Blockbuster Video Survival Guide
Copyright by Gene Leshinsky, feel free to reproduce with proper credits
Past Competitive Challenges and Strategies
Blockbuster faces challenge from the traditional video rental market as well as from new entrants such as Wal-Mart, BestBuy, and Netflix. The Wal-Mart challenge came in the form of pricing and the creation of a competing video rental business [Gop05]. Best Buy began offering DVD and video at very low margins that would force Blockbuster to cut into its margins significantly. Netflix introduced the online rental system that eliminated late fees and the trip to the video store. Movie Gallery is consolidating and entrenching itself within the traditional video rental market further diminishing Blockbuster margins and increasing direct competition through mergers and acquisitions of other chains such as Hollywood Video.
Blockbuster has chosen a new direction to follow in the footsteps of Netflix and develop an online presence closely copying the model of Netflix, eliminating late fees (at a cost of $250 million)[Rae05], and spinning of Blockbuster Online to attract some of the customers lost to Netflix. Blockbuster realized that an online presence is necessary to stay competitive and win customers, while traditional movie renting companies such as Movie Gallery [Man05], the largest Blockbuster competitor, depend on the traditional model and are not expected to embrace the online model. Over the short term the traditional model may continue to work, however in the medium term the online strategy will be the difference between the companies that stay in business and those that are forced out.
The Wal-Mart and BestBuy challenge is the most difficult short term challenge. Both chains are known for selling with a very low profit margin, introducing prices that would not work well with the Blockbuster model. To further challenge Wal-Mart and BestBuy Blockbuster began to sell used videos and provide a place where customers could trade used videos approaching a BestBuy retail model.[Lor05] This strategy will be successful in the short and medium term because short term it will introduce a service to Blockbuster customers that they will not find anywhere else, and long term because the customers will know if they want to come and sell or buy a used DVD or video then the place to go is Blockbuster and not BestBuy or Wal-Mart. Furthermore, [Gop05] Wal-Mart exited the rental business in 2005 and transferred its members over to Netflix further increasing the competition from the online sector.
While Movie gallery acquired Hollywood Video[Lor05], extending their market share and customer base without embracing the online markets, Blockbuster attempted to extend it’s own model on the retail side by entertaining an agreement with RadioShack[Cnn01] that would place RadioShack boutiques into it’s stores offering a wider selection to its customers. It does not seem to have worked as Blockbuster remains a video rental store and seems to be concentrating in this area. Blockbuster also runs a highly effective video game rental segment that is unheard of at its retail rivals and is also better then Netflix; offering unlimited game rental time for a flat fee.[Rae05] Thus, while facing the challenge from all sectors, Blockbuster is showing great operational agility by adapting their business model to changing market condition and establishing an online presence while it’s chief competitors hold on to the old model of in store rentals and late fees. In the short term both strategies will be effective, while in the medium term the more agile company will hold the largest market share. The medium term the market share will increase due to more customers gaining access to online ordering services and seeking the convenience of omnipresent online stores. The cost of improving its infrastructure now pales in comparison to the benefit that Blockbuster will derive from improved IT infrastructure systems.
The Challenge of VOD
Blockbuster will face new VOD challenges as more people have access to VOD enabled services from their home TV sets and PC’s. There are numerous cable and telecom companies that are currently offering PPV and OnDemand options that are helping to put companies such as TiVo on the defensive, snatching market share and providing fierce competition to traditional video rental players. Over the next 5 years the market will continue to see innovations that will mold the PC and the TV into one enabling online video delivery companies such as Netflix to skip the distribution step of mailing the video and deliver it straight to the customers’ living room.
Massively Online Multiplayer Games are invading the traditional out of-the-box games by providing the entire package online. By providing subscription fees these gaming companies are enabling consumer not to buy new games, but to provide upgraded services through the wire without ever needing to go to the store and purchase the setup disks. This is a trend that will take over the video rental industry as well. Many people prefer to rent on demand from their cable providers; if the same selection was giving to cable providers and online renting companies why would people go to the video store at all?
With increased bandwidth and fast download times it is more efficient to click a button then to drive over to the local video store. For now, movie distributors such as Universal prefer to keep a 45 day window between releasing videos to video stores and to online providers due to the large differential in royalties. [Lor05] When these companies relent and release the footage to online providers and video stores at the same time, the customer will have thousands of titles at his disposal, many more then he would at a video store. All titles would be organized and much more browser friendly then the often time disorganized and out of stock rental shops. With VOD there is no concept of out of stock and the customer will always find the video he is looking for .
Pricing for these services will continue to drop. Currently Netflix has several packages priced from $4.99 to $23.99 per month and Blockbuster has similar rate structure [Blo, Net]. There is no point of going to the store if you can get the same value online. Thus, over the next 5 years, competitive VOD forces may erode the traditional brick and mortar video stores and gravitate towards the telco and broadband providers at which point there will be a price war between the 3rd party online vendors and companies such as Comcast for who can provide a cheaper more efficient service. Brand name and customer service will have a direct impact on the survival of the rental business.
The idea of VOD is mature, but the technology is lagging, while everyone can afford a $30 DVD player and a $15 subscription, and $150-$300 internet and broadband charge is harder to justify for many consumers. Paying for a video once a month or paying for a delivery service that you may not use will remain a hurdle for VOD taking the market from traditional video rental companies.
Recommended IT-Oriented Business Strategies
Blockbuster will need to continue repositioning itself in the marketplace as a hybrid shop with both brick and mortar and online stores. Blockbuster cannot remain competitive if it concentrates only on the market segment that is still focused on coming into the store rather then shopping online. Leaving Netflix as the dominant online video rental store is a big competitive disadvantage over the next 5 years as Netflix will continue to consolidate and add services to its existing program growing its customer base and expanding overseas. Movie Gallery will eventually lose its status as a big player in the rental industry because it is not preparing itself for the onslaught of online and VOD markets. Thus, changing the business model to accommodate an online operation is absolutely necessary for Blockbuster to survive as a viable service company.
Blockbuster must continue building relationships with studios to enable it to bring videos on demand to market faster then competitors. The company will need to continue to expand its business model to encompass online and VOD markets to stay viable as a rental business in the technologically transforming market. Blockbuster’s competitive strategy needs to be agile to adapt quickly to new market moves as VOD is quickly growing and the internet is spreading. Building strong relationships with its affiliate marketing partners will assure a strong grassroots marketing campaign that will challenge the Netflix first mover advantage and help win customers for Blockbuster. The affiliate marketing model pays for itself by paying small website operators a commission of all sales. The Blockbuster program is more aggressive then the Netflix Program [Net,Blo], giving higher rewards to its marketing partners. The affiliate businesses model is absolutely necessary for online survival and Blockbuster is doing the right thing by following in Netflix’ footsteps.
Building a strong sustainable competitive advantage model by investing in its online infrastructure, Blockbuster ensures that it will remain a force not only in the retail industry but also online as the business strategy on Blockbuster Online is tied closely to that of Netflix. The blockbuster approach may also be stronger then that of Netflix due to its presents and ability to leverage its stores as support centers and distribution points.[Lor05] This is an excellent way to utilize in store resources and leverage existing workforce to achieve an advantage over Netflix. While Netflix needs to mail everything from its distribution center. Blockbuster offers the option of returning movies in the store or mailing them back as well as picking them up in the store. This flexibility allows the customer to choose what to do giving them an impression of Blockbusters’ greater flexibility and better customer service.
Blockbuster must to invest into the look and feel of its stores ensuring that the shopping experience is superior to those of other video rental stores.[i] The new model of selling used videos should be expanded into selling used PC and video games. This would draw younger buyers to the store as video games are very expensive to buy and some older games are hard to find even on the internet. Expanding complementing offerings enables Blockbuster to create an image of the complete video shopping/rental solution. Blockbuster needs to continue exploiting the brick and mortar video rental market as long as there is money left in the business.
Blockbuster should continue to build its online [Blo] site that supports the sale of used videos, DVD’s, and games. The company should consider setting up an auction site such as eBay to allow the active trading of video games and DVD’s. This would further differentiate Blockbuster and make it the one stop shop for all the needs a rental customer could have. By differentiating into different segments of the online market Blockbuster becomes a real threat to the first comer Netflix. The online video rental market is extremely competitive with many choice for consumers[Top], thus the company with the best selection and ease of use will win out.
IT Planning Recommendations
Blockbuster needs to make sure that it stays competitive in all markets that are interesting to people who rent videos. To enhance this plan, Blockbuster needs to enhance its affiliate marketing [Blo] program and aggressively infiltrate all segments of the online gaming and movie industry. Expanding the online presence means IT will have to step up its efforts to create new portals and sites that are dedicated to promoting Blockbuster and that aim to cater to all customers within its key demographics.
Blockbuster will also need to improve its VOD delivery infrastructure and enable its web based services to deliver streaming video on demand into living rooms to compete with providers who are actively implementing on demand and VOD subscription plans. Improving infrastructure means either negotiating working deals with Telco and cable companies or building their won server farms to support the massive infrastructure demands that a live VOD business will need. On the copyright side of VOD, Blockbuster will need to negotiate with its studio vendors to enable them to release these movies and encompass every service that an online or a Telco service provider can with added features and extended customer service. Blockbuster has not yet implemented downloadable movies on its site, but it is a capability that IT must provide for the company to create an extra feature that Netflix does not have and that would be very favorable to a vast college community that watches a lot of boot legged films but also makes use of computers to watch videos more so then DVD players.[ii]
The customer service wing of Blockbuster Online needs to be improved with live 24/7 customer service representatives, a feature that Netflix has but Blockbuster Online lacks[Top]. The customer experience is a crucial aspect of building and retaining a customer base regardless of the market conditions. With online rivalry heating up, and Netflix ahead of the curve in video selection y some 10,000 titles[Top], blockbuster needs stay competitive and create a sustainable competitive advantage through building a stronger customer base the their rival Netflix. IT needs to step up the efforts of building a strong communication backbone for the company and provide the call center infrastructure.
Blockbuster needs to have tough security and privacy controls not only ensure that the customer data it collects on millions of subscribers is safe, but also to make sure its own database of movies is not a target for content thieves. The TJX scandal illustrated how vulnerable IT systems are in large organizations [Lan07]. Blockbuster IT needs to ensure that the sites are completely secure by maintaining protection against brute force and social engineering attacks on its visible online infrastructure as well as keeping an eye on its ports and patches at all times. Being one of the larges online rental agencies, Blockbuster will be a target for hackers in the future. Having multiple open streaming channels opens the company to data thieves and malicious hacker attacks.
Blockbuster needs to provide POS terminals to turn its retail customers into online customers. On the spot sign up will allow blockbuster to gain new customers not just from the web site but also from the stores. The terminals can be very simple to use and the CRS can promote the online store by getting people to sign up. This approach can be as simple as a Loyalty program and the customers would return to the stores as well since the desire to brows and congregate is a truly human habit[Lev99].
Blockbuster can create a game to cater to younger audiences much like Nectar had done in
Blockbuster can also create an application portal that will enable people to edit movies and create montages such as they do on YouTube. This may violate certain copyright laws, however if Blockbuster has a strong enough relationship with its studios an independent site sponsored by Blockbuster that features these remakes could make Blockbuster even more popular. Blockbuster would need to create an IDE that would support this development, however once the environment is complete it would attract software and video enthusiasts alike.
All of these strategies are designed to make blockbuster an omnipresent force able to compete in all video and entertainment markets brick or virtual without holding to a single outdated model of video rental. Blockbuster needs to use its IT to enable its marketing and product wings to seamlessly create content and add functionalities to its core business. In this manner Blockbuster with the support of its IT can dominate Netflix, Movie Gallery, and giant wholesalers by delivering content and flexibility to its clients.
[Top] Top Ten Reviews
http://dvd-rental-review.toptenreviews.com/
[Net] Netflix Online Movie Rentals
http://www.netflix.com/Register
[Blo] Blockbuster Online
http://www.blockbuster.com/corporate/affiliates
[Rae05] Janet Rae-Dupree, “Blockbuster: Movie Business Remains a Moving Target”, CIO Insight,
[Lev99]Levine, Locke, Searls & Weinberger, “the cluetrain manifesto”, 1999, http://www.cluetrain.com/
Tim Laseter, Eliot Rabinovich & Angela Hunag, “The Hidden Cost of Clicks”, strategy+business,
www.strategy-business.com/enewsarticle/enews022806?pg=all
[Lan07]
http://www.sci-tech-today.com/story.xhtml?story_id=0020007DLIQM
[Cnn01 ]Blockbuster, Universal team for streaming video
http://archives.cnn.com/2001/TECH/internet/03/01/blockbuster.universal.idg/index.html
[Gop05]C. Gopinath. “War in US video rental arena — Will Blockbuster’s strategy pay off?” 2005
http://www.blonnet.com/2005/05/30/stories/2005053000820900.htm
[Man05]Manly, Lorne P. “ Video stores hang on despite new challenges” 2005
http://www.iht.com/articles/2005/08/23/business/video.php
[i] Every time I go into a Blockbuster store I have the feeling that the store is about to smother me. The video sections look old and decrepit, the isle are close together and towering over head. It is not the most pleasant atmosphere.
[ii] This is from my personal experience. Dorm rooms are rather tight and it’s always easier to watch a movie on your laptop if you can download it with no hassle. This approach would also beat out free P2P exchanges of boot legged movies since you need to be savvy enough to find those. While going to the Blockbuster site and downloading a movies is very simple.
