This is the fourth in a series of blog posts assessing how industries respond to competing technologies and how their strategies, or lack thereof, are structured around dealing with these external threats. The series examines the impact of the free economy and considers the implications of Chris Anderson’s “Long Tail” of the demand curve on established industries and companies with “brick and mortar” business models. As this is a series, it’s worth reading this introductory blog post first.
In its heyday, Blockbuster Inc. held the top position in the DVD rental industry. Its market share was unmatched and its reach, substantial. With 500 stores in over 17 countries, Blockbuster had not only dominated the market, they had become the market. However, DVD rentals peaked in 2005 and have since been on a steady and never-ending decline. This led to Blockbuster filing for bankruptcy protection on September 23, 2010. What led to Blockbuster’s demise? More importantly, what external threat did the company disregard and what if anything does the future hold for the once proud DVD rental market?
There are several factors that led to Blockbuster’s decline. First, DVD costs declined substantially through increased economies of scale and reduced manufacturing costs. This led to a lower sticker price for DVDs and had many consumers buying the physical media outright, instead of opting to rent. Second, rental copies were expensive for Blockbuster to manage, which is why most of the company’s revenue was derived from late fees on returns. In addition, these DVD rentals are only made once and are costly to replace if lost or stolen. Third, large retail chains started to sell DVDs below wholesale, further diluting the market. However, despite all of these threats, the one external threat that had the largest impact was Netflix. So, what did Netflix understand that Blockbuster didn’t?
Netflix stole market share by combining physical media sales with on-demand streaming video at a fraction of the cost. This is yet another example of Chris Anderson’s concept of atoms vs. bits, except in this case, Netflix continued to sell physical media through an easy to use online rental service. Netflix provided physical media through a flat rate DVD-by-mail service and coupled that with their streaming video content. This allowed Netflix to provide the same physical media as Blockbuster, but at a much lower cost structure and without the hassle of facing late fees. So, how did Netflix accomplish this?
Netflix anticipated the inevitable shift in consumer needs and buying habits. They recognized that providing an online rental service with physical media would empower consumers to avoid dealing with Blockbuster and its cumbersome service. Netflix understood that the inconvenience of going to a Blockbuster outlet, renting a DVD and then returning in time to avoid any late fees, was something that all consumers would gladly avoid, if given the chance.
To circumvent this aforementioned hassle, Netflix relied upon their DVD-by-mail service. This service is predicated on shipping a DVD in an envelope, which is then used to return the rental back to Netflix. There is no DVD case and no expensive packaging. Instead, the user receives the DVD by mail, watches the movie and returns it with minimal inconvenience and cost to them, or to Netflix.
The DVD rental industry isn’t gone. Instead, it’s morphed into something better and more ideally suited to today’s consumer. It has gravitated away from Blockbuster’s manual processes and has instead adopted Netflix’s simple online strategy. Netflix capitalised on the drive towards online content, whilst maximising on the remnants of physical media rentals. In this case, they both stole Blockbuster’s DVD rental market share and have solidified their streaming video content service for years to come.