Netflix vs. Blockbuster: Round Three

(@bazaarbrett) — 

According to TechCrunch, Blockbuster has been very successful with their "Total Access" offering, which I wrote about in my round two post on Netflix vs. Blockbuster.  Apparently they attacked Netflix where it hurts (the immediacy of movie delivery), and it has resulted in Blockbuster growing their online membership by 700,000 over the last two and a half months to a total of 2.2 million.  Netflix has 6 million subscribers, by comparison.  For the first time since I started writing about this in February of last year, Blockbuster is worth close to the same amount as Netflix ($1.25 billion versus $1.56 billion, respectively).  Blockbuster's stock rose from a low of around $3.8/share in late October to today's $6.57/share.  I'm not sure if Blockbuster reads this blog or not, but they did something right!  They have added $527 million of market value in the last four months while Netflix has basically plateaued in value over the same time period. 

  

I also wrote about how Netflix would eventually launch digital streaming of movies, which would change the game yet again.  That would take away the only serious deficiency Netflix has versus Blockbuster – again, the immediacy of movie delivery.  What I didn't imagine is that it would happen so quickly.  The Associated Press had a great story on Netflix's new "Watch Now" feature yesterday.  One thousand movies and TV shows are available to 250,000 subscribers (for free) and they will be rolling this out to an additional 250,000 each week through June.  And Netflix is spending big money on this – $40 million to cover the licensing and overhead costs, which will cost them greatly at their current operating profit of $17 million per quarter (compared to Blockbuster's $1.9 million).  There is a lot of speculation by individual investors about the two giants battling it out, and a great deal of trading volume. 

I have to wonder if Netflix made this move not just because of Blockbuster but based on Apple's recent announcement of the Apple TV.  Apple has been a huge catalyst for digital music downloads due to the viral success of the iPod.  If Apple TV is executed well, it will become a similar catalyst for digital movie downloads, and Netflix will be well positioned versus Blockbuster.  Netflix's recent move is a difficult one for Blockbuster for copy, but Apple's iTunes may be the real competitor.

There are many word-of-mouth lessons to be learned in watching these two battle it out:

  • Netflix capitalized on the negative word-of-mouth that Blockbuster had generated due to its "bad profits" – the late fees that we all grew to hate; Netflix's campaign launch was "the end of late fees" (all they really needed to say due to the bad profits doing most of the talking for them); Netflix pioneers many "sticky" social networking and community features along the way, including ratings and reviews and great collaborative filtering.
  • It takes Blockbuster no less than four and a half years (during which Netflix's value grows eight-fold) to battle back due to the inertia caused by them being a franchise and not wanting to kill their most lucrative profit source (late fees); Blockbuster's campaign slogan for "Total Access" is "never be without a movie".
  • It takes Netflix only four months to launch "Watch Now" and aggressively start rolling it out to (presumably) its best customers first to stop them from leaving to go to Blockbuster (or, alternatively, movie download sites like Amazon.com's Unbox, CinemaNow, Movielink, or iTunes once Apple TV is launched).

I look forward to seeing how the rest of this movie plays out.

And speaking of online video streaming, we are proud to launch online video upload for customer reviews.  Many of our clients will be launching video-enabled reviews over the coming months.

Update 1/25:
Netflix reports a very solid quarter with a record-low churn rate and 654,000 new subscribers (for a total of 6.32 million).  However, Blockbuster is projecting that it will be at 4 million subscribers by the end of 2007 (Netflix is projecting between 8-8.4 million by the end of 2007).  The battle rages on.

  • http://www.bazaarvoice.com Brett Hurt | Founder and CEO

    Andrew,

    I wanted to try out their Total Access service over the holiday break, using Blockbuster's promotion where you could bring in the Netflix tear-off envelope cover to rent a free movie. Unfortunately, I went to two Blockbuster's according to our car's GPS only to find that they were both out of business (and our car is a 2007 model). The only Blockbuster near us that is still open is over 10 miles away! So, it didn't work for me. Seems like a pretty big "last-mile" problem for them to work out, and Total Access has to be eroding their margins even more.

    You hit the nail on the head, though. It is going to take one incredibly easy device to bridge the gap between the PC and the living room. No one has cracked the code yet, but I bet Apple TV or someone will figure this out this year. Remember how few people listened to digital music on a MP3 player before the iPod came along?

    We live in a very interesting time of accelerating change, no doubt. And it is creating a wealth of choice for us as consumers.

    Best,
    Brett

  • http://www.bazaarvoice.com Brett Hurt | Founder and CEO

    Andrew,

    I wanted to try out their Total Access service over the holiday break, using Blockbuster's promotion where you could bring in the Netflix tear-off envelope cover to rent a free movie. Unfortunately, I went to two Blockbuster's according to our car's GPS only to find that they were both out of business (and our car is a 2007 model). The only Blockbuster near us that is still open is over 10 miles away! So, it didn't work for me. Seems like a pretty big "last-mile" problem for them to work out, and Total Access has to be eroding their margins even more.

    You hit the nail on the head, though. It is going to take one incredibly easy device to bridge the gap between the PC and the living room. No one has cracked the code yet, but I bet Apple TV or someone will figure this out this year. Remember how few people listened to digital music on a MP3 player before the iPod came along?

    We live in a very interesting time of accelerating change, no doubt. And it is creating a wealth of choice for us as consumers.

    Best,
    Brett

  • http://www.bazaarvoice.com Brett Hurt | Founder and CEO

    Andrew,

    I wanted to try out their Total Access service over the holiday break, using Blockbuster's promotion where you could bring in the Netflix tear-off envelope cover to rent a free movie. Unfortunately, I went to two Blockbuster's according to our car's GPS only to find that they were both out of business (and our car is a 2007 model). The only Blockbuster near us that is still open is over 10 miles away! So, it didn't work for me. Seems like a pretty big "last-mile" problem for them to work out, and Total Access has to be eroding their margins even more.

    You hit the nail on the head, though. It is going to take one incredibly easy device to bridge the gap between the PC and the living room. No one has cracked the code yet, but I bet Apple TV or someone will figure this out this year. Remember how few people listened to digital music on a MP3 player before the iPod came along?

    We live in a very interesting time of accelerating change, no doubt. And it is creating a wealth of choice for us as consumers.

    Best,
    Brett

  • Andrew Knight

    Brett,

    I have been watching this fight closely as well. I converted over to Netflix 2 years ago and really like the service. However, last month I took total access for a spin and from my perspective it smokes Netflix. I have a Blockbuster on my way to work and the ability to run in on a Friday night and grab another movie is awesome! Not everyone has a Blockbuster close by but if you do, this service can't be beat! The mailing turnaround times were also just as fast as Netflix. I think the video download is interesting but I am not sure Netflix is going to win with this as consumers have struggled with bridging the gap between the PC and the living room. Apple TV could change this but for the average consumer sticking a DVD in and hitting play is where the comfort zone is. For Blockbuster, the financial implications of total access are going to be very interesting. Total access might very well erode the more profitable walk in business. No question this is going to be one of the best corporate battles in 2007!

    Andrew

  • Andrew Knight

    Brett,

    I have been watching this fight closely as well. I converted over to Netflix 2 years ago and really like the service. However, last month I took total access for a spin and from my perspective it smokes Netflix. I have a Blockbuster on my way to work and the ability to run in on a Friday night and grab another movie is awesome! Not everyone has a Blockbuster close by but if you do, this service can't be beat! The mailing turnaround times were also just as fast as Netflix. I think the video download is interesting but I am not sure Netflix is going to win with this as consumers have struggled with bridging the gap between the PC and the living room. Apple TV could change this but for the average consumer sticking a DVD in and hitting play is where the comfort zone is. For Blockbuster, the financial implications of total access are going to be very interesting. Total access might very well erode the more profitable walk in business. No question this is going to be one of the best corporate battles in 2007!

    Andrew

  • Andrew Knight

    Brett,

    I have been watching this fight closely as well. I converted over to Netflix 2 years ago and really like the service. However, last month I took total access for a spin and from my perspective it smokes Netflix. I have a Blockbuster on my way to work and the ability to run in on a Friday night and grab another movie is awesome! Not everyone has a Blockbuster close by but if you do, this service can't be beat! The mailing turnaround times were also just as fast as Netflix. I think the video download is interesting but I am not sure Netflix is going to win with this as consumers have struggled with bridging the gap between the PC and the living room. Apple TV could change this but for the average consumer sticking a DVD in and hitting play is where the comfort zone is. For Blockbuster, the financial implications of total access are going to be very interesting. Total access might very well erode the more profitable walk in business. No question this is going to be one of the best corporate battles in 2007!

    Andrew