1.

How would you characterize the differences between Blockbuster's and Netflix's
business models?
● Blockbuster -
○ Business model depended on maximizing days that a movie was out for rent
■ Large drivers of revenue came from new releases - first three
weeks of studio distribution → demand fell sharply after
■ Stores reluctant to stock large numbers of lesser known films since
demand for those were inconsistent
■ Because focused on only popular films, selection for films was
small - only familiar movies → customers could select a title w/
limited amount of advice from sales staf
■ “Late” fees - repped 10% of revenue
○ Blockbuster acquired half of inventory under
■ Purchase model - pay studios $15-18, rent 9-10 times for
$4/rental ($36-40) → profit $21-22
● Netflix -
○ Search engine - allowed customers to sort through selections → QUEUE
movies to receive from Netflix
■ $4 per movie $2 shipping handling; return by certain date or late fees
○ Customers unsatisfied w/ price - charged same as competing retail locations,
SLOWER shipping delivery
■ Problems with shipping delay → spent lots of money acquiring
new customers, couldn’t retain them
○ Move to prepaid subscription service → turn longer delivery times into
an advantage
■ Customers have 4 movies at a time, receive 4 new films each month
■ Turned disadvantage of delivery time to having movie at home all the time
○ Ofered unlimited rentals → keep 3 movies at a time with unlimited
exchanges
■ “Unlimited” was great marketing tactic

2. Was Netflix disruptive? How? How would you evaluate Blockbuster's response?
● Netflix went after different customer segment than Blockbuster
○ While Blockbuster mainly catered to people who rented NEW RELEASES on-
demand
○ Netflix targeted new customer segment overlooked by competitors -
■ People who watch movies as a part of their daily entertainment, not just
an “event”
■ Netflix had proprietary algorithm that allowed it to tailor its
movies / films to customer preferences → positive cycle of
constantly wanting to watch more movies → keep customers
■ delivering an inferior (but more tailored) alternative, often at a lower price
● Blockbuster’s response -
○ Too late to the game

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 Launched “Blockbuster Online” 2004 - larger selection of movies
■
than available in sores → tried undercutting Netflix in prices
■ Tried “no fees” program → lost a lot of revenue from not
charging late fees
● Netflix eventually appealed to Blockbuster’s core segment through “a wider selection of
content with an all-you-can-watch, on-demand, low-price, high-quality, highly convenient
approach.”

3. Did Reed Hastings make the right move in trying to separate the DVD-by-mail business
from the streaming business?
● YES!
● Innovation / Tech: Hastings saw the trend (changing technologies that allow movies / TV
to be delivered to our homes from the cloud) and capitalized on it
○ Saw that DVD’s and movie renting would soon become obsolete due to
streaming services and technologies
● Operational Advantage: each business can have its own CEO, own strategic decisions,
etc.
● Pricing: having two separate businesses allows Netflix to have two separate pricing
models so that one does not interfere with the other
○ Streaming services should be prices differently than DVD-by-mail - they require
different resources and cost structures

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