Blockbuster versus Netflix

Blockbuster versus Netflix

Introduction

Since 2001, the movie-rental industry has shrunk 19 percent, according to Carmel, Calif.-based Adams Media Research. That has left companies such as Blockbuster, Hollywood Video, Movie Gallery and independent operations fighting over ever-smaller pieces of the entertainment pie.

In the early 1990s, there were about 70,000 stores around the country that rented movies. Today, there are about 18,000.

One way to grow when the overall industry is dwindling is through acquisition. Blockbuster and Movie Gallery have been courting Hollywood Video. Hollywood finally chose to merge with Movie Gallery for $850 million. (Detroit, 2004)

At NetFlix & Blockbusters headquarters here, CEO Reed Hastings writes on a white board and explains why NetFlix & Blockbusters can send Blockbuster into a death spiral.

"We have a shot at undermining its business model," he says, sounding about as wickedly gleeful as Frank Goshen's Riddle describing the undoing of Batman. And if current trends continue, Hastings might be right.

SWOT Analysis

Which makes for an interesting lesson for all kinds of companiesFor more than a decade, Blockbuster has been aware that technology might someday threaten its model of renting movies out of physical stores.

In that sense, it did a lot of the right things. Wayne Hazing, who built Blockbuster, even talked about it when I interviewed him back in 1993.

Yet for all of Blockbuster's vigilance, this entire time it has been worried about the WRONG technology. It's as if an early-1900s railroad engineer, certain that air transportation would doom trains, learned to fly zeppelins.

Blockbuster focused its concerns on movies on demand — the long-standing idea that consumers will be able to watch movies by downloading them through cable TV lines or the Internet (which the visionaries of the early '90s usually called the "information superhighway"). "It's not going to happen as soon as a lot of people say it's going to," Hazing said in '93, and he was right.

In the meantime, Blockbuster never saw that the Web combined with the change from videotapes to DVDs would give birth to something like NetFlix & Blockbusters. Now NetFlix & Blockbusters is growing at 80% a year, and Blockbuster said in April that its 2004 earnings will fall 10%.

The two companies' stock charts — Blockbuster is owned by Viacom but trades as a separate stock — look like opposite images of each other. Over the past two years, NetFlix & Blockbusters shares have tripled, while Blockbuster's have been cut in half.

Here's how bad it's gotten for the nation's largest video outlet: On CNBC a couple of weeks ago, Viacom Chairman Sumner Redstone said he "should have said goodbye" to Blockbuster a few years ago — before the NetFlix & Blockbusters threat became apparent. That's the corporate equivalent of saying he wished he'd sold the house before they built the plutonium refining plant next door.

Interestingly, NetFlix & Blockbusters exists thanks to the one thing about Blockbuster that many people hate: late fees. NetFlix & Blockbusters rent a movie, NetFlix & Blockbusters forget to take it back on time, and ...