Yahoo! Finance tells a dramatic story since then.  Blockbuster's total market cap, as of the close of trading on Friday, is $73.25 million.  Netflix, by comparison, is worth $2.24 billion.  Netflix is worth more than 30 times what Blockbuster is worth.  And to think that just two years ago, Blockbuster was worth the same as Netflix, based on Blockbuster's launch of Total Access (see my Round Two post).

It is worth revisiting my posts (linked to the dates cited above).  The lessons of bad profits apply more today than ever. The psychological cost of buyer's remorse is the highest it has ever been, with U.S. unemployment now at 8.1% (and California's unemployment rate at 10.1%).

Unfortunately, our entire global economy has been significantly challenged by bad profits, mostly stemming from financial firms' overly engineered and incredibly complex derivative trading products based on mortage-backed securities to Madoff's actions that will fundamentally change regulation of the entire hedge fund industry.  We will persevere, as we always have, but the costs of bad profits will hopefully be remembered like never before, especially as we live in this age of global connectedness and word of mouth transparency.

First, there has never been more of an emphasis on gas prices in my lifetime, and certainly not in the history of eCommerce (being a relatively new field).  On my flight up to Toronto yesterday, I was reading a NY Times article, "American Energy Policy, Asleep at the Spigot".  I was amazed to learn that oil was just under $10/barrel in early 1999.  It has increased 1450% since then, closing at a high of $145/barrel last Thursday.  Not surprisingly, most Americans are downsizing.  But what is surprising is how quickly.  Ford's SUV sales are down 55% this year, and their sales of the Ford F150 truck, the best selling vehicle in the U.S. for 26 consecutive years, is down 40% this year.  Detroit is reeling from this – this is an unbelievably massive change in consumer demand.  To put it mildly, gas prices are dominating word-of-mouth conversations all over the country.

Second, a huge share of word of mouth is focused on the global problem of climate change.  With gas prices running this high, it is easy to feel both guilty and financially irresponsible.  This gives you a dual opportunity to strike now with this marketing message.

Third, home delivery is more efficient.  Jeff Bezos' clued me in to this in his recent appearance at WSJ's D3 conference.

MR. MOSSBERG: Are you seeing the effect of this economic slowdown? Or do you worry about it?

MR. BEZOS: As you can see from the last-quarter results that we just put out, we haven't seen that. You can never know for sure because I don't know what our growth rates would've been in a stronger economy. There are some things working to our advantage in this kind of economy.

Gasoline is expensive. Driving to the store is expensive. You take a 2,000-pound car to pick up five pounds of stuff. It's the least efficient transportation network in the world. So, there are some positive factors in our business in that regard.

To my co-founder's point about the importance of authentic green marketing, it is time for retailers online to emphasize this.  A very simple Web page devoted to educating consumers on why USPS, UPS, FedEx, and others are more efficient in their use of gasoline and, therefore, have less impact on the environment is all consumers need.  They are almost begging for this message.  Retailers should promote this message in stores, email, and throughout their website.

But here is the rub.  It is hard to do because most retailers online are part of a huge multichannel business.  And I know from experience that the store managers will not embrace this message for fear of losing their sales.  Just like the book Freakonomics educates us on the importance of incentives, incentives in these businesses need to change.  And that takes time.  So, this is probably an immediate word-of-mouth opportunity for online-only retailers, but I would love to be surprised and see multichannel businesses embracing this message and gaining share as a result.  I'm confident that the in-store message could be figured out (e.g., "buy accessories for this digital camera online instead of driving back – here is why it will cost you less and help our environment").

What do you think?

P.S., to learn more about why the time is now, check out my previous posts (post1, post2, and post3) on how Netflix attracted Blockbuster's customers with their simple marketing message, "the end of late fees".  You will find that the battle of these two giants offers many fascinating word-of-mouth insights.

Update 7/8: Peter Cobb, co-founder and SVP at eBags, just sent me the link to a recent email promotion (here) that they sent to customers, emphasizing free shipping and saving on gas.  I also like the fact that this campaign highlights eco-friendly bags.

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.

Round two is getting a little more interesting, as Blockbuster finally starts to leverage their stores to create a potentially more positive word-of-mouth offering. In today's Wall Street Journal, Blockbuster announced that they are letting subscribers of Netflix rent movies for free through Dec. 21 by simply walking into one of their stores and redeeming the tear-off address flap from the signature red Netflix envelope for the free rental. This is a promotion for Blockbuster's new "Total Access" feature, which lets customers return DVDs rented through its online service, which competes directly with Netflix, in their stores. Blockbuster announced Total Access in the November 1 edition of the Wall Street Journal with the following quote from their CEO:

"Customers shouldn't have to choose between renting online versus in-store, and they should never have to be without a movie," said Blockbuster Chairman and Chief Executive John Antioco in a statement.

This is a smart strategy as it enables Blockbuster to leverage something Netflix doesn't have – 8,500 stores located across 29 countries. It will ultimately lead to some positive word-of-mouth for Blockbuster, and a new competitive differentiator against Netflix. I, for one, plan to try this out over the holidays as the only downside to my Netflix subscription is sometimes I don't plan far enough ahead to have the movie I want when I want it.

However, it is hard to imagine that this will lead to a long-term competitive advantage for Blockbuster. The next wave that will hit is movie downloading, which will solve the only real challenge Netflix has (the wait time). And Netflix is planning to lead in that wave. Check out Reed Hastings' recent interview on 60 Minutes. And don't get me started on how great of a job Netflix does in creating high switching costs (or "community stickiness") with all of its great ratings and social networking features. Even though I will try Blockbuster again as a result of this promotion, it is unlikely I will dump Netflix.

What is the lesson learned here? Leverage your multichannel assets, like Blockbuster is finally doing, to earn "good profits", especially in the face of a competitor acting on your source of bad profits. This will help offset the negative word-of-mouth that your bad profits have generated with positive word-of-mouth. Also, reducing your sources of bad profits now will help prevent disruptive upstarts in the future. This is much harder to do than it sounds, and the book The Innovator's Dilemma does the best job of any I have read in explaining why.

Update: I just saw that Reed Hastings won the "Innovator of the Year Award" from the NRF (National Retail Federation), the parent of Shop.org.

Speaking of bad profits, I was especially intrigued this morning to read about my friends at 1-800-FREE-411 (Jingle Networks). TechCrunch reports that 1-800-FREE-411 has already received 100 million 411 calls! It has taken over 3% of the $8 billion 411 market. I know the CEO of this company (he founded Flycast with a fellow Wharton MBA graduate from my class), as well as their early investor Josh Kopelman, who is also an investor in Bazaarvoice and the founder of Half.com. I consider these two some of the smartest people I am fortunate enough to know. This is another stunning example of bad profits creating an incredibly huge and disruptive market opportunity. 1-800-FREE-411 has the easiest marketing slogan I have seen in a long time – everything you need to know is right there in the phone number. To learn more about what created this opportunity, check out Josh Kopelman's great blog post.

There are so many recent examples of bad profits in action. Think of the incredibly disruptive Skype, which yesterday had over 8 million users online. The negative word-of-mouth from exorbitant long distance fees paved the way for Skype's success. And, of course, everyone knows by now that eBay bought them for $2.6 billion.

Where are the bad profits in your industry and how can you capitalize on them?

Do you have any bad profits yourself? One example I can think of in retail is the difficulty of returns when you have a bad experience with a product. Costco capitalizes on that by providing unlimited returns on all items (i.e. buy a TV, save the receipt, and you can literally return it 2 years later if it breaks). Their only exception is for computers – there is a 6-month policy on those. I have been tracking Costco's success for years to see if this incredibly customer-friendly policy would hurt them. Quite to the contrary, Costco has thrived as a result. I encourage you to read my friend Gary Stein's blog for more analysis on Costco.

If you are a Bazaarvoice client, we suggest you measure your word-of-mouth promoters and detractors with our Net Promoter service. We haven't promoted it as well as we should (we'll change that), but it is truly powerful and will illuminate any potential sources of "bad profits" and word-of-mouth detractors.

And now enjoy the free 411 calls!

First, a friend of mine that works at Yahoo! sent me a BusinessWeek article put out yesterday, Web 2.0 Has Corporate America Spinning. If you have read "The Cluetrain Manifesto", this article will lead you to believe that companies are finally hopping on the train. It continues to amaze me how visionary that book really was. If it wasn't for the tech market bubble bursting right after it came out, more people would cite it today.

As usual, BusinessWeek has an insightful and practical view on the subject, instead of the typical hype-laden fluff. Here are a few of my favorite excerpts:

• Companies are starting to take a page from MySpace, Facebook, and other social-networking services. The reason: As appealing as that social aspect is for teens and anyone else who wants to stay in closer touch with friends, it's even more useful in business. After all, businesses in one sense are social networks formed to make or sell something. [Comment: Why reporters don't mention "The Cluetrain Manifesto" when they write sentences like this boggles my mind.]
• But the payoff can be substantial, if hard to quantify. Genial Microsoft (MSFT) blogger Robert Scoble, for instance, is credited by many Redmond watchers with doing more to improve the company's image than millions of dollars in public relations. In no small part that's because he has shown a willingness to criticize his company at times. [Side note: I am speaking with Robert Scoble at the Supernova conferencein San Francisco in two weeks.]
• But the upside can be a brand to which people feel a stronger emotional tie. Says Forrester Research analyst Chris Charron: "In the end, the brand is owned not just by the people who create it, but by the people who use it."
• All that's going to require more than slick technology. Executives, long used to ruling from the top of the corporate hierarchy, will have to learn a new skill: humility. "Companies that are extremely hierarchical have trouble adapting," says Tim O'Reilly, CEO of tech book publisher O'Reilly Media, which runs the annual Web 2.0 Conference "They'll be outperformed by companies that don't work that way." Ultimately, taking full advantage of Web 2.0 may require — get ready — Management 2.0.

Second, Netflix was profiled in BusinessWeek's June 5th issue for their "top 100 hot growth companies" feature story.  This reminded me of my blog post back in February. The subtitle of the BusinessWeek article is "the mail-order movie house that clobbered Blockbuster." If that doesn't sum it up in a few words, I'm not sure what would. Read my blog post to get a different perspective on why this is happening and what it has to do with word of mouth.

Third, I was happy to see Ed Keller's new company, Keller Fay Group, prominently mentioned in the same June 5th issue of BusinessWeek on page 12. Keller Fay is producing some really groundbreaking research.  Sam Decker blogged about some of it earlier this month, highlighting research that 62% of word of mouth is positive. Ed is answering questions that have been perplexing us for some time.

Fourth, congratulations to Ed Keller (and Bazaarvoice) on him joining our Board of Directors (as our first independent member) as well as WOMMA's Board of Directors (in their first elected Board).  Ed has the perfect profile for our Board as well as WOMMA's. He has fantastic operational experience (as the former CEO of Roper) and deep industry experience (27+ years in marketing research, including co-authoring "The Influentials", a truly amazing book that helped launch the recent word-of-mouth movement). I feel flattered that Ed joined our Board and look forward to working with him for years to come.

And fifth, congratulations to Chris Pacitti of Austin Ventures. Throughout my entrepreneurial career, I have had the fortune of working with some truly great venture capitalists. It is an amazing achievement for two of the companies that Chris serves on the board of, Bazaarvoice and Pluck, to be the only Texas-based companies in North America to be selected for Red Herring's Top 100 list.  We are very fortunate to be working with him. With Chris and Ed on our Board, we have a very powerful combination of resources.