![]() ![]() In the view of customers, the late fees that Blockbuster and other stores charged were exorbitant (often higher than the cost of the original rental itself) and arbitrarily enforced (kicking in within minutes of the deadline with no room for leniency). Instead, they could leverage the recommendation system of Netflix to gain viewership.Ī third, and possibly the biggest weakness of the traditional home video industry was the dependence on revenue earned in late fees. Independent movie studios – for example – were keen to release their movies through Netflix since they did not have to spend exorbitant amounts of money to capture the attention of the public. Another consequence of this innovation was that it allowed Netflix to wield more power when dealing with its suppliers – such as movie studios. This allowed Netflix to differentiate itself from Blockbuster and its competitors as users loved getting movie recommendations from Netflix. Netflix on the other hand, leveraged technology to introduce the concept of queueing movies (to allow users to pick more than one movie – allowing the company to send at least one movie to the customer) and later providing movie recommendations based on customer preferences (thereby reducing the customer’s need to only watch new movies). Therefore, Blockbuster store shelves primarily catered to new releases while ignoring older movies. New movies made up over 70% of all rentals from Blockbuster stores. The second key weakness of the traditional model that Netflix was able to exploit was the lack of suitable movie alternatives. Although Netflix initially received a lot of negative feedback over long delivery times, as it opened more warehouses (rather stores) and optimized its operations by working with the USPS to reduce delivery times, it was able gain a lot of positive customer satisfaction – which in turn led to more customers. This allowed Netflix to gain a huge operational and cost advantage over its brick and mortar rival. ![]() The sheer number of stores that Blockbuster had to maintain in order to provide convenience added to the infrastructure costs associated with the business, something that an upstart like Netflix would not have to contend with. However, Netflix took the concept of customer convenience one step further by leveraging the use of a customer’s mailbox – thereby ensuring that the customer did not have to leave home to rent or return movies watched. This made video rental process reasonably convenient to most customers. At its peak, Blockbuster had stores in every major town across the country. ![]() The rise of Netflix exposed a couple of weaknesses in the traditional video rental business model. The key to the rapid success of Netflix and the downfall of Blockbuster can be attributed to the disruptive nature played by innovation and emerging technologies. However, within 8 years, Netflix dominated the industry and forced Blockbuster into bankruptcy. In 2002, Blockbuster had enjoyed multiple years of high growth and enjoyed record levels of revenue and profitability. Although the industry was highly fragmented, it remained highly profitable for Blockbuster owing to the multiple revenue streams the company milked to maximize its revenues (late fees, high unit rentals, etc.). Although it was an easy industry to enter, running a profitable video store was difficult unless the store could invest a large amount of money to build a large video collection and The largest market share within this industry was held by Blockbuster Inc which had over 5000 store locations all over the US. UNC CHAPEL HILL, KENAN-FLAGLER BUSINESS SCHOOLĭuring the 1990s and the early 2000s “brick and mortar” stores ruled the home video market (Exhibit 1). ![]()
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