As I have stated in previous posts, much of my past 10 years has been spent at a Silicon Valley start-up done well, Netflix. While off to bigger challenges, my role there allowed me to follow the fits-and-starts, the trials-and-tribulations of the entertainment industry as it competed for the mind share, eyeball share, and wallet share of American consumers. I have watched and studied all the possible incarnations (to date) of "content meets technology" in delivering content to the consumer. Remember 24 hour disposable dvds? Remember VONGO? Remember MovieBeam? Remember Kozmo.com?
The enterprise that commercialized entertainment rental for all consumers, Blockbuster, is clearly still around. While it has created and suffered its fair share of strategic challenges (and blunders), it remains an omnipresent element of the American retail landscape. A year ago a new CEO, Jim Keyes, replaced John Antioco as the firm's leader after Antioco was unable to profitably compete against Netflix. Yes, there were other issues with the execution of the Blockbuster strategy - not to mention the quality of the strategy itself - but the chart below shows the true tale:
Since the week of June 7, 2002, not a single penny of increased shareholder value has been created. Not that is wasn't attempted.
- Video on demand (with Enron)
- No late fees
- Focusing on games (buy, sell, trade, rent)
- Focusing on in-store retail (merchandise, dvds, electronics)
- Focus on electronics (in-store + Radio Shack)
- Focus on online rental
- Focus on online + store rental integration
All evaluated, vetted, and attempted. No increase in shareholder value. So John is out and Jim is in. New blood, new ideas. And what do they use to lure in new customers in August of 2008, nearly 9 years after Netflix introduced the online dvd subscription service? Have a peek.
What brought this topic that is so near and dear to my heart to my mental forefront was a recent interview with CEO Jim Keyes with paidcontent.org. During the interview, Keyes made the following statement:
PaidContent.org: How does the digital strategy sit with the retraction of advertising TotalAccess online, and the pullback in promoting it to make it more profitable? How can you reconcile those two?
Jim Keyes: I’m glad you asked because this has been an area of a lot of confusion and particularly in the press… We’ve been really struggling with this message because I’ve been frankly confused by this fascination that everybody has with Netflix. They’re in a small segment of our business...
While not a Blockbuster shareholder (I like my money to grow...), I would be very concerned by this cavalier statement by Mr. Keyes if I were. It suggests a lack of understanding of the marketplace in which he must compete. Remember the "new blood, new ideas" from the paragraph above? Well, wishful thinking, folks. Mr. Keyes comments reflect a continuation of the "head in the sand" strategy that Blockbuster and its leadership have demonstrated for much of the past decade. Have a quick peek at how Blockbuster has historically looked at Netflix's competitive threat: a niche market.
Even after the Netflix went public in 2002 and was growing into the millions of subscribers and delivering fantastic growth and Blockbuster was beginning to feel a pinch (store closings, year-over-year same-store rental declines), it maintained the failed mindset that online dvd rental is a niche, a small part of the market.
Netflix did more than one billion dollars in revenue last year (U.S. only, by the way) as compared to Blockbuster's U.S. movie rental and used product sales revenue of $2.9 billion (this takes into account all subscription rental revenues which includes game rental revenue... so the revenue number is, by definition, too high). So Netflix in one-third of Blockbuster's rental revenue. I am left wondering in what universe does zero to one-third in less than a decade equate to small?
What Mr. Keyes did in the last quarterly call, as can be seen in this market assessment slide, is to redefine the market opportunity so that it minimized the impact and opportunity for Netflix. Paint the picture BIGGER and show words on a page that suggests that you, Blockbuster, are aimed at the BIGGER picture, while framing that "niche" player, Netflix, as one that is limited in scope.
Unfortunately, what is not taken into account in this argument is the discussion about executing against this strategy. Think about the list of attempted tactics from above that were tried, touted, and terminated. Do you have faith that Blockbuster has the capabilities to execute against a strategy that will enable it to win against the likes of innovators like Netflix, Apple, Amazon, and Comcast? What has the company show in its past that gives one any faith that it can accomplish this? By recasting and redefining the market, Blockbuster has attempted to move focus to a bigger opportunity that it is "uniquely positioned" to compete in. What it does not do is address why 250 U.S. stores have shut down in 2007, why it has been unable to create a competitive and profitable online operations that competes with Netflix, why most tactical executions against the "strategy" (I use the term loosely) have failed to make any gains, why U.S. same store rental revenues (excluding online- store only) are down 7.2% in 2007? This is called smoke and mirrors, a promise of future gains with no historical confidence to back it up.
So allow me to answer the query posed by Mr. Keyes- why the fascination with Netflix?
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Netflix created an experience that allowed American consumers to challenge the status quo: choose, receive, watch, and return a movie on one's terms and without pressure.
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Netflix eliminated the single largest hassle in movie renting- the late fee (which goes hand in hand with due dates).
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Netflix achieved one million subscribers faster than AOL or HBO (and grow to more than 8 million current subscribers).
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Netflix beat Wal-Mart resulting in Wal-Mart ceasing its online dvd rental operations.
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Netflix created an online experience that has consistently been rewarded with the highest levels of customer satisfaction in the online world.
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Netflix introduced America to movies beyond "new releases"- more than 100,000 titles.
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Netflix allows subscribers to get even more value from its Watch Instantly service; streaming content, in addition to dvds delivered to ones home, for no additional fee.
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Netflix has delivered significant shareholder value (see chart above).
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As a result of all of these, Netflix has created the perception of being the industry leader and innovator while casting Blockbuster as the fast-follower... although looking at for how long Blockbuster called Netfix a "niche" market, "fast" is a generous adjective.
As I have commented on prior, Netflix is not a perfect company. No company is. But it is relentlessly focused and has a stellar track record of insight, strategy, and execution. It has forced the home entertainment industry to rethink its strategy and marketing, enabled consumers to have access and select content that it enjoys versus the mandated "new releases", and created a consumer-centric brand that has enviable affinity.
In response to this, the industry's 800-pound gorilla, Blockbuster, has responded with an all-too-late copy cat of the Netflix business model, thrown a wide variety of "strategies" against the wall (see list above), closed down stores, increased individual dvd rental rates, experienced declines in revenue, profits, and same store comps... and more.
That, Mr. Keyes, is why there is a fascination with Netflix.
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