During the 80s and 90s, Blockbuster dominated the US home video rental market. However, the emergence ofNetflixin 1997 with its ‘rental by mail’ model challenged Blockbuster’sbusiness model(and market dominance). Blockbuster’smarket position was furtherweakened whenNetflixbegan to stream video content directly to consumers’computers. In this case study, you are required to prepare a report which examine show “Netflix beat Blockbuster Video”. In preparing your report, please consider the role of technological diffusion, first movers and followers, and innovation. In addition,please consider whether Netflixwill continue to remain as the dominant online streaming providerin the US?
Business strategy plays a significant role for the business organizations as this determines the success of the company in the competitive market. As commented by Verbeke (2013), business strategy is defined as the choices about business positioning relative to competitors. As the customers are easily bored with a similar trend, the demand, and expectation of the customers’ changes. Therefore, the business organizations need to change their business strategy in accordance with the present market and trend in order to sustain in the competitive market. The modification and change in the business strategy provide an opportunity for the business organizations to bring innovation to the existing business thereby, increasing the revenue.
The report is a case study analysis about the technological advancement and innovation of Netflix and Blockbuster. The report also sheds light on the impact of changing technology, pricing strategy and the difference between retail outlets and operating value. Additionally, the report also discusses whether Netflix has the potential of being the dominating provider of online streaming.
During the 1980’s and 1990’s, Blockbuster dominated the US home video rental market. Blockbuster is an American based company that provided video game rental services along with home videos. The company was internationally popular throughout 1990. The company established more than 9000 stores both nationally and internationally and had employees more than 50,000 employees in the US and more than 25,000 employees internationally. The range of services provided by the Blockbuster includes VHS/DVD home video rentals along with video streaming on demand. The company solely operated on retail shops. As a result, the customers had to visit the retail shops in order to access the services offered by the company (Blockbuster.com, 2017). However, competition from Netflix, Redbox resulted in the decreasing demand of the company eventually shut down the majority of the stores in the US. In 2000, the company started losing their popularity thereby, encountering a significant loss in the revenue. The company filed for bankruptcy protection in 2010 after which the satellite television provider Dish Network bought the remaining 1700 stores in the US (Blockbuster.com, 2017).
Netflix is an American entertainment company founded in August 1997. The range of service offered by Netflix includes streaming media and video on demand. Due to similar service providers in the US market, the company expanded their business into film and television production. Initially, the business strategy of Netflix included renting and selling DVD. However, considering the changing demands of the customers and the prevailing competition in the US market, Netflix changed their business strategy by introducing media streaming simultaneously. At the beginning, the company expanded the video streaming service to Canada but later the service was operated in more than 190 countries (CNN, 2017).
In 2013, Netflix entered the content production industry by broadcasting their first series “House of Cards”. Since then, the company has expanded their services to both films and television series that have been hugely popular. Netflix has released more than 120 original series or films only in 2016. Due to such innovative and a wide range of services, as of October 2017, Netflix has an estimated 109.25 million subscribers globally out of which more than 50 million belongs from the US (Netflix.com, 2017).
A brief history of Blockbuster
The main databases used by Netflix are Oracle, PostgreSQL, MySQL, and Cassandra. Additionally, the most preferred database tool includes Atlas-DB. Netflix developed the Atlas-DB with the aim of controlling dimensional time series data effectively. One of the significant function of Atlas-DB includes the ability of in-memory data storage thereby, enabling the database tool to gather and report a huge amount of data in minimal time (Chopra et al. 2017). Therefore, the continuously improving technology used by Netflix helped in overtaking the entertainment industry internationally.
Blockbuster generally operated in retail stores that made it difficult for the target customers to access according to their convenience. As a result, the customers were unable to view the services and offers provided by Blockbuster without visiting their stores physically (Kang, Tang and Fiore 2014). However, on the contrary, the CEO of Netflix predicted the increase of internet among the population. Based on the upcoming trend and demand of the customers, Netflix preferred operating mainly through online facility. As a result, Netflix has very few outlets and warehouses thereby, becoming one of the virtual operating organizations. The online operating service allowed the company to provide global access to the target customers nationally and internationally (Cavusgil et al. 2014).
Operating through retail outlets hampered the flexibility and professionalism provided by Blockbuster. On the other hand, the online operation used by Netflix improved the client service through greater flexibility. The services provided by the company along with the charges offered for the services were easily accessible by the customers. Additionally, being a virtual organization allowed Netflix to provide access to the target customers according to their convenience. The customers are able to compare the services and the prices offered by Netflix before making any subscription. On the other hand, the company also informs the customers about any changes instantly (Hill and Hill 2012).
A brief history of Netflix
Operating online also provided an opportunity for Netflix to manage the business from anywhere in the world that was less practiced by Blockbuster. As Blockbuster operated both through retail and online, the company encountered issues in managing both the operations effectively. However, on the contrary, as Netflix operated majorly through online services and has very few outlets, managing business is comparatively much easier (Wakefield, Bayly and Scollo 2014). Moreover, operating mainly as a virtual organization saved the costing of land, tax, decoration, electricity for Netflix. Furthermore, operating as a virtual organization is also a sustainable approach implemented by Netflix, as it saves paper (Varley 2014).
Netflix has been successful in overtaking Blockbuster in terms of the pricing strategy implemented by the company. Blockbuster charged $5 per movie and the target customers did not prefer the late returns that were frequently practiced by Blockbuster. In order to avoid the mistake, Netflix developed the pricing strategy of a monthly subscription. Due to the implementation of the monthly subscription, Netflix was able to offer unlimited rentals to the target customers along with avoiding late fees. Therefore, the pricing strategy developed by Netflix emphasized on providing convenient service rather than renting movies. Therefore, to make the customers easily order for movies online, Netflix developed the best software in the industry (Nagle, Hogan and Zale 2016).
Netflix offers unlimited online video streaming for only $7.99 whereas Blockbuster charges $9.99 for video streaming. For $7.99, Netflix offers unlimited TV shows and movies with a membership option or using the unlimited one-disc at a time rental service for $11.99 for 2 unlimited. Additionally, Netflix also offers the $15.98 per month for opting unlimited video streaming and one-disc rental. Netflix also offers the access to Blu-ray discs with additional charges of $2 per month. However, on the contrary, Blockbuster charges $2.99-$3.99 per rentals and $9.99 for one disc rental and $14.99 for two discs. Therefore, the price offered by Netflix is affordable compared to Blockbuster thereby, making it preferable within the entertainment industry (Xu, Frankwick and Ramirez 2016).
In spite of increasing the price of the services offered by Netflix, they are also increasing the number and quality of the services. Netflix entered the US market with an innovative product and an innovative pricing strategy. The implementation of flat subscription fee by Netflix rather than penalty pricing strategy by Blockbuster allowed Netflix to overtake the entertainment market. According to the CEO of Netflix, the short-term loss incurred by Netflix due to the cancellation of subscription does not need consideration in order to consider the long-term benefit by the new subscribers that do not prefer DVD-by-mail option (Adhikari et al. 2012).
Initially, Netflix used postal service in order to distribute DVD that questioned the survival of the company in the competitive market. However, the founder of Netflix soon predicted that renting video cassettes would soon be out of trend. The success of Netflix is due to exceptional leadership along with the understanding of technology within the founder of Netflix. Initially, Netflix used to stream movies on a television box that required 16 hours of downloading time. Even Blockbuster was aware of the fact that renting video cassettes were soon outdated but were unable to develop the business strategy accordingly. In spite of foreseeing the impact of technology, Blockbuster increased the number of stores into outlets for books, toys and other merchandise (Gomez-Uribe and Hunt 2016). The founder of Netflix saw that better video compression and faster internet connectivity facilitated the use of YouTube largely. It was then when the founder of Netflix decided to change DVD rental business to video streaming. This is because developing a box was a limiting factor and that an open-source approach would provide an opportunity to Netflix to distribute movies in almost any device. Additionally, in order to increase the acceptance of the new service provided by the target customers, Netflix gave away streaming movies thereby, making it easy (Villarroel, Taylor and Tucci 2013).
How Netflix beat Blockbuster
Another innovation used by Netflix to overtake Blockbuster is to avoid the burden of operating retail outlets. Blockbuster majorly operated on retail stores due to which the customers were not allowed to access the services according to their convenience. Additionally, the burden of operating the retail stores added to the bankruptcy of the company. Considering the results, Netflix decided to operate majorly through online services. The company had very few warehouses and offices thereby, becoming a virtual organization with absolutely no employees and retail stores. This allowed the customers to access the services offered by Netflix according to their convenience without being present physically (Euchner and Ganguly 2014).
Figure 1: Netflix vs. Blockbuster
(Source: Abraham 2013)
After successful establishment of Netflix in the entertainment industry, the company announced that they would operate DVD-by-mail and video streaming business separately. This gave rise to Qwikster that would solely conduct the DVD-by-Mail service of Netflix. Qwikster by Netflix failed to make a mark in the entertainment industry due to a variety of reasons. In order to sustain in the competitive market, video games were also included within Qwikster by the CEO. Therefore, the inclusion of video games resulted in price hike that is considered as one of the reasons of the failure of Qwikster. This is because the users would not get both DVDs and video games simultaneously upon joining Qwikster. The customers did not prefer to pay additional charges for video games thereby, decreasing the popularity of the website (Bailey 2016).
Another major reason for the demise of Qwikster is that both Netflix and Qwikster had distinct websites as well as credit charges. According to the CEO of Netflix, having separate websites for Qwikster and Netflix would provide an opportunity to ensure equal attention. Therefore, providing better attention to both Netflix and Qwikster will help in improving both the services. However, things did not go the way predicted by the CEO of the company. On the contrary, having two separate websites made it more complex and difficult both for the customers and for the company. Due to separate websites, the customers had to create two distinct accounts and passwords. For example, if a user was unable to stream their title, they would have to make a Qwikster account in order to get the title on the DVD. The customers did not prefer such complexity thereby, resulting in the demise of Qwikster so quickly (Bowers, Hall and Srinivisan 2017). Additionally, Qwikster would enforce the Netflix users with combined streaming and DVD subscriptions to create separate accounts for availing the services. However, the users were unable to access the websites simultaneously. This suggested separate bills, ratings, and preferences for the users despite being owned by the same company. The users did not find it justified to pay twice for the services offered by the same company thereby, decreasing the use of Qwikster (Ryan 2013).
The name Qwikster also did not go in the favour of the company, as it was extremely easy to misspell. Additionally, new users may not recognize that Qwikster and Netflix are owned by the same company thereby, enforcing the users to select a completely different mailing service. This resulted in losing millions of customers for Qwikster thereby, resulting in the demise of the company. The services offered by Qwikster were less user-friendly compared to Netflix. During splitting the websites of Netflix and Qwikster, Netflix still contained bigger library than Qwikster.
The Changing Technology
After the failure of Qwikster, Netflix has developed the idea of original content in order to rebuild and combat their loss. According to a survey, it has can see that original streaming is gaining popularity and momentum in terms of video streaming. The opportunity of having access to original content is enforcing the users to pay the subscription charges offered by Netflix.
Figure 2: Increasing popularity of original Content from 2015-2017
(Source: Cook 2014)
According to the graph, it can be seen that the demand for original content has increased over the years and has become a top priority for the streaming enthusiasts. Additionally, the majority of the Netflix subscribers states the main reason for subscribing Netflix is original content. By 2018, Netflix aim towards making its own library containing 50% original content by spending an estimated $8 billion. As a part of the initiative, Netflix proposes the release of 30 new anime series along with nearly 80 new original films.
Figure 3: Netflix vs. Amazon original content
(Source: Michalis 2014)
According to the graph, it can be seen that users prefer the original content offered by Netflix compared to Amazon. After officially entering the market of original content in 2013, Netflix nearly chocked the competitors. For example, Netflix has successfully made original shows such as “House of Cards” and “Orange is the New Black” thereby, making the concept of original content extremely easy. The implementation of original content as the strategy by Netflix has eventually helped in rebuilding the company and sustain in the competitive market.
Video streaming is the future of television thereby, highlighting an extremely bright future for Netflix. The company has huge opportunities as it emphasizes in improving the selection, content and video streaming. Alongside, the company also emphasizes in producing exclusively original contents that are very much in demand among the population. According to the CEO of Netflix, internet television will soon replace linear television. This will provide an opportunity for Netflix to take a lead in the league. Additionally, the company also aim towards subscription service that will help in increasing the revenue for the company. Furthermore, the recent inclusion of original content is proposed to increase the number of subscribers thereby, generating more revenue for the company (Zeng et al. 2013).
However, on the contrary, the future of Netflix possesses potential threats in terms of the lack of luxury for the internet providers. For example, the kids need to pay the subscription charge in order to use the services offered by Netflix. This suggests that the subscription business of Netflix does not grow with the population. Due to this Netflix might have to increase the price of their plans thereby, providing simultaneous streaming. Therefore, without new target customers, Netflix might run out of potential users thereby, unable to take advantage of new channels (Tryon 2013).
In this report, it can be concluded that Netflix overtook the entertainment market from Blockbuster towards the end 1990s. Netflix overtook the market from Blockbuster due to the technological advancements incorporated within the service provided by Netflix. The company predicted the decline of TV boxes and the emergence of video streaming through internet facility. Additionally, operating as a virtual organization helped in attracting more users for Netflix, as they were able to access services and offers by Netflix according to their convenience. Netflix also incorporated the latest technological tools in terms of databases and programming tools that Blockbuster failed to consider during the technological revolution. In spite of such huge success, Netflix also encountered huge failure by launching Qwikster, as the users did not prefer paying separate charges for the same company. Moreover, different name, separate accounts, and additional credit charges resulted in huge failure for Netflix in terms of Qwikster. After the failure of Qwikster, Netflix rebuilt itself by spending on original content as this is preferred largely among the video streaming users. The future of Netflix is bright as the use of internet and original content is highly popular among the users.
Retail outlets versus operating online
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