Contributors: Muhammad‎ Mahmood; Dzenan Buzadzic‎; Jaime Marie Welch‎; Ankit Mishra; Joshua David Szumski
Blockbuster Market Leader in the 90's: In the late 1990’s the home video market consisted of retail outlets, with
Blockbuster (BB) as the market leader. BB’s success was based on customer
perceptions of home movie night as an impulse decision and customer satisfaction by
the availability to rent new releases. BB met customer needs by offering hit VHS movies
and operating over 5K stores in the U.S.
Enter Netflix:In 1998 Netflix (NF) began providing home-delivered DVDs ordered online. At
launch, they met the first-of-two criteria to be a disruptive innovation –creating a new
market by initially selling an inferior product, determined by the inability to meet the
needs of the mainstream customers. The DVD platform was not yet widely utilized and
NF’s pricing was higher and provided slower delivery times than retail locations. On the
basis of competition as identified by BB’s insights, NF was not gaining market among
traditional movie renters, rather focusing on early-adopters.
NF changed the basis of competition and quickly moved to a prepaid subscription
service, eventually with unlimited rentals, thus meeting the second criteria of disruptive
innovation –improving performance and quality over time to meet customer needs,
allowing new market applications to emerge and propelling an upward trajectory. NF
solved their distribution challenges, revised the rental structure and added
recommendation software. This, along with the increased use of internet retail and DVD
players, quickly moved their disruptive innovation into a position of market leadership.
 
Beware of the BB pitfalls: Attempting to merge retail and online business models, Blockbuster Online
(BBO) failed by trying to be all things to all people. The customer value proposition in
the NF model was value, convenience and selection. NF targeted early adopters and
established strong relationships with customers through analytics and technology.
Through expansion of distribution centers and relationships with the USPS, they could
meet delivery demands and manage inventory and distribution efficiently. Finally, they
captured value by providing a subscription based service that met customer needs.
Comparatively, BBO was an incremental change in BB’s existing model. The
retail model was based on impulse movie night for customers that centered on new
releases. Targeting of customers was via placement of stores in high-traffic areas near
competitors. Their staff wasn’t focused on enhancing the experience or building
relationships, their financial success was largely based on maximizing rental periods,
including significant revenue from penalizing late fees. At the time, given the lack of
meaningful competition, BB needed only to meet the basic needs of the customers to be
successful.
When launching BBO, BB merely attempted to undercut NF pricing, remove the
pain point of late fees and augment their store offerings with an online component,
resulting in massive operating losses. Their model didn’t include the underlying
attributes that made NF successful and should have overhauled all aspects (value
capture, creation and capabilities) to compete with NF.
Why streaming was "Natural Evolution" for NF: Streaming video content provides viewers with immediate gratification and
expands the market to new audiences. Streaming is aligned with NF’s value proposition
and mission to provide the best home viewing experience for customers and would be
advised to expand NF’s business. NF should integrate streaming into their core offering,
leveraging their brand, current customer base and established relationships.


 Ref:  Netflix Willy Shih; Stephen P. Kaufman; David Spinola