PLUG FOR NETFLIX
Blockbuster... A Fading Dinosaur?

Last month, when I visited my younger brother he was ranting about Netflix, an online DVD subscription service. He didn't have to bother with returning movies to Blockbuster anymore or dealing with their exorbitant late fees. He told me how you can keep up to 3 DVDs as long as you want as long as you pay the monthly subscription fee, and it was easy to receive and return the DVDs through snail mail.

"Blockbuster is in trouble, huh?" I said.

Since I've been primarily in Asia for the past four years, I haven't kept an eye on all the changes in the movie & video industry. I remember Netflix from a few years back, but I almost thought they died out. When I was I doing a video-on-demand startup back in 1998 and 1999, Blockbuster was the juggernaut in the movie industry.

By 1998, video sales and rental made up 50% of the movie studios revenues and Blockbuster held almost 20% of the rental market. Before 1998, the leading video rental chains were forced to change their business model to a revenue-sharing system with the movie studios since they were facing growing competition from cable and satellite pay-per-view service, video-on-demand services in the horizon, and the growing "disappointment factor" of their customers. This last factor was the most important. Approximately 20 percent of Blockbuster?s customers were leaving their stores without a selection and their sales were freefalling in 1997.

Blockbuster turned around all of this. Instead of purchasing the videotapes for $60-$75, which limited each store to approximately 40 copies of each hit movie and lead to the "disappointment factor," they leased each video tape for $8-$12 and received as many as 120 copies. In return, the movie studios or wholesalers received 30%-40% of the rental revenue. Blockbuster continued to grow from its $3.9 billion in revenues to last year's $5.9 billion, but it's power in the movie industry has waned dramatically in recent years.

The company use to hold the movie industry to at least a 50-day release window advantage over cable and satellite pay-per-services. Now that release window is slowly shrinking, cable and satellite pay-per-view and NVOD services are increasing, video-on-demand might finally be a reality in many homes (maybe in a decade?), and its revenues are being assaulted from all angles, especially from Netflix (CBS Marketwatch: "Netflix zooms to new all-time high")

Netflix has 1.5 million customers and growing... like roaches (196,000 net subscribers in Q4 2003) . Customers who don't want to pay for late fees, which make up to 30% of the video rental industry's revenue are fighting back by joining Netflix. Blockbuster and Wal-Mart have tried to fight back or get a piece of the action, but Netflix still holds 95% of this online market and has a patent for a barrier if needed.

How will Blockbuster respond now? Its parent, Viacom, already responded by shedding its stake in the company last week. Will Blockbuster become a dinosaur and a faded memory within a decade? Probably not, but its growth will taper off and become more and more limited to dense urban cities. How it reinvents itself will be interesting to watch over the next few years.