Blockbuster Versus Netflix

Blockbuster, the retail movie rental king, is increasingly challenged by Netflix, the online movie rental king.

So, Blockbuster implements an online rental program, leveraging retail stores as a key component in the new program.

And then the financial results come in, and they look awful. Forbes magazine has a headline that says "Online Service Costs Blockbuster". Forbes also lists an article that says "Blockbuster Gains On Netflix". Forbes also mentions "Netflix Losing Ground". Which article is "right"?

First, one needs to consider that Blockbuster executed a $35,000,000 advertising campaign to educate the public about the new program. If we assume that the advertising campaign was executed in an effective manner, it is highly unlikely the program will pay for itself in the short term. It may never pay for itself in the long term.

The article states that Blockbuster added 800,000 new subscribers, bringing their total to 2,800,000. Netflix added 481,000 subscribers, bringing their total to 6,800,000 --- but more important, new subscribers were dampened by about 200,000 verses prior quarters.

In other words, Blockbuster may have dramatically over-spent (as is evidenced by the cost of the advertising campaign, directionally similar to the increase in loss verses last year) to acquire new customers, and cannibalize Netflix business.

Also, pay attention to comments that Blockbuster retail sales decreased significantly verses prior year. Only Blockbuster knows if the online business is cannibalizing their own retail sales.

This is where Multichannel Forensics can be applied both within and across businesses, with the advantage going to Blockbuster. Blockbuster has retail and online channels, and has competitive data provided by Netflix. Management can use Multichannel Forensics to forecast long-term changes in retail and online growth, and can incorporate Netflix information into the simulation. Over the next few years, Blockbuster management can see the long-term financial impact of their decision (which will hopefully be better than what is being reported today), and can project the potential damage inflicted upon Netflix.

What a wonderful, real-life laboratory we have in Blockbuster and Netflix. We see that multiple channels can be better for the customer, expensive for the multichannel brand, and can erode the growth of the online pureplay. I look forward to seeing what Netflix does to compete against this multichannel intrusion into their space.

If you were Netflix, how would you compete against Blockbuster?

Blockbuster Verses Netflix: Multichannel Forensics

Blockbuster's PR folks are doing a good job getting the word out that they are gaining ground in their battle with Netflix. A series of articles are circulating the press, including this one from Forbes. Blockbuster claims to have 2.0 million paying online subscribers, compared with the 5.7 million that subscribe to Netflix.

Financial documents from both Blockbuster and Netflix tell us the story of online and retail sales, during the third quarter of 2006 verses 2005. Some of these numbers may be a comparison of apples and oranges, especially given retail closures associated with Blockbuster. They can still be used for illustrative purposes.

Comparison of Rental Income, Online and Retail
Blockbuster Verses Netflix, in Millions
Third Quarter Results
	2006	2005	Change
Blockbuster Retail	$676.0	$726.5	-7.0%
Blockbuster Online	$64.7	$41.0	57.8%
Netflix Online	$256.0	$172.7	48.2%
Totals	$996.7	$940.2	6.0%
Blockbuster Total	$740.7	$767.5	-3.5%
Netflix Total	$256.0	$172.7	48.2%
Blockbuster To Netflix Ratio	2.893	4.444	-34.9%

Blockbuster claims that retail rental revenue decreased due to expense management associated with closing poorly performing real estate locations.

Between the two businesses, total volume increased by six percent in the third quarter, suggesting an expanding market, or suggesting that Netflix is taking market share from other competitors.

Multichannel forensics come into play for Blockbuster when evaluating the growth of the online subscriber base. If these subscribers are simply retail customers who are converting to the online channel, Blockbuster may have a series of additional future challenges.

By offering in-store dropoff and pickup of online movies, Blockbuster may stem loss of customers to Netflix. This strategy may allow Blockbuster to slow the rate at which Netflix is growing its customer base via customer acquisition. Given that Netflix likely has an annual customer retention rate of around seventy percent, Netflix must really amp-up the customer acquisition activity in order to continue the torrid growth rate Netflix has achieved.

If, however, Blockbuster is simply shifting its own retail rentals to an online subscription channel, then a very interesting set of dynamics shift into play. Can Blockbuster drive more visits to the store under this model? Management seems to think so. If this results in fewer visits to the store that result in a purchase, fixed store costs may not leverage as well, requiring Blockbuster to make a series of decisions about the true incremental value of the online initiative. It is possible that sales decrease in all stores, resulting in the eventual closure of underperforming stores. This could eventually lead to a more profitable business model, assuming Netflix doesn't clobber Blockbuster during this period of transition.

Stay tuned. Both companies appear to be moving their chess pieces around the board. Both executive teams must be feeling the stress of this multichannel verses online pureplay battle. Who do you think will win?