes. By 2009, 68.7% of US households had broadband internet. Also, in 2008, the Broadband Data Improvement Act, a bill to improve the quality of federal and state data regarding the availability and quality of broadband services was passed, ushering a digital highway for movie streaming.
- Competition Thoughtlessly Expanded – Blockbuster rapidly expanded, adding its 1,200th store by June 1990 and 9,000 stores worldwide by 2004. They wanted to be the biggest. And fast. They filled their stores with not just movies but video games, candies, and other goods. Unfortunately, all these stores require operating expenses. Operating expenses that were greater than the gross profit (i.e., Revenues minus Cost of sales). Also, among many stumbles (which is much too long for this post but I put some references below so you can read to your heart’s content) is they failed to anticipate how media consumption will change. From analog to digital.
Fast forward to today, Netflix has a share price of over $400, revenues of $4.37 billion USD, and over 2,000 full-time employees. Blockbuster is bankrupt. David had defeated Goliath.
However, like most engaging stories, the end is never the end. Dish Network purchased Blockbuster and its remaining 1,700 stores on April 6, 2011 for $233 million and took over Blockbuster’s $87 million in debt and liabilities. Dish now continues to license the brand name to franchise location, and keeps its “Blockbuster on Demand” video streaming service and the “Blockbuster@Home” television package for Dish subscribers. Maybe this strategy to resuscitate a nearly-dead brand sounds foolish. However, so did mailing out DVDs.
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