Consulting Report

Case: Netflix
January 19, 2016

1. To begin with, at a first glance, Blockbuster and Netflix may be considered two quite identical firms, operating in the movie rental industry. Therefore, it could be inferred that their business models have many similarities, yet, that is not the case. Their core differences are most obvious on their respective levels of value propositions, resources, and the profit formulas that each company has adopted.
Firstly, Netflix’s initial idea behind their business model was to become providers of a better home movie service, which become feasible, in 1997, with the introduction of DVD technology. On the other hand, Blockbusters, a well-established company since 1980s, continued to follow the traditional retailing outlet style.
A basic difference is the resources of their business models. In 1998, a year after its founding, Netflix boldly adopted a very innovative attitude by launching a website while simultaneously operating online. Thus, Netflix targeted the revolution of new age technology adopters (purchasers of DVD players), while Blockbuster’s main target group was wider, focusing on anyone who decided to watch a movie, especially last minute.
The two companies’ profit formulas are different, with Blockbuster’s following the common charging system (a fixed price for every movie rental and additional charges for delayed returns), whereas Netflix, in its early uprise and foundation of its business model, implemented a subscription based pricing model (fixed price for a monthly service). In my opinion, this was a milestone in Netflix’s success because they gained access to a wider array of consumer usage and started building a more personalized experience for subscribers.

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The impulsive nature of the majority of Blockbusters’ customers resulted in 70% percent of movie rentals being new releases. Their initial business model was focusing on maximizing the days that a new movie was out for rent, while their stocking of less famous movies or independent films were fairly limited. With new releases being much more expensive to acquire and being profitable for only a short period of time (a movie could disappear from store aisles within six months from its release date), Blockbuster faced high inventory costs. In comparison,
Netflix proved to be resourceful by generating profits from this fault, which competitors found quite problematic. Wisely using the power that their internet-based service gave them, Netflix altered their business model by developing a recommendation system for users that supported strongly less-known films.
A monumental difference is the fact that Blockbuster always held a narrow movie collection, following the new releases’ trends. Their services came along with poor in-store advice provided by the sales stuff, due to the limited options. By contrast, in 2006, Netflix’s web platform was already established as the largest collection of movies’ rating worldwide, as well as the provider with the widest range of movie selection, available anytime. In this way, they succeeded to stimulate the demand, instead of blindly modifying their services to the current trends, as Blockbuster have been doing for more than two decades.
Netflix’s success is partly reliant on the fact that anyone could join their online platform, subscribed or not, as well as to their subscribers’ queues. Both points provided Netflix with great data. At the same time, this added value and marketability to the company since it could give the same satisfaction to customers as Blockbuster’s service, with proportionally much more inventory.

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Netflix platform’s features and their national inventory based on data allowed them to forecast nearly perfect demand and avoid insufficient movie stocking (right amount and right location). Blockbuster’s business model process, in contrast, was store-oriented with a large number of outlets easily accessible (larger stocking required), but with a much more assumption foundation of demand, which sometimes led to great losses.
Netflix, in order to add value to their services by leveraging the Internet’s potential, created a more personal relationship with its customers, in comparison to Blockbuster’s method of retail, in which retail associates in physical stores had incomparably less data available about each customer's personal taste.
Blockbusters had a competitive advantage regarding new releases with the late fees as a utilization asset, encouraging customers to return rented films on time, so popular titles could be re-rented multiple times maximizing profit. The changes of Netflix’s business model
(resources) occurred due to their inability to rent new releases at a reasonable time. So, they agreed to reduce the upfront price and be charged by the total number of rentals, which increased their costs, but at the same time allowed for greater guarantee of customer satisfaction. Another major difference between the two companies was Netflix’s decision to offer unlimited rentals with their service. With this improvised value proposition, another target audience arose for them: the frequent movie viewers.
In 2004, Blockbuster completely altered their business model, in terms of value proposition and resources, to replicate similar actions that Netflix has been practicing, and

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launched their own online platform. Although they tried to incorporate their new strategic move of going online with their existing store-based business, it was hard to catch up to competitors after refusing to recognize the urgent need to innovate earlier. In addition, since
2005, almost 10% of Blockbuster’s revenue came from late fees, while Netflix had already abolished this extra charge in 2000.
A year later, after Blockbuster’s elimination of the large charge, they altered their business model again, even more drastically this time, by establishing Total Access (exchange
DVDs by mail or store), as their last resort to gain back lost ground. On the other hand, Netflix improvised their business model in 2007, in order to grow their existing business with video on demand, by creating original content such as web series.
2. In order for Netflix to become a grand success in such a competitive market, a uniquely valued angle was a necessity. Although, competitors like Blockbuster, insisted on a more traditional pattern, Netflix’s concept could only become profitable if they managed to address problems that consumers faced by the commonly provided services in the movie rental market. Therefore, originated by personal problematic experiences from already existing movie rental services, the Netflix founder succeeded in finding a way to maximize value for customers who faced the same problems as him, as well as to develop an efficient profit formula for the new company. More specifically, Netflix took advantage of new technologies such as DVD discs and introduced a whole new type of movie rental process; the mail delivery. Basing their initial model on a high innovative field was risky, but at the same time disruptive towards the established competitors. In other words, the reason why Netflix was problematic to

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competitors was because it set the bar for the adoption of new DVD technology and its innovative mailing system.
Later on, in Netflix’s case, they succeeded to understand their existing business model’s strengths and limitations, so their developments were strongly evidence based. To become more specific, Netflix’s online platform adopted a brand new feature that allowed subscribers to have access to video on demand for a fairly low additional cost. The rapid technological growth that allowed video on demand to become cost efficient and simple by online streaming, along with the fast penetration of Internet and personal computers in everyone’s life, boosted
Netflix’s innovative activities. Netflix’s disruption shifted the whole movie industry beyond the boundary of simple renting towards a completely different type of business model. Netflix transformed their online platform from a value-adding tool, which costumers used in order to enjoy their DVD-by-mail services or to use it as a web portal, into a facilitated network business.
As stated in Harvard Module Note, “What are Business Models, and How Are They
Built?” “Negligence or failure in business model innovation is the primary reason why the leading incumbent firms in most industries typically fail when confronted by disruptive attackers.“ Blockbuster’s response was much delayed, which made it impossible for them to recover, because Netflix’s disruptive activity by both DVD-by-mail service and web platform development had already established the company as a strong competitor to defeat. Moreover,
Blockbuster, after failing to forecast industry’s course at first, rushed into adopting Netflix’s successful features later on, without taking into consideration the different background and structure of their existing business models throughout the years. Although they were leaders in traditional retailing stores industry, they altered their business model in order to match

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Netflix’s, ignoring the fact that the resources, processes, and profit models required in order to be successful in their original market, differ than those required to succeed in the new environment. 3. It is obvious that Reed Hastings’s decision regarding the name change highlights the fact that Netflix’s future relies on online streaming. It can be inferred that the loss of DVD-bymail subscribers might actually mean that Netflix is trying to leverage their established brand name and awareness by cannibalizing its current successful business to invest in the near future. In my opinion, the separation was a wise decision because, nowadays, the DVD industry is becoming weaker and weaker, so the long-term benefits of early actions will overpass the current loses. Netflix seems to be preparing, in a way, for the time when the DVD business will shrink or even disappear. Additionally, by separating the two businesses, they might succeed to maintain the DVD operation active longer by letting its managers concentrate on their own needs and develop the right strategy, without the distractions of operating the web business. I believe that in order to maintain its strong position on a competitive map, Reed Hastings wanted to attack his core assets by building new ones.
It is well known that predictions tend to assume that technology changes will cause obsolescence of previous technologies much more quickly than they actually do. Therefore, regarding Netflix’s future decisions, in my opinion Qwickster should be well supported and promoted, so it continues to operate profitably in the DVD business and pull the demand. In this way, it contributes to their most notable of assets, which is the much deeper library rather than the streaming business.

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Equally, for now, the online streaming business should accelerate the content acquisition and focus more on customer retention rather than on growth. Moreover, Netflix should invest heavily on R&D in order to improve streaming technologies to improve satisfaction of the demanding users, when at the same time, make it tougher for competitors to imitate or adopt their model. Of course, they've got to continually improve the user interface and keep innovating.

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