Competition in the Movie Rental Industry in 2008

Competition in the Movie Rental Industry in 2008: Netflix and Blockbuster Battle for Market Leadership Although the corporate strategies implemented by Netflix and Blockbuster have allowed them to become leaders of competitive advantage in the movie rental industry, they sometimes encounter strategic issues that slow down their product and services process. My research of Netflix and Blockbuster will enable me to present a SWOT analysis and recommendations for each company. Netflix, founded in 1997 by Reed Hastings, has achieved its goal of becoming the largest online movie rental service in the world. By the end of 2007, Netflix recorded revenues of $1. 2 billion. With a library of 100,000 movie titles and a subscriber base of over seven million, they had become the leaders of the movie rental industry (Gamble & Thompson, 2011). Netflix’s business model of internet subscription enabled them to compete in the movie industry. Consumers love going to the movies, but with increasing theatre prices found it too expensive to attend public viewings. Netflix provided an inexpensive way to view movies which could be done from the comforts of home. According to the text, (Essentials of Strategic Management, 2010), â€Å"Netflix’s success is due to its six-pronged strategy of providing comprehensive selection of DVDs, easy way to choose movies, fast delivery, no return due dates, and convenient drop in mail movie returns† (Gamble & Thompson, 2010). In an online survey by Nielsen Online, Netflix was rated number one for three years and for nine consecutive periods by Forsee/FGI Research (Netflix, 2009). Netflix Strategic Issues Blockbuster, Netflix’s fiercest competitor, experience many rental issues until 2007 when they regained market shares forcing Netflix to reduce subscription prices. Not only did Blockbuster gain presence, other competitors like Redbox also gained presence in the market due to new technologies (VOD & DVR) that are influencing the business environment. The business model used by Netflix caused a stir in the market industry. However, the damage control strategies of competitors and competitor recapture of market shares is threatening Netflix’s competitive advantage. Netflix has to change with the times. Competitive Forces Netflix and Blockbuster are affected by the five forces of competition which are potential new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, and rivalry among existing competitors (Gamble & Thompson, 2010). The companies must understand how these forces work and affect their operation. Threats of New Entrants -In the home video/game industries, new entrants must own large amounts of movies/games for rental or sale to fulfill customers' demands. Meanwhile they have to build up various distribution channels for products to reach customers in a very quick way (Xie & Lin, 2008). Bargaining Power of Suppliers -The inputs of suppliers in the home video/game industries are very important and since there are only a few qualified suppliers in the industry, their bargaining power is high. Netflix acquires its movies from movie studios and distributors, buying DVDs on a fee-per-DVD basis, paying license content fees, and signing revenue sharing agreements. Blockbuster also has revenue sharing agreements with its suppliers. To some extent, these agreements reduce the bargaining power of suppliers. In terms of the computer system, Blockbuster is using Provia's Viaware warehouse management system (packaging, sorting, and distributing rental products) in its supply chain management to keep costs down (Xie & Lin, 2008). Threats of substitutes -Substitutes include movie theaters, satellite TV, and cable TV. Customers can go to movie theaters and enjoy the vivid atmosphere. Alternatively, they can order â€Å"pay-per-view† or subscribe â€Å"on-demand† from satellite TV and/or cable TV providers to watch movies at home. Users can watch anytime they want. Satellite and cable TV offer sufficient selections of new releases and are is easy to watch with just click on remote. Netflix and Blockbuster compete for customers by offering various kinds of movies and internet access (Xie & Lin, 2008). Rivalry among industry competitors – Netflix and Blockbuster are in a highly competitive industry. Competitors include merchant retailers, such as Wal-Mart, Best Buy, and Target; video and game store like Hollywood Video, Movie Gallery, and Game Stop; supermarkets, convenient stores such as Publix, and McDonald's. The significant rival is Hollywood Video which offers movie and game rentals (Xie & Lin, 2008). Bargaining power of buyers -Buyers are not in concentrated groups and do not buy in large amounts. However, within the entertainment industry, customers have a lot of alternatives and have no switching cost. However the introduction of DVDs, influenced customers to purchase DVDs since the cost is almost the same cost of rentals. This makes buyer power moderate (Xie & Lin, 2008). The five forces of competition of the movie rental industry presents little force against a competitor’s market position based on buyer power, supplier power, and new entrant threats. However, threat of substitutes and rivalry among competitors can affect the amount of profits a company will gain and retain. Netflix SWOT Analysis The presence of Netflix and Blockbuster in the movie rental industry has assisted me in developing this analysis of each corporation’s strength, weaknesses, opportunities, and threats as followed: Netflix’s strengths are: Good reputation, unlimited movie rental subscription, no due dates or late fees, easy website access, and large movie selection. Netflix’s weaknesses are: Limited to internet rental access, and long waiting period for new releases. Netflix’s opportunities are: To provide Video on Demand media access, music and movie download, and acquire partnership with gaming industry. Netflix’s threats are: Low DVD rentals, government regulation of rental distribution, high level of competition, and new movie media technology. Blockbuster SWOT Analysis Blockbuster’s strengths are: national and international recognition provides movie and game rentals, various vices for rental access (i. e. stores, kiosk, and internet), offers snacks and beverages for purchase in stores, and accommodates all customer types. Blockbuster’s weaknesses are: Poor distribution process, increased operating expense, decreased reputation, limited new released video games, unable to compete with game distributors (i. e. GameStop), and constant rental policy changes. Blockbuster opportunities are: Unlimited access to downloadable media libraries, increased production of brand movie rentals, and partnership with gaming system industry. Blockbuster’s threats are: New video formats, decreased DVD movie rentals, increased competition, and government regulation of movie rentals. The SWOT analysis shows that Netflix and Blockbuster have strong strengths and opportunities, however in order to Netflix to maintain its competitive advantage there needs to be an upgrade in innovation and technology that will strengthen their reputation and reliability. Blockbuster’s loss in reputation will continually plague their ability to remain competitive and maintain the customer base that they have. Blockbuster will continually face challenges until they upgrade their innovation and technology to level where they will enter into recovery mode. As I studied the financial information presented in the text, it appears that Netflix has been able to offer customers the benefit of low rental fees because they have been able to maintain a low level of expenses. The benefits offered to customers have increased the amounts of net income and movie rentals. Netflix prides itself on promoting customer satisfaction and meeting demands of its internet base. According to the numbers presented by Internet World Stats, the percentage of internet penetration by the North American population was 74. 2 percent in 2009, which was a 134 percent increase from 2000. At this rate, Netflix could secure an internet rental customer base of 74. 2 percent which would strengthen its success (Miniwatts Marketing Group, 2009) Blockbuster’s biggest challenge is development of a viable strategic approach to price setting. When Netflix entered the game, Blockbuster began to lose profits. In an attempt to recoup some of its losses, Blockbuster presented campaign where the rental policy constantly changed leaving customers confused and unsure of the rental process. Although Blockbuster has a large selection of movie titles and global presence, its reputation of dissatisfied customers and inefficient distribution has caused its overall cost to rise significantly. Blockbuster’s competitive advantage is that it offers various channels by which customers can access entertainment media. According to Blockbuster, â€Å"The same customer can choose different ways to access media entertainment on different nights† (Blockbuster, 2010). Recommendations In order for Netflix to maintain its competitive advantage there must be an adjustment of their strategy. Customer satisfaction should be a key factor of its strategy. I recommend that they base their marketing promotions on increasing customer awareness of the variety of accessible content offered. They should also implement the availability of music content and digital media to their library. The development of an award program for customers with lengthy memberships would influence word of mouth recommendations. Most of all, Netflix must continue to offer their customers the benefit of more titles at modest cost subscription memberships. In order for Blockbuster to regain its competitive advantage and reputation there must be the development of a strategy that will increase their profit. They have to become more innovation in internet and in-store rental process. There should be monitoring devices placed on scanner registers and mailed movie rentals to better track returns in order to keep their cost at a minimum. Staff should be trained and monitored on a constant basis to ensure that customer satisfaction is the key priority. Blockbuster must implement policies that will be enforced and understood by customers. They should also team up with gaming system producers to ensure that they will be supplied with current games and possibly offer gaming system rentals. Most of all they should find their own niche market which will provide them with a specialized competitive advantage. The information researched on Netflix and Blockbuster has enabled me to conclude that competition in the movie rental industry is highly competitive. There are new companies entering the market that have a competitive advantage whether it consist of internet rental, vending machine rental access, or in-store rental access. Netflix and Blockbuster have taken the lead in providing thousands of movie title to be viewed in the comfort of our own homes without the expense of movie theatres. Although both companies have a competitive advantage, they each have a following of dedicated customers who will stay with them because of familiarity. Through my research I have learned that consumers are the controllers in the movie rental industry. If consumers dislike the way they are serviced or the cost of movie rentals they will most certainly move on to a company which will cater to their movie wants and needs. However, the movie rental industry must stay up on new innovations and technologies in order to remain competitive, profitable, and maintain modest levels of overall costs.