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During the 80s and 90s, Blockbuster dominated the US home video rental market. However, the emergenceof Netflix in 1997 with its ‘rental by mail’ model challenged Blockbuster’s business model (and marketdominance). Blockbuster’s market position was further weakened when Netflix began to stream video content directly to consumers’ computers. In this case study,

That examines how “Netflix beat Blockbuster Video”.

This assessment focuses on Strategic Choice and Strategy in Action. In preparing your report, you should demonstrate understanding and application of the strategic concepts that are outlined in in Part II: Strategic

Choice and Part III: Strategy in Action of the textbook.

You should specifically address the role of technological diffusion, first movers and followers, and innovation. In addition, please consider whether Netflix will continue to remain as the dominant online streaming provider in the US?

Institutional Background

Business strategy is the plan laid down for a given business to remain relevant and competitive in the market. The process of running a business therefore involve making decisions on various strategic choices and implementing various actions for the accomplishment of the already formulated business plan. For every business to thrive, the management ought to come up with unique plans that differentiate a given business approach from the existing ones in order to give that particular business an upper hand and advantage over the similar existing businesses in the market.

This report therefore provides and analysis of various business strategies that gave Netflix an advantage over Blockbuster. The report looks at the two organizations background, implementation of changing technologies in the market. A comparison of retail outlets and online operation business strategies is also made in this report which also looks at various pricing strategies used by Netflix and Blockbuster and some of the innovations made by Netflix that made it beat Blockbuster in the market. Finally, the report also analysis why Netflix has remained dominant in providing online video streaming by looking at Netflix stumbles, rebuilds and its future. A comprehensive conclusion of the report is also outlined at the end of this report.

A brief history of Blockbuster

Blockbuster is an American based video games and movie providers for homes and rental services which was first opened in 1985 in Dallas, Texas (Bartleby, 2018). The company was international recognized in the 1990s and operated through Cinema Theater, DVD-by-mail, streaming, video rental shops, and video on demand. The company was at its peak in the year 2004 and by then it had employed a total of 84, 300 across the globe. With the changing in movie and video technology, the company applied for bankruptcy protection in the year 2010 as a result of significant lose experienced in 2000s. Its demise was as a result of introduction of Netflix into the market which provided great competition in movies and videos mail-order services (Patsuris, 2003). This resulted into reduction of its store worldwide from 9094 to 1700 stores.

Netflix is a global internet entertainment service which was founded in 1977 by Reed Hastings and software executive Marc Randolph for online movie rental services. The company is the current leading internet entertainment service provider with a membership of about 120 million people in more than 190 countries across the world (Sergeykin, 2017). Netflix allows its members to watch movies anytime and anywhere as long as one is connected to the internet. The company first launched its DVD rental and sales site in the year 1998 before introducing a subscription service which offered unlimited DVD rentals per month at low prices in 1999. The company later introduced a streaming service in 2007 that enabled its members to watch movies and television shows instantly on their computers. Currently Netflix is accessible across many electronic device such as iPhone, Apple iPad, Nintendo Wii, iPod Touch and any other device that is connected to the internet.

How Netflix beat Blockbuster

Netflix operates its business on proprietary software which means that all its technologies are in-house built. The company has employed the use of a comprehensive Customer Relationship Management System (CRM) with an aim of improving customer interactions with their applications and reducing the direct interaction between their customers and their employees.  The CRM helps netflix to understand the needs and behaviours of its customers and this help them to improve on their service delivery to suit the needs of the customers as well as to adapt to the ever changing technology.

The major technology employed by Netflix is Artificial Agent. This is a software that perfomrs repititive tasks on the behalf of the CRM user. The software acts as a buyer agent or a shopping bot on n etflix website and it helps the customer to find a product or services of their choice. This buyer agent performs tow functions which are predicting the customers DVD preference and providing collaborative and adaptive filternig functionalities. With adaptive filtering, the software gorups the customers with the same preferences or taste together and everytime the customer searches for any product or service, he or she is presented with a common selection from the group. The adpative filtering feature on the other hand enables the customer to rate a certain product and it monitors this particular product over time. This process is aimed at finding the likes and dislikes of a given customer and with time the intelligent system is able to provide accurate recommendations to the customer hence improving netflix service delivery as well as limited human to human interactions. Also with netflix, the software provides more than one recommenfdations and allows the account owner to create many lists of movies hence if the account is shared amongst the family members, each family member can create his or hr own list of movies. These features makes netflix website more interactive and this improves the customer experience with netflix.

This use of artificial intelligence technology on its website made netflix very competitive in the market and more interactive over Blockbuster which relied mostly on its DVD retail stores for selling of its videos and movies to its customers. The customer therefore, prefered netflix services which is basically built on current technology than Blockbuster human to human interactions during sales.

Retail outlets involve having a physical store where a company sells its products and services from. This was the startegy used by Blockbuster to sell their movies and videos to their customers across all the 9094 stores worlwide. Although this kind of business approach create customer rapport between the buyer and the seller, it consist of many costs such as rent and other utility bills. Therefore, with changing trend in marketing, commercial marketplace for products and services have evolved from retail outlets to online shopping. By conducting its business operation online, netflix is able to sell its products and services to its customers via their site without having to set retail outlets anywhere.

Changing technology

An online operation approach is quite cheaper than having retail outlets, this is because online shopping do not have costs such as rent or utility bills and the only costs involved are directly related to the website and they include; setting up the website, shippment of products and costs incurred in accepting payments. This business strategy help in reduction of expenditure needed it managing retail outlets and increasing the company’s profit thus making it remain more competitive in the market.

Another benefit of having an online shopping operation as it is the case with netflix is increasing the number of sales of products and services. With an online operation, the number of customers likely to purchase movies and videos from netflix website is quite big compared to Blockbuster. This is because netflix online shopping is readily available and accessible at any given place at any time as long as the customer has an internet enabled device. This approach therfore, gave netflix more advantage over Blockbuster and most consumers  of movies and videos shifted to netflix from Blockbuster thus making netflix to beat Blockbuster in the market.

Blockbuster charged its customers a rate of between $3 to $4 for renting a DVD for a specified period of time. With this pricing strategy, the customer had to pay a late fee once the DVD was not returned on time to Blockbuster stores (Gunderson, 2007). The late fees charged contributed to the 10 percent of the Blockbuster revenue.

On the contrary, netflix which provided an online services introduced a prepaid monthly subscription pricing model to its customers (Murphy, 2011). With this pricing strategy, netflix customers  were allowed to have unlimited offer to DVD per month, as long as increased the DVD retention time which led to longer delivery periods without any late fees charged. The pricing model for netflix can be represented as shown below.

Figure 1: Netflix Pricing Model

With a prepaid subscription pricing model, the customer was allowed to create a list of their preferred DVDs, rent a DVD and keep it for as long as one wishes to and return  without paying late fees in order to get a new movie from the list created as shown in the model above.

The Netflix pricing model attracted many customers as it provided an alternative payment model from the traditional model that was in use by Blockbuster Company (Analytics, 2010). Netflix pricing strategy seemed to be more friendly and cheaper to the consumer and this favored the company which harvested many customers from Blockbuster hence affirming their dominance in the market.

Retail outlets versus operating online

The creation of new business ideas by netflix has made it take over the movie and video market. The company has been evolving from one business innovation to the other (Bill, 2017). For instance having provide DVD services by email for so long, netflix management came up with a new idea of offering streaming services at half the price of renting a DVD and getting it via mail. This innovation gave netflix a breakthrough as this could be accessed by its customers via various platforms and use of several elcetronic devices connected to the internet (Mui, 2011). With netflix, its innovation has always been based on a blue ocean strategy where they create a new market with new group of client. This approach enables the company to create more profits than Blockbuster which was not evolving in terms of its business innovations.

The company also improve their services by ansuring that they are accessible on many support such as Xbox, iPad, iPhone, Playstation, amongst others. This approach gives them a wider range of customers form the youngest to the old hence expanding their marketpalce.

The prepaid subscription is another innovation made by netflix after analyzing the market needs and demands. With prepaid subscription, netflix created for itself a new market with another group of its consumers hence making it more stable and great competitor in the market than Blockbuster.

Netflix stumbles: The demise of Qwikster

In the year 2011, netflix stumbled by the CEO making a wrong business strategy that was aimed at raising prices and spin off DVD by-mail services. The DVD service was referred to Qwikster and was to be separated from streaming services (Stelter, 2011). These two services were the main pillar of Netflix and splitting the two and increasing the prices for the DVD by-mail services did not go well with a large number of its customer. This was a self-inflicted Qwikster debacle that was caused by the CEO, Freed Hastings (Schonfeld, 2011). This idea was not received well by Netflix customers and resulted to many customers sending emails of disappointments to the company. This mistake led to severe consequences which included Netflix losing about 100 million subscribers in the year 2011 (Finch, 2015). Based on this information, it is evident that the business strategy choice made by Mr. Hastings had not considered the feelings and needs of their customers and as a result when the customer felt discriminated, they got angry and opted out of Netflix services. It was therefore necessary for Hastings to seek customers take on the new approach and analyze the effects that these changes in business would bring before taking any actions to implement the decision.

According to 451 research, the original content had grown to 36% in the year 2016 and this  gained momentum by attracting many consumers of video streaming (Alliance, 2017). The research provided a comparison of Amazon and Netflix growth of original content and how this growth affected the two businesses. Origibnal content of video streaming is of great importance is what customers pay or subscribe for. This is therefore clear that originality of any videos or movies provided by netflix acted as a catalyst  to attract subscribers hence increasing the number of sales made and this resulted into great profits afterwards (Lynley, 2017). The understand the rebuilding of netflix after stumbling as a result of creating Qwikster services, the graph below shows the number of subscribers of netflix that cited that they only pay for original content from December 2015 to June 2017 during when the 451 research was carried out.

 

Figure 2: Original Content Respondents

Original contents have really helped Netflix to rebuild its brand by attracting many customers that like high quality video contents that are original and not counterfeit of other people’s work. An increase in the number of subscription have seen Netflix making great progress in the world of business and this has made it one of the leading company dealing with online content such as video streaming. The company has increased its investment in creating original contents of their products to their consumers.

In the year 2017, Netflix took home 20 Emmy Awards as a result of investing so much into the content originality that got new users signing up with Netflix (Trainer, 2017). The company invest into original contents that are likely to attract many consumers internationally. For example in 2017 the company invested in original contents of shows such as “The Crown”, “Master of None” and “Stranger Things”. These shows paid off well with many users subscribing to Netflix and this was such a great positive response from their consumers (Katz, 2017). It is therefore clear to say that original content is very essential and critical for Netflix to build its brand and facilitate its growth and relevance in the market.

Netflix future is bright and it will experience tremendous growth in the world of subscription video on demand (SVOD). This growth will be brough about by the quality business model that is in place and which facilitate the good relationship between netflix and its users (Sergeykin, 2017). Some of the factors that guarantees a brighter future for netflix include:

Cost

Netflix pricing strategy is customer friendly and manageable. The cost of subscribing and streaming movies and videos from using Netflix is quite cheaper and this makes it easier for users to associate themselves with Netflix (Bourgeault, 2018). This manageable cost of services continues to attract many consumers from every corner of the globe hence increasing the growth of Netflix to greater heights. This growth therefore guarantees a better future for Netflix by ensuring that the company remains more competitive in the marketplace for a longer period of time.

Convenience

Convenience is another factor that promises a greater future for Netflix. This is because users do not have to use televisions to watch movies and videos from Netflix, since Netflix services are accessible via different devices ranging from TV to smart phones as long as one is connected to the internet (Houser, 2018). Also for any television show or series, the users do not have to watch their favorite movies or TV series based on the traditional broadcaster’s schedule instead Netflix allows time-shifting and this enables users to watch their series at their comfort and their convenient time. This therefore, provides a better environment and an opportunity for the users to do other things without worries of missing any single episode of their TV series since with Netflix this will be available.

Content

Being the leading subscription video on demand provider, Netflix provides an in-depth content that its viewers likes. It also provides a variety of movies and video collections than the existing TV stations. This therefore gives it an advantage over many providers such as Blockbuster and hence its position on the market is likely to last longer as it continues to attract more consumers, everyday as a result of its quality content (Philleo, 2018). The many categories and variety of movies and videos provided by Netflix covers a larger market share and accommodates every person from a small kid to an adult, this increases its growth which guarantees a good future ahead.

Also the fact that Netflix pays a great attention to its customer’s preferences such as allowing customers to create their own lists and choosing their moves and films as per their preferences and taste as well as having an interactive website that has integrated current technologies such as artificial intelligence, creates a close relationship with its customers which is likely to last long hence affirming Netflix position in the market even in the days to come.

Conclusion 

In conclusion, it is therefore clear that Netflix enjoys greater supremacy than Blockbuster in the DVD by-mail and video streaming services. The company has employed various business strategies that have facilitated its growth for over a longer period of time. These business choices made by Netflix has affected the company positively while the other wrong choices like the one for separating DVD by-mail from video streaming affected it negatively. From this analysis, it is evident that for a company such as Netflix to remain relevant and beat Blockbuster which was dominant in providing movie and video streaming services, critical choices had to be made. These choices included; setting up a proper platform for their market (that is, online operations), providing a standardized pricing approach that is affordable by all its customers and implementation of the changing technological features to improve its service delivery. These business actions taken have increased the number of Netflix subscribers over time and this has helped the company to remain competitive and number one choice to most of the online movies and videos consumers. Therefore, it is the duty of every management to ensure that they make the right business choices with considerations of what the user requirements are and the changing marketing trends in order to gain more profit and conquer the market as Netflix CEO, Hastings did.

References

Alliance, 4. (2017). The Rise of Original Content - Amazon vs. Netflix. [online] WITI. Available at: https://www.witi.com/articles/1144/The-Rise-of-Original-Content---Amazon-vs.-Netflix/ [Accessed 4 Jun. 2018].

Analytics (2010). Netflix vs. Blockbuster. [online] Amitadeshpande.blogspot.com. Available at: https://amitadeshpande.blogspot.com/2010/12/netflix-vs-blockbuster.html [Accessed 4 Jun. 2018].

Bartleby (2018). Netflix vs Blockbuster Business Model - 1592 Words | Bartleby. [online] Bartleby.com. Available at: https://www.bartleby.com/essay/Netflix-vs-Blockbuster-Business-Model-FKQWY29K6ZZA [Accessed 4 Jun. 2018].

Bill (2017). Vision, Innovation and Disruption have Netflix Streaming to Success. [online] Branding For Results. Available at: https://brandingforresults.com/netflix/ [Accessed 4 Jun. 2018].

Bourgeault, G. (2018). The Future Of Netflix Getting Murkier As Competitors Match Business Model. [online] seekingalpha. Available at: https://seekingalpha.com/article/4133259-future-netflix-getting-murkier-competitors-match-business-model [Accessed 4 Jun. 2018].

Finch, C. (2015). Netflix Kills Qwikster after 1 Million Subscribers Leave. [online] Inc.com. Available at: https://www.inc.com/tech-blog/netflix-kills-qwikster-after-1-million-subscribers-leave.html [Accessed 4 Jun. 2018].

Gunderson, A. (2007). Netflix vs. Blockbuster - Leadership - Strategy - Competition. [online] Inc.com. Available at: https://www.inc.com/magazine/20071001/netflix-vs-blockbuster-what-would-you-do.html [Accessed 4 Jun. 2018].

Houser, K. (2018). Hollywood is wrong: Netflix is the future of film. [online] Futurism. Available at: https://futurism.com/netflix-future-film-industry/ [Accessed 4 Jun. 2018].

Katz, A. (2017). Netflix Is Increasing Its Spending on Original Content. How Will Competitors Like HBO Respond?. [online] Adweek.com. Available at: https://www.adweek.com/tv-video/netflix-is-increasing-its-spending-on-original-content-how-will-competitors-like-hbo-respond/ [Accessed 4 Jun. 2018].

Lynley, M. (2017). Netflix’s original content costs are ballooning. [online] TechCrunch. Available at: https://techcrunch.com/2017/10/16/netflixs-original-content-costs-are-ballooning/ [Accessed 4 Jun. 2018].

Mui, C. (2011). How Netflix Innovates and Wins. [online] Forbes.com. Available at: https://www.forbes.com/sites/chunkamui/2011/03/17/how-netflix-innovates-and-wins/#1586863561f3 [Accessed 4 Jun. 2018].

Murphy, E. (2011). Netflix pricing strategy. [online] CQ2 | Ed Murphy. Available at: https://blogs.harvard.edu/cqtwo/2011/07/14/netflix-pricing-strategy/ [Accessed 4 Jun. 2018].

Patsuris, P. (2003). Blockbuster Takes On New Strategy Vs. Netflix. [online] Forbes.com. Available at: https://www.forbes.com/2003/04/21/cx_pp_0421bbi.html#25e7b90e3751 [Accessed 4 Jun. 2018].

Philleo, J. (2018). Will Netflix Continue Dominating Its Space Long-Term?. [online] Forbes.com. Available at: https://www.forbes.com/sites/quora/2018/02/09/will-netflix-continue-dominating-its-space-long-term/#2a14dd5554b4 [Accessed 4 Jun. 2018].

Rivière, L. (2016). Innovation in Netflix.

Schonfeld, E. (2011). Breaking: Netflix Splits DVD And Streaming Businesses; Creates Qwikster For DVDs. [online] TechCrunch. Available at: https://techcrunch.com/2011/09/18/netflix-qwikster/ [Accessed 4 Jun. 2018].

Sergeykin, O. (2017). What is Netflix? How does it work? How much does it cost, etc?. [online] quora. Available at: https://www.quora.com/What-is-Netflix-How-does-it-work-How-much-does-it-cost-etc [Accessed 4 Jun. 2018].

Sergeykin, O. (2017). What is the future of Netflix?. [online] quora. Available at: https://www.quora.com/What-is-the-future-of-Netflix [Accessed 4 Jun. 2018].

Stelter, N. (2011). Netflix Lost 800,000 Members With Price Rise and Qwikster Plan. [online] Nytimes.com. Available at: https://www.nytimes.com/2011/10/25/technology/netflix-lost-800000-members-with-price-rise-and-split-plan.html [Accessed 4 Jun. 2018].

Trainer, D. (2017). Netflix Price Increase Signals Original Content Is Not Enough. [online] Forbes.com. Available at: https://www.forbes.com/sites/greatspeculations/2017/10/06/netflix-price-increase-signals-original-content-is-not-enough/#2c79a9dc6d3e [Accessed 4 Jun. 2018].

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