Reference no: EM132180901

In the context of the chapter's material, what is the reason the authors included this particular story?

What does it teach us about strategy?

Support your answer with evidence from the story and from outside research if necessary.

Be thorough

In the early 1980s, a radical, new product was introduced to the market by Japanese companies Sony and Panasonic: the home video player. For the first time, consumers could purchase or rent a movie and watch it on their video player in the comfort of their own home whenever they wanted. Video players gave rise to video rental stores—a less expensive alternative to buying movies. By the early 1990s, Blockbuster had built 3,400 stores and dominated the home video rental market.1 The company reached its peak in 2004 with close to 9,000 stores and more than $6 billion in revenue.2 Blockbuster invested heavily in its stores and inventory—each store carried more than 1,000 different movies—so that customers could conveniently find a store and the movie they wanted to rent. The cost of each store ranged from $225,000 to $750,000.3

Blockbuster’s leaders quickly discovered that Blockbuster didn’t make money from the videos sitting on the shelves. It needed to get customers to rent the DVD and return it as quickly as possible so Blockbuster could rent it to another customer. To encourage customers to return the DVD rentals quickly, Blockbuster charged late fees that were unpopular with customers but helped Blockbuster get the DVDs returned quickly. Blockbuster’s overall strategy worked well until Netflix entered the movie rental business in 1997. Instead of building stores, Netflix rented DVDs over the Internet and shipped movies directly to the customer’s home. Rather than charge a per-use fee, Netflix charged customers a monthly subscription fee that allowed them to rent one to eight movies at a time. From the customer’s perspective, the downside of renting movies over the Internet was that it required planning ahead—no impulse movie watching. You couldn’t just pop down to the Blockbuster store and grab a movie to watch. But the upside was the ability to access 90,000 movies. Netflix shipped movies from 50 strategically located warehouses around the country to ensure that most customers got their orders within two days.4

This business model gave customers more movie options to choose from, and because Netflix customers paid a monthly fee, their business model profited in the opposite way of Blockbuster’s. Netflix made money when customers didn’t watch the DVDs they ordered. As long as the DVDs sat unwatched at a customer’s home, Netflix didn’t have to pay return postage or mail out the next DVD. And because Netflix didn’t have to build stores, hire sales clerks, or buy a huge inventory of DVDs to put in each store, it had more than a 30 percent cost advantage over Blockbuster. It was able to share some of this cost advantage with customers in the form of lower prices, and keep some of this advantage in the form of higher profits.

If Netflix took Blockbuster to the mat, Redbox tagged in for the pin. Blockbuster’s primary advantage over Netflix was the ability to provide movies for the impulse movie watcher. Redbox entered the market renting movies through vending machines. Each vending machine cost approximately $15,0005 and was placed in convenient and well-traveled locations like grocery stores, pharmacies, convenience stores, and even McDonald’s. By 2013, Redbox had placed more than 47,0006 vending machines around the United States, making them far more accessible than a Blockbuster store for most customers. Because vending machines were cheaper than stores, Redbox could rent movies at the low price of $1.20 per night and still make money. By 2010, Blockbuster had filed for bankruptcy. Netflix’s market value as of January 2017 was more than $60 billion, and Outerwall’s (Redbox’s parent company) market value was over $1 billion.7 But the battle for home video entertainment isn’t over. Apple, Amazon, and Microsoft have attempted to leverage their online capabilities and customer bases to win share in the video on demand (VOD) and Internet video on demand (iVOD) markets. For example, Amazon offers free streaming of older movies and pay per view for newer movies to its Amazon Prime members. Moreover, Hulu (backed by NBC Universal and Fox) first offered free streaming service (supported by advertisements) and, now, only Hulu Plus, a subscription-based service like Netflix. The market entry of these new competitors—each attempting to gain advantage by leveraging different capabilities—suggests that new innovative strategies will continue to emerge in the home movie entertainment industry.