Netflix V/s Blockbuster

Netflix NFLX has fallen 14%, while its arch rival Blockbuster BBI is up 67%. So what changed? Let us first understand what do they do and what are their business models.

What does Blockbuster do ?
Blockbuster is one of the largest movies and video games rental chain in the world. However they lost $1.6 billion in 2002, almost $1.0 billion in 2003, and $1.2 billion in 2004. In 2004, they introduced an online DVD rental service just like Netflix. Currently they have a collection of 65,000 titles and has about 2.2 million subscribers.

What does Netflix do ?
Netflix is the largest online DVD rental service, renting DVD's at a flat monthly rate depending on the plan. They have a collection of 70,000 titles and has about 5 million subscribers. Currently, Netflix spends about $300 million a year on postage to ship 1.4 million DVDs a day.

What changed at Blockbuster ?

* Blockbuster launched its Total Access program in November '06, which enables subscribers to return movies rented online to a local store and in return, pick up a free in-store rental. As soon as the trade is made, the online store knows automatically that you have returned the rental in the store and without waiting to receive it at their distribution center, they send you the next movie in your queue. So you could potentially have 6 movies out at a time while signed up for 3-at-a-time service.

* Additionally, Blockbuster still gives subscribers two coupons for free in-store rental of a movie or video game every month. This has helped Blockbuster add 700,000 new subscribers, which is a 47% increase over their previous subscriptions.

* Additionally, through their media campaigns outlining the benefits of Total Access over Netflix, they have managed to snatch some of Netflix's casual customers over.

* With their success of Total Access program, Blockbuster has also managed to increase the traffic to their stores (which was their basic business to begin with) which adds to higher retail sales of DVD's, magazines, video games and movie munchies.

* Blockbuster has set up a sign-up terminal at the stores allowing them to add subscribers who would not otherwise do this at home or over dial-up.

* Blockbuster also allows their 2 coupons a month to be used for video games. Now this is an additional bonus for those gamers who wouldnt want to spend 50$ over a game.

So what is next for Blockbuster?

* They are predicting 4 million subscriber by the year end.

* One should not forget that Blockbuster owns stores (property), which will grow over the years if they decide to sell them off bring in loads of $$$

What changed at Netflix ?

* Nothing much, they seem to be running out of steam.

* Their subscriber growth seems to have slowed down considerably, and it will slow even further with Blockbuster's onslaught.

* Recently, Blockbuster has started to offer incentives for Netflix subscribers to switch over.Netflix intends to offer movie download service via set-top boxes. Now this is encouraging but it faces stiff competition from XBox 360 and soon to be release Apple TV.

Conflicts between Netflix and Blockbuster

* In April 2006, Netflix filed a lawsuit alleging that Blockbuster's online DVD rental program violates the patents held by Netflix. Blockbuster issued a statment saying that the claims are without merit and that they intend to fight them.

* Also in fall 2006, Blockbuster signed a deal with The Weinstein Company, that gives them exclusive rental rights for the studio's films, beginning on January 1, 2007. This means that Netflix will not be allowed to make future Weinstein Company DVDs available for rental, although they can sell them.

Conclusion: I think the DVD rental subscribers base will grow for both companies, but i see quicker growth for Blockbuster. I personally am a Netflix subscriber for the last 2 years and i have had no major problems with them. I hate their customer support sometimes since they dont provide any phone numbers (you are on the mercy of their email service support). Every once a while i get broken DVDs which needs to be shipped back for a replacement. On the other hand, with Blockbuster you could pick DVDs instore and avoid such hassles. Also it gives the customer the freedom to get the desired movie at any time rather than wait for the mail to arrive.

Recommendation: I think that by the end of this year, the Blockbuster stock will outperform Netflix.