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.

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.