The Contrast Between Blockbuster and Netflix

by: Todd Sullivan posted on: May 29, 2008 | about stocks: BBI / NFLX    
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This is just beautiful...... Netflix (NFLX) CEO Reed Hastings gave a timeline for the company to convert its business to digital distribution: 5 years. After that, he believes the mail-order DVD business will peak and then start to decline.

We think the by-mail business is very strong but will probably peak in the next five years. Our key challenge is growing earnings per share and subscribers while funding streaming which should give us years of subscriber and earnings expansion.


This comes less than two weeks after the company rolled out its set-top box to good reviews.

The news here is the contrast between two companies. One doggedly hanging on to an outdated business model and being dragged into the current one and another, a pioneer in the current model already looking down the road at the next one.

Rather than buying a heap of problems at Circuit City (CC) and trying to convert its video rental stores in Apple (AAPL) store look-a-likes, Blockbuster ought to be using that energy and the money involved to try to leap ahead of Netflix in the download game. It has not ruined its brand yet and any box that streamed movies into the home would get a try by folks.

But, the longer it waits, the more the current offerings become entrenched with consumers and the harder, and more expensive, changing behavior becomes.

But hey, Blockbuster will always have the less than 1% of the population that actually still likes going to the video store...

This article has 20 comments! Add yours below...
Todd Sullivan

Todd Sullivan

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This article has 20 comments:

  •  
    borisb
    May 29 08:54 AM
    netflix has improved online marketshare from 70% to 80%+
  •  
    WallSt Man
    May 29 09:55 AM
    My Website
    Netflix is already ahead of Blockbuster in this area. What's wrong with exploring new strategies? If say, a decade ago, Netflix was trying to outdo Blockbuster like Hollywood video, how successful would they have been? The digital distribution/download movies market is getting overly crowded, there's no reason why Blockbuster shouldn't try to find an alternate path to profitability. Just because we're used to the company being a rental service provider, doesn't mean it has to stay that way. Netflix on the other hand, has incredible brand loyalty, and they can leverage that to get new subscribers and bring old subscribers into their new services. Blockbuster needs a fresh tactic, and I don't see the problem in them exploring those options.
  •  
    rich94061
    May 29 10:55 AM
    A few years ago I shopped at Blockbuster on a weekly basis. Then I subscribed to Netflix and have only returned to Blockbuster on 2 occasions, both of which were dissatisfying. A year ago I subscribed to Comcasts triple play where I can watch "movies on demand" and some are free but still enjoy my Netflix movies. Netflixs latest move to distribute movies with their set-top is interesting but I'm not sure how it will compete with Comcast. As far as I'm concerned, Blockbuster isn't even in the picture anymore. They have an outdated distribution system, poor customer service and high prices. That's not a model for success.
  •  
    res ipsa
    loquitur
    May 29 10:57 AM
    I wonder if Blockbuster is too beholden-to/cozy-with/... other words here> the MPAA and the content producers to see the trouble they are heading for. Netflix is to SONY Pictures as Apple is to EMI Music: the asteroid of disintermediation looms and is threatening change for narrow minded producer's and middlemen's business models. We'll see who the dinosaurs and mammals are as their cozy ecosystem rings from the impact.
  •  
    pirgnori
    May 29 11:17 AM
    So is NFLX a buy now?
  •  
    pirgnori
    May 29 11:18 AM
    So is NFLX a buy right now?
  •  
    Iconoclast42
    1
    May 29 11:20 AM
    My Website
    If the netflix player could also play divx movies, it would be useful. Both over the network, and from a usb storage device. It would only cost a pittance to add that functionality.
  •  
    rede2fly
    May 29 11:44 AM
    As an 8-year Netflix subscriber, I can promise you that I will only switch to online distributation when the picture quality rivals that of the then current hardcopy picture. I have no interest in watching movies on my computer screen when I have a 100" screen available.
  •  
    cank
    May 29 12:20 PM
    The scary thing in terms of playing NFLX as a long is that if things go the way the NFLX CEO says, then Blockbuster won't be their only competitor. They will also be up against Comcast, AT&T, Apple, Amazon, Microsoft (XBOX 360), and Sony (PS3). NFLX's current success is due in large part to the giant footprint they made in the mail-order DVD service before Walmart et al could begin. The question you have to ask before you make a long play is: Does NFLX have enough of a head start to block out the other media giants? Wait a few months, see how many of those seemingly awesome $99 boxes they sell, and then make your play.
  •  
    ethelthelog
    May 29 01:09 PM
    The commenter writing about watching videos on his computer misses the point. I agree that most people will want to watch movies on their TVs, not on their computer (most of the time).

    But this is already possible with some of us. I can rent a movie from Apple on my computer, and then have my computer direct the output to my television. Anyone who has purchased AppleTV can do the same thing more easily. The same will be true for anyone with NetFlix's set-top box.

    The big question to me is who will be able to provide a wide variety of high quality compressed video in a format that is easy to access, and appropriately priced. Apple is doing well in terms of easy access, acceptable quality, and appropriate price. Not well (at least not yet) in terms of having a wide variety of movies available.
  •  
    Van
    May 29 01:22 PM
    My Website
    Right you are, cank. And the short play -- and the size of the digital footprint as the future of entetainment and media -- is and will be even more crucial. Consider how many FREE options are now flooding the market already, enabling free television, movies and video viewing online. It's intended to change behaviors up front, in order to monetize it within a successful business model later. Much like Napster harked the paradigm shift before Apple's iTunes. People still buy CDs, cassettes and LPs, though -- thanks to the long tail created by cheap distribution. But - that's changing, too -- thanks to $5.00 a gallon for gas/$140 barrel, impacting shipping costs.

    The market for video entertainment has many tentacles. Blockbuster's position has always been one based in Real Estate - they're like McD's (What's McD's business model? It ain't selling burgers -- they buy and own real estate, and pay for it by selling burgers). As long as the rent is being paid on their buildings, and it is, BB owns land. They also have a recognizable brand (albeit outdated with many customers leaving and no new ones coming). There are always customer segments willing to use outdated modes of commerce. My mother (78) still uses travel agents! While BB will need to act to remain competitive, they've always moved slow to protect their physical holdings.
  •  
    shaffner
    May 29 01:24 PM
    Apple/Blockbuster should partner (better yet, Apple should buy Blockbuster). Apple could then use the brand appeal of Blockbuster to increase its rental revenue through iTunes/AppleTV.
  •  
    todd su
    May 29 01:29 PM
    My Website
    shaffner

    apple could just wait and pick up the bbi real estate on the cheap when they start to fail....or need to sell stuff off if they go ahead with the cc buy
  •  
    todd su
    May 29 01:29 PM
    My Website
    shaffner

    apple could just wait and pick up the bbi real estate on the cheap when they start to fail....or need to sell stuff off if they go ahead with the cc buy
  •  
    az12c
    May 29 02:04 PM
    I have order the Netflix Roku box for greater convenience - but I have been watching Netflix Instant view movies for 8 months on my Samsung 56 inch dlp. It is a simple connection from the PC to the TV using cables from Cablestogo.com and following the simple instructions in the Samsung manual. Simple for this 78-year old techno amatuer.
  •  
    ValueInvesto
    r
    May 29 02:06 PM
    Netflix's mail-order business doesn't appeal to me whatsoever. When I want to watch a movie its usually a spur of the moment thing and I don't want to have to wait a few days for it to be delivered. Thats where Blockbusters advantage is. I have no problem going to the store and getting one. Is everyone else so lazy they can't drive 5 minutes to get one?

    The only thing that seems reasonable in the future would be an on demand downloadable movie. My concerns are the download rates. I haven't used any of them, but if an average DVD is 4-5 GB, it would take hours to download on my cable modem. A blueray movie even worse, it would probably take days. Therefore I don't think it would be streamable unless you have an extremely fast connection. This doesn't appeal to me either. The most efficient way is still to go to a BB and pick up a physical copy of the movie. People say its expensive, but your time is money. For a couple bucks more I'd rather get it right away instead of waiting.

    I'm definitely not going to get another damn box to put in my entertainment stand just do download Netflix or Apple movies. I've already got a PS3, cable box and other equipment.

    Until downloadable content can stream at a fast enough rate to play blueray movies in 1080p with no quality loss I'm gonna stick with Blockbuster.
  •  
    Under Man
    May 29 03:13 PM
    My Website
    Not everyone has highspeed, so I can't see how this will work, plus Verizon FIOS has a huge selection of movies I can download literally only takes about 2 minutes. I think the cable companies are going to knock both blockbuster and Netflix out in the future. Going to the store is great for getting older movies. I don't think that will ever go away.
  •  
    tony1962
    May 29 07:22 PM
    Going with Netflix is a no brainier… I just ordered the Roku box for streaming Netflix movies ($99 - very fair, but should be free or subsidized for long term customers), and joined Netflix as a result of the offering. I like the idea so much I bought a few shares of Netflix as well… Sorry Blockbuster I won’t be stopping by anymore. Move over Cablevision (on-demand) Netflix has more of the content I want to see, and works out cheaper in the long run.

    Roku has a great product with their internet radio and now the alliance with Netflix brings digital data delivery to the next level.

    Let’s see Netflix start streaming HD content.
  •  
    svosavvy
    May 30 01:52 PM
    people with foresight can realize that the next natural step is downloadable content straight to your livingroom. The dvd makers probably wont go hungry for a few more years. An interesting look into the future came at the expense of the writers strike, writers were highly concerned about the royalties for online content. This was the butt of a lot of jokes by the comedians covering this. Joking about worrying about the royalties on reruns of 30rock and the office. The cable industry must change or die because behind the technical jibberish is a fundamental change. When you have cable they tell you when you are going to watch your show unless you have a dvr even then you are told when you can record this show. Online content will allow the user to access what they desire instantly. Yes the netflix plan is a little campy, but, its a good start. I must admit I'm long nflx and a supersatisfied customer. I basically see this space or sector as the next battleground of the clash of the titans msft vs aapl. With significant m&a of people who have some semblance of a clue in the pioneering end of the development. aapl is already in this space and msft likes to buy into spaces with their cash from qdos all the way to yhoo. Without foresight we would be waxing poetically about the awesome 8 track player we used to have.
  •  
    dgwife42
    Jun 06 02:27 PM
    When netflix's loyalty fades there in for trouble. their set top box solution is set up for the short term conditions. blockbuster announced a trial kiosk the other day. it currently downloads to a portable device that can dock to a television. So it allready trumps netflix. and the kiosk is intended to become compatible with a variety of devices. As to content; movielink gave bbi access to tons of content, and the device that is compatible currently has been tested in the french market for a year so the studios can see the effectiveness of the DRM on it. Netflix is counting on its single stream of subscribers to carry them, blockbuster is becoming more versitile and flexible which is what the consumers are demanding. Look at bbi's numbers the last 2 quarters.
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