MOVIE RENTAL BUSINESS: BLOCKBUSTER, NETFLIX

& REDBOX

SUBMITTED TO

SUBMITTED BY

Professor Jishnu Hazra

Indian

Institute

Bangalore

of

GROUP 15
Management,

ADITYA KUMAR GUPTA

1511377
CHINMAYA PANDA
1511388
MANISH PANDEY
M V SAI CHAITANYA

1511407

A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

Q1. What are the key success factors in the movie rental business?
How do the three players in the case compare on those
dimensions?
As per Industry analysis using Porter five forces:

Threat of new
entrants
Walmart,

Amazon,
Comcast, Netflix,
Redbox, BestBuy,
i-tunes, Time
warner cable etc.

HIG
Bargaining Power of
Buyers

Bargaining Power of
Suppliers

Suppliers are
Hollywood studios.
Switching cost is low
for them.
Recently introduced
VOD offers maximum
revenue to them.

rental
movies.
Switching cost is
low.
Customer
preferences &
behavior is changing

HIGH

HIG

HIG
Threat of
substitutes
VOD (Video on

demand), Kiosks,
Online streaming
are new
substitutes for instore rentals.
Theater
Experiences
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Buyers are
Competition
customers
Rivalry
purchasing

HIG

A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

From the above analysis, it appears that the movie rental industry is a
tough battleground for new entrants but holds huge potentials for the
incumbents given the huge market potential and expansion opportunities in
different parts of the globe. Any new entrant or the existing players need to
come up with supply chain and technological innovations, a Critical Success
Factor.
This is the prime source of revenue for the Hollywood studios as 45% 1 of the
movie industry revenue of $24Bn comes from Home video in 2009 (DVD
sales & rentals). Hence Hollywood studios have quite a high bargaining
power over key players in the market. They are the key people who decide
after how many days of theatrical release the DVDs, VODs are going to be
in the market and what is going to be the type of contract between them
and Rental Service providers. This can vary from piece/rate to revenue
sharing contract. Hence, strategic partnership is required with the studios to
perform well in the market.
KEY SUCCESS FACTORS IN MOVIE RENTAL BUSINESS ARE:
1. Convenience: Customer convenience is the most important key success
factor in movie rental business. They are interested in getting what they
want when they want the product. Hence a flexibility is to be provided on
the customer side. While Blockbuster In-store rentals were about 3750 2 in
the US of which around 26% were on the verge of termination of the
lease. On other hand Red-box kiosks at the same time were around
230003. They were also located at the McDonalds restaurants, leading
grocery stores, Walmart, Walgreens & seven-eleven stores. Netflix was
getting further more convenient by pay per rental mail order & online
subscription based services.
2. Movie selection choice/ Variety: Customer is more focused on choice
availability. In Blockbuster in-store model the choice is limited by the
1
Exhibit 3, Movie Industry revenue distribution, Page 14, Movie Rental Business
case.
2
Page 4, Paragraph 6, Movie Rental Business Case
3
Page 8, Paragraph 2, Movie Rental Business Case
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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

number of titles generally around 3000 4. Netflix offered more than ten
times variety. Also, Redbox in its kiosks carried about 630 5 disks
comprising 200 of the newest movie titles. With the online model
disruption, clearly, Netflix offers the most choices as Netflix members
received any of more than 1000006 DVD titles delivered to their homes.
3. Cost/ Value: Cost/value is defined as the need gratification of the
customer. It is defined as per the value derived by the customers as per
their cost structure. Several customers who are frequent buyers will be
more inclined towards the monthly subscription-based service for $9 7
which costs while customers who watch comparatively fewer movies will
go for operated vending machines which are less than $1 per rental.
Customers who are fan following of a particular movie are more likely to
go for buying DVDs through in-stores or on mail delivery. Hence customer
preference which provides the cost per unit value addition will be the key
success factor in this regard.
4. The quality of service/ No delivery Hassles: This metric is decided as
a key success factor in providing a customer experience in the movie
rental business. This experience should not detract him from the leisure
time. Since mostly in vending machine operated costs are less with
automation provided to deliver hassle free service. Also, Netflix spent
$600mn in 2010 for shipping expenses to facilitate one-day delivery
service to around 95% of customers. Even in the online streaming of
Netflix, the number of IT servers in different geographic locations were
increased to ensure zero buffering time. Netflix also focused on providing
supplements in the industry in the form of ratings. They partnered with
CineMatch that made recommendations based on customers rental
history. This rating system proved to be accurate with 60% of the Netflix
users selected their movies based on recommendations tailored to their
individual tastes8. Also, Blockbuster partnered with ATM manufacturer
NCR to begin installing Blockbuster express- branded DVD kiosks for video
4
Page 3, Paragraph 8, Movie Rental Business Case
5
Page 8, Paragraph 4, Movie Rental Business Case
6
Page 5, Paragraph 4, Movie Rental Business Case
7
Page 4, Paragraph 3, Movie Rental Business Case
8
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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

rentals to increase delivery service to customers. They also focused on

creating Blockbuster Direct Access that gave store customers access to
more than 95000 titles carried in the distribution centers. This made the
inventory searching for the staff and the customers easy and transparent.
5. Rental Holding Capacity: For customers, rental holding capacity is also
Key success factor. When Netflix targeted the Blockbuster customer base
they keep their offering as zero late fees. This helped in increasing the
customer base of the Netflix. Also, Redbox offering for the budget
conscious movie renter with less rate and more rental holding capacity.
6. Rental Transaction turns: This is an important factor for the physical
DVDs rental in the business. No. of transaction turns of DVDs increases
the revenue for the service provider thereby improving Profit Margins.
Redbox was able to achieve high transaction volumes for the rental DVDs
which was leveraged by keeping the pricing strategy low. Also, set up
costs was relatively inexpensive at $15000 and generated revenue on
average $30000 in the first year, rising to $40000 & $50000 in second
and third years. A Redbox kiosk rented its average DVD fifteen times at an
average of $2 per transaction 9. This metric was quite low for Blockbuster
as movie rental industry CAGR for in-store was declining at 9% from 200509 and was expected further decline at 5% from 2009-1410.
7. Supply Chain Innovation: As technological advancements have been
observed with change in process technology. Supply chain needed to be
responsive and flexible to keep in-line with the new industry shift. Cable
VOD (Video on demand) is having a CAGR of 144% from 2005-09 and is
estimated to rise to 29% from 2009-14 11. Traditional in-store is having
declining CAGR of 9% from 2005-09 which will continue with 5% from
2009-14. Also, industry is witnessing digitization of content rather than
physical DVDs. Netflix is able to provide a supply chain to customers with
technological advancements which Blockbuster failed to do so. Redbox
has kept the cost efficient supply chain with a focus on innovation to
deliver rental DVDs at low cost to customers.
Page 6, Paragraph 3, Movie Rental Business Case
9
Page 8, Paragraph 4, Movie Rental Business Case
10
Page 15, Exhibit 4, Movie Industry Rental Shift, 2005-14, Movie Rental Business
Case
11
Page 15, Exhibit 4, Movie Industry Rental Shift, 2005-14, Movie Rental Business
Case
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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

8. Low cost supply/ Cost efficient: Since price sensitivity of the

customers is also presence as one of the factors in customer buying
criteria. Netflix kept the strategy of purchasing an only limited number of
new release DVDs, preferring to wait a few weeks to buy the bulk of its
supply at lower cost. Redbox also offered an alternative that allowed last
minute rentals of new DVD releases at low cost. Blockbuster was suffering
massive losses as they failed due to change in customer buying
preferences, which resulted in the closing of stores.
9. First Mover Advantage: Netflix entered into the online streaming, mail
order video rental, subscription services in 1998 which helped them to
gain significant Market share as per customer preferences. Blockbuster
entered into the above segment but in 2004. Till then a lot of damage in
RMS (Revenue Market Share) has been done by the Netflix. Also,
Blockbuster entered into installing kiosks in partnership with ATM
manufacturer NCR. But till then, Redbox has gained a significant market
share of about 19% in this segment. Hence, tapping the technological
innovation is important in this industry. Currently, VOD (Video on Demand)
is gaining popularity with Comcast and Time Warner cable 12. Google/
Amazon/ Apple iTunes is also targeting these segments. Hence, First
mover advantage is a key success factor in this industry.
10. Supplier Relationship: With the increase in piracy content, there is
pressure on studios as they were wary of sharing revenue with pay-tv
providers. The contribution margin was higher for them in the physical
rental of DVDs which Blockbuster was following. Also, in Redbox model,
studios agreed to provide 28 days after DVD release. Hence strategic
partnership is also a key success factor in this industry.
ANALYSIS OF KEY SUCCESS FACTORS FOR THREE
COMPANIES: BLOCKBUSTER, NETFLIX & REDBOX
S
No.
1
2
3
4
5
6
7
8

Dimension
Convenience
Movie selection choice/
variety
Cost/ Value
Quality of service/ No
delivery Hassles
Rental Holding Capacity
Rental Transaction turns
Supply Chain Innovation
Low-cost supply/ Cost
efficient

Blockbus
ter
Low
Medium

Netflix

Redbox

High
High

Medium
Low

Low
Low

Medium
High

High
Medium

Low
Low
Low
Low

High
Medium
High
Medium

Medium
High
Medium
High

12
Page 10, Paragraph 4, Movie Rental Business Case
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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

9
10

First Mover Advantage

Supplier Relationship

Low
High

High
Medium

Medium
Low

Value Ofered
High

Clearly, Blockbuster is on unsustainable operating costs while Netflix

(subscription services) & Redbox (Kiosks) is having lean operating
costs.

Q2. How would you advise these companies to modify their strategies and
structures going forward?

The frontiers of the battle of movie rental industry have seen disruptive
changes with the advent of mail delivery rental on online streaming services.
As discussed above, the three competitors: Blockbuster, Netflix, and Redbox
have created intense rivalry and need to excel on the value proposition, cost,
innovation, consumer-focus, and operations front. While Netflix and Redbox
have enjoyed success in recent times with $116mill and $54mill in profits in
Blockbuster
FY2009 respectively, the erstwhile industry behemoth Blockbuster has been
Netflix
facing huge losses and is under a debt
of nearly $1 billion13.
Channels of service

High

CURRENT POSITION (COVERAGE VS VALUES OFFERED):

Low

When we benchmark the three companies on the current market coverage i.e.
Channels of service such as retail stores, mail delivery, and online streaming,

Blockbuster is ahead of competition with high diversification

while when it
comes to value
Netflix has aced the market with its in-house
Lowoffered, Redbox
recommendation engine, movie ratings, queue system, suggestion system etc.
and huge library offered at a very high convenience. Redbox sits pretty in the
lower corner though it has captured the budget conscious movie watcher with
its accessible network of kiosks.

13
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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

Value Offered: movie rental + online rating, recommendations, suggestions, CRM etc.
Channels of service: Retail, mail order, online streaming/VOD.

Going forward, below are the recommendations on the strategic front for the
three companies:
BLOCKBUSTER
It is pretty evident that Blockbuster needs to update itself with the changing
consumption pattern of the customers. In this ready to go age, consumers
are watching films/TV shows while moving on their electronic devices such as
smartphone, tablets etc. and physical DVD consumption will see further
decline.
The primary issue in Blockbusters strategy is it being a laggard when it
came to adaptation and innovations. It has even tried to follow business
models of direct competitors without getting the operational part of it
correct. The price wars have hurt its bottom line.
Strengths: Hugh diversified network across the globe; huge range of titles;
support of Hollywood producers.
Weaknesses: High operating costs: high distribution costs; inefficient
distribution system
Here are some recommendations for Blockbusters.
1. Lower its operational costs: The high operational costs have been
hurting Blockbusters financials from past many years and Blockbuster
needs to take stock of the situation. It needs to close to its retail stores
in phased manner while the transition is made to mail delivery and
online mode.
2. Focus on online and mail delivery service: Its high time that
Blockbuster focuses on the online and mail mode of delivery of
services. It needs to build the web presence with tools of customer
relationship management such as loyalty benefits, recommendations,
and reviews which are now any important decision-making factor for
consumers for choosing a film which drives the consumption of the
medium itself. A recommendation and a prediction system will not only
help consumers find the movies they want, it will also help Blockbuster
on the operational fronts where it can predict demand and manage its
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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

inventory accordingly, reducing overage and underage costs. Also,

these features will complement the offline store experience with the
store managers having access to better information of choices of its
customers, helping them recommend content.
3. Transform its key retail stores to cater to niche movie lovers:
Given the presence of retail stores in key strategic locations,
Blockbuster can convert these few store into a movie experience
store by offering signed DVDs, merchandises, and rare prints for the
connoisseur of movies.
4. Build on relationships with studios to provide the latest
content: Blockbuster already enjoys the support of studios as per the
current revenue sharing agreements, where Studios make higher when
compared to other forms of distributions. It can leverage its
relationship to strike exclusive deals of not only recent movies but
prized films of yesteryear for the niche segment, film school students
etc.
5. One Stop Solution plans: As mentioned above, the key strength of
Blockbuster is its diversified network which it can optimize to provide
all access ecosystem of movie rental where consumers can utilize any
medium to rent, consume and return the DVDs with added offline and
online CRM based benefits. It can include subscription plans which
cater to needs of all different segments of movie rentals; even to ones
who do not have access to fast internet.
6. New product lines such as games: It's 2009 and the consoles such
as XBOX 360, PS3 and WII are staple platforms for playing games.
Game rentals is an exciting market given the steep prices of games
(~$60) and relatively small pocket size of target segments (14-35).
Blockbuster can leverage its industry contacts to enter into the game
disc rental market. The retail network in its arsenal can also be utilized
to offer its customers gaming accessories etc.
NETFLIX
Founded in 1997 as a pay per rental mail order video rental company,
Netflix grew to 13 million subscribers by 2010 for its subscription-based
model. With an intuitive web portal, no late fees, unlimited rentals for a fee,
Netflix was making huge strides into homes of average movie consumer via
devices such as laptops, PC, and even video game consoles and set-top
boxes.
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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

The technological backend and innovations have helped Netflix gain market
share very rapidly. However, in order to sustain and gain in its highly
competitive industry:
Strengths: Huge online subscription base; cutting age technology
delivering high quality of service; recommendation engine; low-cost
services.
Weakness: Low market coverage with only online and mail-delivery
services; lack of latest titles.
Some of the recommendations are:
1. Provide Original/Exclusive content: Netflix can bank on the
changing consumption behavior of users and provide them tailored,
conventional and relevant content to consumers, delivered onto his
mobile. Such content not only helps retain customers, increase their
willingness to pay but also unshackle itself from dependency on movie
studios for the content. The backward integration into content creation
can also help it supplement its brand value as a media consumption
platform.
Further, it needs to continue adding varieties of titles, its competitive
advantage, by collaborating with Movie Studios, TV serial studios and
independent filmmakers across industries.
2. Build technological capabilities to meet huge demand spikes:
Given online streaming can be accessed by many at the same time,
say a latest popular release, Netflix needs to build on its scale and
resilience factors of service to meet heavy access of its services and
products.
3. Capitalize on digital movie broadcasting: Given the advent of
competitors such as iTunes providing downloadable content, Netflix
shall venture into providing such option for the wide variety of content
it has on its platform.
4. Providing latest content: Though its Netflix Strategy to not source
latest movies in order to keep the costs low, it is advised to venture
into video on demand services for latest content such as latest movies,
maybe at a premium. This will help it tackle the new VOD services
offered by Cable operators.
5. Expansion into new territories: Given the technologically superior
backend using distributed systems which provide consistent streaming
services, Netflix can scale up and be open to other territories such as
Europe and East Asia where the internet speed and penetration are
good with the low amount of piracy.
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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

6. CRM: Netflix is already a pioneer in understanding the customer

preferences and it shall build up customer retention through loyalty
programs, referral programs, and bulk subscription discount offers.
REDBOX
Launched in 2002, REDBOX is DVD vending Kiosks installed at accessible
locations which dispense movie DVDs for a price as low as $1. Convenient
access, cheap price, and convenient return have made it a hot favorite
amongst the budget conscious movie watchers though it did face some
friction from studios as it was eating into their DVD sales business. In a
short amount of time, it captured a huge market share of 25% of DVD rental
volume with a network of 23000 kiosks.
Strengths: Huge network presence; low costs and convenience for
customers; quick ROI for installers;
Weakness: Only kiosks vending presence, no online or mail delivery
option.
Though REDBOX had seen success faster than Netflix, but in order to
sustain it needs to implement below strategic steps:
1. Have an Online presence: It is no denying fact the Kiosks model has
been highly successful but given the new industry trends and
consumption pattern changes (physical DVD players to tablets), REDBOX
needs to build capabilities to deliver online streaming content. There is
already a very stiff and strong competition from Netflix and VOD services,
but building an ecosystem of online + Kiosks will be beneficial in the next
decade. People can browse and book DVD for nearest kiosk and pick it up
as per their convenience and time. Also, the online portal will provide an
avenue for rating titles, recommending titles and also payment options
using a subscription feature. Since the capacity of a box is limited, online
bookings will help REDBOX to predict and accommodate demand
changes such as sudden interest in a movie. The movies in demand can
be replenished to accommodate user interests. The streaming
capabilities shall be built over time in a phased manner.
2. Improve network using collaborations: With 23000 kiosks
nationwide, REDBOX already as a strong presence in the mainland USA. It
can still build up on the network by targeting specific strategic locations
such as outside IT parks, Office parks and Hostels where there is a high
density of budget-conscious movie enthusiast who wishes to relax over
the weekend at his/her house. REDBOX can also collaborate with fast
food/pizza joints and offer weekend chill packages for movie + food at
the house at affordable bundle prices.
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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

3. Improve demand responsiveness: It also needs to strengthen its

operational backend to meet uncertain demands such as a spike in a
certain movie of a deceased actor etc. Stock-outs can be painful
customer experience and REDBOX needs a very responsive system to
update its catalogs as per the demand. Further, titles low in demand
must be turned over using discounts and bundle offers say a popular title
+ non-popular title at $1.59 etc.
4. Better variety of movies including latest titles:
Though the
economic factors and the competitive advantage of cost do not
showroom for latest movie titles from major studios, REDBOX can come
up with premium pricing for latest content in order to serve customers
who are REDBOX loyal/find kiosk vending comfortable. It needs to
negotiate waiting period times with the remaining studios for reducing
the interval between availability at REDBOX and availability at retail
stores. It may come up with a revenue/rent sharing models per a given
window.
5. Venture into other media content such as video games: As stated
above, there is a huge market for video game rentals and REDBOX can
provide video game rentals after striking a balance between studio,
customers and its own expectations on the pricing and service front.

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A CASE ANALYSIS OF MOVIE RENTAL BUSINESS: BLOCKBUSTER,

NETFLIX & REDBOX

APPENDIX

Movie Rental Industry Shift CAGR 2005-14

Cable VOD

Online Subscription

Vending

Instore

160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2005-09
-20.00

2009-14

FIGURE 1: MOVIE RENTAL INDUSTRY SHIFT CAGR 2005-14

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