Chapter 3

Chapter 3 Case Study: Blockbuster vs Netflix

1.) What is Blockbuster's business model? How successful has it been?

Blockbuster's business model began with establishing itself as the market leader in video and DVD rentals which it did by 2004 when it had 40% of the market share. Unfortunately, the threat of a new entrant, Netflix, forced Blockbuster to re-engineer its business model by adding a monthly subscription service similar to what Netflix was offering. Blockbuster created a separte business for its online services and attempted to re-capture the market lost to Netflix by using a cost leadership strategy. Blockbuster offered lower prices for its monthly subscription then Netflix. Blockbuster also tried to differentiate itself from Netflix by also trying to get customers to use its physical rental stores by offering coupons for free rentals and offering no more late fees giving customers both the option of instore and online rentals

Blockbuster's new business model to try to regain the market share lost to Netflix has not been very successful. Because Blockbuster entered the online movie rental market late, Netflix already had a large customer base and has built on it, Blockbuster has been unable to catch up. Also, it is suffering do to the costs of implementing its new business model. It lost the $250-300 million in revenue it used to receive for charging late fees.

2.) What industry and technology forces have challenged that business model? What problems have they created?

Blockbuster's old business model of being an established leader in video store rentals was challenged by a new entrant into the market, Netflix which had a completely new business strategy of online movie rentals. Blockbuster had to deal with the cost of implementing new technology so that it could also enter the online rental market. It lacked the experience with the technology that Netflix had so it did not offer as good a user interface which resulted in less cusotmers. Also, it had to deal with customers that were loyal to Netflix because of its good customer service and low prices.

Blockbuster faces lower revenues in its traditional brick and morter video stores as customer turn to the convenience of online rentals. It faces stiff competition from Netflix which was a pioneer of this new business model and still holds the marketshare. Blockbuster most still deal with the increase in costs of implementing a completely new technology and the challenges off using the technology in the most productive way to win customers back. It has to deal with its lack of experience in the industry which makes Netflix more desirable to customers seeking both low prices and good customer service.

How successful is Netflix and its business model?

Netflix was very successful because it was able to enter the market early and become the leader in this new emerging industry. Even though competitors like Blockbuster tried to copy its strategy it was still able to grow its customer base to over 3 million by leveraging its experience in the industry. Even though Blockbuster may have offered lower prices, Netflix offered better selection and a better customer interface which allowed it to maintain the market share. It now must deal with new entrants with video on demand which is a new emerging technology that makes it even more convenient for customers to rent movies.