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Institutional background of Blockbuster and Netflix

Question:

Discuss about the Case Analysis Of Blockbusters And Netflix.

The report is a strategy and case analysis of Blockbuster and Netflix.The report provides an institutional background on both the companies. Blockbuster has been a provider of rental services for video game and home movie based on America (Blockbuster.com 2018). The services undertaken by the company provided through rental shops, DVD via mail and on demand video. The company rose to international acclaim in the year 1990s. During the year, 2004, Blockbuster employed a large number of people from United States and other countries for an approximate 9000 stores. On the other hand, Netflix was an American entertainment company found in the year 1997 and located on the Scotts Valley of California. The company led by Reed Hastings and Marc Randolph specialized on providing streaming media and online video on demand as well as DVD via the system of mailing. However, by the year 2013, the company also expanded on television and film production in addition to its online distribution. There is also discussion how Netflix beats Blockbuster based on the changing technology, retail outlets versus online operation, strategy for pricing and innovations. The report also discusses about Netflix being the dominant provider of online streaming of videos (Netflix.com 2018). To explain the position of Netflix there is discussion on demise of Qwikster and rebuilding of Netflix and the rise of original content. The report also provides a vivid description on the future growth of Netflix.

Blockbuster Inc. is one of the largest rental chains for providing videos around the world. The company provides game and movie entertainment on a rental basis. The company around 9100 video stores around United States , its 24 nations and territories that helps in serving around three million customers every day(Gershon2013). The initiation of the company was around the middle of 1980s as an alternative to the small and local operations that had a limited selection of video rental. The company transformed into a global chain in no time thereby offering DVDs, video games and videos either through its stores or through its online subscription program.

The history of Blockbuster traced to Cook Data Services Inc found in the year 1982 by David Cook for supplying services related to computer software in the Texas oil and gas industry. After Cook Data Services Inc went in a state of bust, the owner sought other means of revenue generation by entering into a business that dealt with video rental.

Reasons behind how Netflix beat Blockbuster

After several months of research into the industry of video rental, David Cook sold the software business related to gas and oil and entered into the business of movie rental. It was in the year 1985 in the month of October that Blockbuster was able to open its first outlet in the city of Dallas (Abraham2013). Around 8000 tapes covered around 6500 titles along with a huge inventory stock sufficient to give the nearest competitor a run for their money. The stores allowed the customers to choose before finally renting out.  The first store of Blockbuster became an immediate hit that enabled Cook to expand his business by introducing three additional stores.

The company however appeared to be in a flux during the year 2005 because of the litigation surrounding its policy of no late fees. Problems also cropped up because of the loss of income due to extension in the viewing fees, failed attempt to merge with Hollywood Entertainment Corporation and the efforts of Carl Icahn's in ousting John Antioco, the CEO. 

Netflix represents the leading internet service for entertainment around the world serving around 109 million members in 190 countries that enjoys around 140 million hours of movies and television shows including documentaries, original series and feature films. Members are able to watch on an unlimited basis anytime and anywhere provided there screen have an internet connection (Dixonand Graham2017). In addition, the members can also pause, play and resume watching without any kind of interruption.

Marc Randolph and Reed Hastings found the company in the year 1997. Both were technology enthusiasts who had a successful career in setting of websites and thereby successfully running them. Therefore, they possessed a better idea for the creating of a website that would make it easier for people to rent and buy DVD while sitting at home. Around, $2.5 million invested by Hastings for starting the business in an improved manner.

Netflix began its business in the year 1998 in the month of April. The company started with around 30 employees and made an offering of around 900 titles for the purpose of rent (Preuss 2013). The company also added newer titles for the purpose of sale by providing a discount of around 30 percent for attracting customers. The website of the company also provided the users with not only automatic suggestions and movie reviews that prompted them in renting out additional DVDs.      

Future growth of Netflix

After a month into the business, the company declared into entering a promotional venture with the Toshiba America that allowed renting out three DVDs on the purchase of a DVD player of the company. Other companies that went into a similar pact with Netflix included Apple, Hewlett-Packard, Pioneer DVD players and Sony.

Changing technology was one of the reasons as how Netflix beat Blockbuster. Initially the stocks of Netflix tumbled with the introduction of the main delivery service by Blockbuster in the year 2004. Blockbuster, the largest video rental chain primary focused on the fact that its survival depended on conquering Netflix. However, in a matter of six years, the worst nightmare of Blockbuster was a reality when Netflix became the winner in the mailing business for renting DVDs.

In addition to good leadership, the executives of Netflix understood that the emergence of technology contributed to a rapid change in the delivery of the movie rentals (McDonaldand Smith-Rowsey2016) compared to Blockbuster. This enabled Hastings in developing a virtual organization that focused on a strategy for internet streaming and convenience in customer service in a cheaper and flawless manner. Thus, Hastings proved himself to be far ahead of technology curve that helped him in molding the industry.

Streaming of movies over the internet was another aspect that worked in favor of Netflix. Even when only few Americans had access to the broadband in the year 2000, Hastings believed that renting of the video cassettes would soon result in streaming of movies over internet. Netflix worked on a television box that helped in streaming movies with sixteen hours of downloading time. Blockbuster was also aware of the situation but refrained from taking a plunge. Instead, the company tried to enhance their sales through expansion of their outlets with toys, books and merchandize (Cook2014). Around the year 2005, better compression ofvideos and faster broadband lead to the eruption of the Web 2.0 sites and You Tube. It was during this time that made Hastings realize that it was high time for cannibalizing the rental business of DVDs in the favor of the streaming video. Hastings also ensured an open source approach followed by Netflix that would allow the company in distributing movies on DVD players, desktop computers and mobile phones. The company also did the unthinkable that helped the customers in giving up DVDs. Netflix thus allowed easier streaming of movies. 

Unlike Blockbuster, Netflix adopted the strategyof believing in online operation while avoiding the burden of the retail outlets. Netflix operated virtually with only a few offices and warehouses (Halal2015). Thus, the company had no retail store or sales employees. Netflix also has a smaller staff that operated on the sole idea of freedom and the culture of responsibility.  Instead of authorized sick days, fixed work hours and vacations, Netflix allowed people to choose as long as their job done. In addition, the company also allows its staff to choose their titles and compensation.

In the initial days of the internet, videos posted in the website as a link. The visitors of the website needed to download the complete file before playing it. The streaming of video brought about a change in this concept (Craig2013). In video streaming, the content served in a manner that allows the files to play almost immediately after it starts downloading. There are also special streaming servers that allow the viewers in moving backward and forward through the video file.  The concept is undertaken put adopted by Netflix that is quite unlike Blockbuster.

The streaming video technology adopted by Netflix is hard to copy and prevents user from saving a copy in their system. This allows the owners of Netflix in providing mental peace in distributing the content online.

As far as pricing strategy is concerned Netflix improved the outmoded pricing and lackluster service of Blockbuster. Blockbuster charged around $5 for each of the movies and people usually hated the prices that the company imposed on them for the late returns. Contrary to this, Hastings made use of monthly subscription that allowed disallowed late fees and unlimited rentals (Cramer2014). The primary focus of the company was not on renting movies but on providing a convenient service. Thus, Netflix developed the best industry software that made it inviting for ordering movies online. Moreover, the website of the company was a representation of intuitive clarity and clean organization. Unlike blockbuster, Netflix also made use of the responses of the clients for recommending movies as per the individual taste. The company also offered prize money close to $ 1million to anyone responsible for improving the rating system of the company.

Netflix adopteddisruptive innovation to beat Blockbuster. Disruptive innovation described a specific manner in which smaller companies destroys the bigger rivals (Desouza, and Smith2014). Thus, disruptive innovation is a strategy undertaken by smaller companies to get a market share. In the year 1995, American scholar, business consultant and educator Clayton M. Christensen coined the term disruptive innovation. This type of innovation helps in creating a value network and new market thereby disrupting an existing value network and market and displacing already established alliances and market leaders (George and Lin 2017). There have been several kinds of disruptive innovation over the past decade that not only changed lives but also market. These innovations have gradually transitioned in our lives. Netflix acts as one of the example of disruptive technology. The first appearance of Netflix appealed to only a few groups of customers who were movie buffs who were unaware of the new releases, online shoppers and primary adopters of DVD players.

During the initial days, the launch of the mail in service for subscription by Netflix did not look threatening for bigger companies like Blockbuster that ruled the market arena between the year 1980s and the 1990s. Everything changed with the growth of video streaming. The founders being already a market player proved to be advantageous for Netflix.  The company was able to appeal to the core audience of Blockbuster through providing a wider greater option for content, lower price, higher quality and convenient approach.    

Disruptive companies like Netflix rose quickly since larger companies like Blockbuster overlooked it. This is because the strategy adopted by Netflix gave the bigger company an idea that they would not eat away on its customer base. However, eventually with time Netflix captured the market and proved to be a primary challenge Blockbusters.  By the year 2016, Netflix totally captured the market of Blockbuster and had a net worth of around $1.2 billion (Preuss 2013). The only means by which Blockbuster could have fought Netflix was by introducing its own innovation of disruption. 

Presently Netflix is the king of streaming video providers that provides a service that reaches close to 80 million users in around 200 countries (Walker et al. 2017). Live streaming drove millions of users in binge watching the entire seasons in just a couple of days.  This has put Netflix in an enviable position compared to its competitors. The company has enough cash and a market cap in the range of $60 billion. There were enough talks about Apple being the acquirer of the company. 

Netflix acquires a dominant position however, there is enough confusion about whether the company will be able to maintain its position since increasing number of competitors are moving into the video streaming arena especially in America.                                             

The primary downside for Netflix was its decision of cancelling Qwikster. Before, the announcement of the DVD only service in September Netflix ensured the demise of Qwikster(Goldfayn2012). The CEO of Netflix, Reed Hastings, declared pulling plug on the Qwikster because of the confusion that would arise from having a completely segregated offering for only DVDs. He also went on to say that, Netflix and Qwikster, required two different websites for operation with no integration between the two. This would also create confusion amongst the users, as they needed to pay two different companies on a monthly basis, maintaining separate profiles and posting two movie reviews.

Netflix decided to pull down the shutters of Qwikster since they learned from their users that maintenance of two websites would be a hindrance and would result in situations that are more difficult. Therefore, the decision to keep a single company that would not only be responsible for streaming but also ensure DVD rental service. This implied that there was no change and hence no Qwikster. However, Qwikster was unpopular from its early stage of initiation. The decision of launching Qwikster as a separate business for DVDs also led to the price hike in Netflix that resulted in controversy. With the thought ofQwikster, the monthly subscription plan of $9.99 replaced by two different monthly plans of $7.99 for unlimited video streaming and DVD renting respectively(Jethaand Berente2014). Thus, the customers who initially paid $9.99 per month would then have to pay $15.98.

People in addition to subscribing to Netflix also have also developed a familiarity with the company(Bailey2016). Many of them associate Netflix with quality and express their willingness in acquiring the service.

Companies like Netflix build their customer base on the basis of trust. This implies a big leap on the part of the customers as well.  This is because more than knowing a service and actually subscribing for it is important whom the customer can trust and share the credit card information(Zetterberg, Davidssonand Johansson2015). Netflix has been a market disruptor and focused on the consumer needs for variety and convenience.  To recover from the debacle, the brand took necessary corrective action in restoring customer trust and moved towards a trend of individualized environment.

The brand equity built by the company helped it to recover its position in a matter of three years. The company suffered a major disaster due to the decision of its CEO in deciding to split the company(Wayne 2017). This outraged the customers and as a result by the third quarter of 2011 the company lost around 800,000 subscribers.  The however ensured a rapid turnaround. Netflix also built a bond with the customers that only few companies are capable of. The company also has the capability of connecting with the customers at a deeper level that helps in driving attraction.

Therefore, by the end of 2013, Netflix had around 44 million members which were higher compared to the previous years(Riquier2015). The company however expects to have more than 48 million members by the end of 2014.

Netflix however faces major challenges since it is quite pricey to license the content and further expensive to produce the original content(Jenner2016). The company will also have to ensure making deals for paying the internet bandwidth required by its service. In spite of everything, the powerful brand equity gives the company an edge over the others.

In future, Netflix is planning to spend on a program spree that’s original. In addition to shelling out on big budget movies or favorite retreats of fans, the company is planning to pick up a dozen anime series(Kovalick 2016). This is a major step on the part of the company and is a major step towards global expansion.

Compared to the previous years the company have plans of spending around $6billion in the coming years(Halal2013). This would help in making life so much simpler. There would also be a jigsaw map putting the regional licensing deals forward that would help in governing the anime offerings of the company. The company also made sure that in future when the contract of a program ran itscourse in Netflix then it would disappear regardless of watching. 

In future, the country plans to make a global appeal. One step towards it was its flamboyant announcements of the adoption of program related anime in Japan that helped in creating ripples around the globe since the company targeted on making country specific shows(Baka2016). Netflix also targets in streaming shows that the entire world plans to watch. In ensuring this, the company ensures operation out of a black box.

The company had nearly $ 20 billion debt and liabilities therefore the company will try to seek out means that will ensure less expensive means of production (Cade, Koonceand Ikuta2017). Otherwise, a single season of a program known as the House of Cards would cost around $100 million for production.

Conclusion

The report ends by throwing a light on the future of Netflix. The report discusses about rise of Netflix after its debacle on declaration of separate website dedicated to only DVDs known as Qwickster. The report also throws a light on the fact on whether the Netflix will be able to maintain its dominant position. There is also discussion on how innovation, pricing strategy, changing technology and online operation worked in favor of the Netflix and helped the company in moving ahead of Blockbuster. The report gives an overview on both Netflix and Blockbuster. 

References:

Abraham, S., 2013. Will business model innovation replace strategic analysis?. Strategy & Leadership, 41(2), pp.31-38.

Bailey, M., 2016. 12 Will Big Data Diminish the Role of Humans in Decision Making?. Big Data Is Not a Monolith, p.163.

Baka, V., 2016. Formative reputation: From being an organizational asset to becoming a process in the making. Corporate Reputation Review, 19(2), pp.152-165.

Blockbuster.com 2018. Blockbuster Video Stores & On Demand Movies. [online] Blockbuster.com. Available at: https://www.blockbuster.com/ [Accessed 12 Jan. 2018].

Cade, N.L., Koonce, L. and Ikuta, K., 2017. Text versus Video Disclosure of Forward-Looking Information: The Effect of Non-Verbal Cues on Investors' Judgments.

Cook, C.I., 2014. Netflix: A stepping stone in the evolution of television.

Craig, C.S., 2013. Creating cultural products: Cities, context and technology. City, Culture and Society, 4(4), pp.195-202.

Cramer, B., 2014. Netflix: New pricing strategies. Bidnessetc, April, 22

Desouza, K.C. and Smith, K.L., 2014. Big data for social innovation. StanfSocInnov Rev, 2014, pp.39-43.

Dixon, W.W. and Graham, R., 2017. A Brief History of Comic Book Movies.Springer.

George, G. and Lin, Y., 2017. Analytics, innovation, and organizational adaptation. Innovation, 19(1), pp.16-22.

Gershon, R.A., 2013. A case study analysis of eastmankodak and blockbuster Inc. Media Management and Economics Research in a Transmedia Environment, Routledge, New York, NY, pp.46-68

Goldfayn, A.L., 2012. Evangelist Marketing: What Apple, Amazon, and Netflix Understand about Their Customers (that Your Company Probably Doesn't). BenBella Books.

Halal, W.E., 2013.Forecasting the technology revolution: Results and learnings from the TechCast project. Technological Forecasting and Social Change, 80(8), pp.1635-1643.

Halal, W.E., 2015. Business strategy for the technology revolution: competing at the edge of creative destruction. Journal of the Knowledge Economy, 6(1), pp.31-47.

Jenner, M., 2016. Is this TVIV? On Netflix, TVIII and binge-watching. new media & society, 18(2), pp.257-273.

Jetha, K. and Berente, N., 2014. Strategic Reactions: Corporate Responses to Social Media Consumer Movements.

Kovalick, A., 2016, October.Looking Deep into the Future Infrastructure Prospects for the Media Enterprise in 2036. In Annual Technical Conference and Exhibition, SMPTE 2016(pp. 1-17). SMPTE.

McDonald, K. and Smith-Rowsey, D. eds., 2016. The Netflix effect: Technology and entertainment in the 21st century. Bloomsbury Publishing USA.

Netflix.com. 2018. Netflix United Kingdom – Watch TV Programmes Online, Watch Films Online. [online] Available at: https://www.netflix.com/in/ [Accessed 12 Jan. 2018].

Preuss, T., 2013, June. Mobile applications, function points and cost estimating. In International Conference on Cost Estimation and Analysis Association (ICEAA).

Riquier, C., 2015. Reacting to the Connected Reality. Research World, 2015(54), pp.36-38.

Walker, R., Walker, R., Jeffery, M., Jeffery, M., So, L., So, L., Sriram, S., Sriram, S., Nathanson, J., Nathanson, J. and Ferreira, J., 2017. Netflix Leading with Data: The Emergence of Data-Driven Video. Kellogg School of Management Cases, pp.1-19.

Wayne, M.L., 2017. Netflix, Amazon, and branded television content in subscription video on-demand portals. Media, Culture & Society, p.0163443717736118.

Zetterberg, M., Davidsson, P. and Johansson, M., 2015. Brand Equity for Service Brands Online.

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