Blockbuster Inc a Strategy and Competitive Analysis free essay sample

Blockbuster Video is facing many challenges in trying to remain competitive in the video rental industry. Besides strong competition from Hollywood Video and Netflix, consumers are migrating to new choices, including video-on-demand and DIVX (Digital Video Express), an alternative rental option that allows consumers to eventually own the movie. This report will describe Blockbuster’s strategy and will compare Blockbuster to its main competitors, Hollywood Video and Netflix (see exhibit 2). The research and analysis will attempt to answer the question of whether Blockbuster can survive in the fast changing video rental industry. A competitive comparison will be done between Blockbuster Video, Hollywood Video and Netflix, with regards to the state of the rental industry, strategy to remain competitive, economic factors, innovation and development strategies, the supply chain strategy and the sales, service and promotion strategy. Blockbuster History The first Blockbuster Video store opened on October 19, 1985 in Dallas, Texas. David P. Cook, the founder, with the help of CEO, Wayne Huizenga, grew the business from a $7 million business with 19 stores to a $4 billion global enterprise with more than 3,700 stores in 11 countries. In 1994, Blockbuster sold to Viacom for $8. 4 billion in stock. Following the deal, Huizenga left the company. Over the next few years, Blockbuster experienced poor business decisions and executive departures, starting with Steven Berrard (CEO after Viacoms 1994 takeover), who resigned in 1996 to head Huizengas used-car operations. Wal-Mart’s Bill Fields replaced him and started promoting the retailer as a neighborhood entertainment center, selling videotapes (in addition to renting them), books, CDs, gift items, and music. In 1997, Fields resigned and current chairman and CEO John Antioco replaced him. By the time Antioco took over, Blockbuster was widely described as a mess. Cash flow was down, and major marketing initiatives such as selling magazines and candy in the stores had flopped. Its performance was dragging down Viacoms stock. Antioco immediately started unraveling many of Fields efforts, especially his focus on non-rental operations. Then in 1997, with the help of Blockbusters large market share he forced the movie studios into a revenue-sharing agreement that replaced the standard practice of buying rental copies for as much as $120 each. It not only saved money, but it allowed Blockbuster to stock more copies for less. By 1999 Viacom spun off a minority stake in Blockbuster and the company split into three new operating units that oversee its retail outlets, e-commerce operations, and database and brand marketing. Viacom later sold off the rest of Blockbuster in 2004. In 2001 Blockbuster announced that it would decrease its VHS and video game inventory by 25% to make room for more DVDs. In 2004, Blockbuster eliminated late fees on all of its in-store rentals at locations in the US and Canada. This was in response to competitor Netflix policy of not charging late fees for returned DVD’s. Later in 2004, Blockbuster launched a $700 million takeover bid for Hollywood Video, a move that the FTC was very concerned about and attempted to block. Hollywood Video refused to consider the offer and eventually agreed to a purchase by its smaller competitor, Movie Gallery, in 2005, creating a strong #2 in the industry. Blockbuster has lost significant amounts of money in recent years: $1. 6 billion in 2002, almost $1. 0 billion in 2003, and $1. 2 billion in 2004. The past few years, Blockbuster has been busy reinventing itself for a future in which video rentals may be on the way out. Competition and the State of the Rental Industry Technological and market evolution is finally catching up with the brick and mortar movie rental business. With all the new sources of competition available, Internet subscription services (Netflix), cheap DVDs at Wal-Mart, online movie download services, cable and satellite movie channels plus video-on-demand, Telco entry into the video business, it’s no wonder that Blockbuster and Hollywood Video are struggling. In 2005, Joe Flint and Kate Kelly reported in the Wall Street Journal that â€Å"Blockbuster Inc. is facing new pressures as signs increase that a sharp decline in the video-rental market is putting a strain on the company’s finances. † The company’s stock prices fell by 9. 7% in late 2005, hitting a low of $4. 60 per share. Then Hollywood Video (Movie Gallery Inc. ) reported that sales at many of its stores dropped 10% the same quarter in 2005. Meanwhile, Netflix was gaining momentum and a customer base of almost six million subscribers (see exhibit 2). Antioco admitted to the Wall Street Journal that the â€Å"rental industry is in the tank† and the firm’s SEC filing in 2005 said that it anticipates a â€Å"faster than expected decline† in the store-based video rental market. According to Adam Thierer , â€Å"This is what makes the FTC’s efforts to stop the Blockbuster-Hollywood Video merger so troubling. Clearly, this is a sector in the midst of rapid decline; perhaps even the beginning of a death spiral. This has been forecast by some industry analysts and techno-pundits for years, but now it is really happening thanks to all the new competition and innovation in the media sector. Without this merger, both these firms are likely dead. Of course, they might have been dead even if they had been allowed to merge. But now we’ll never know. † The Strategy to Remain Competitive As the SWOT analysis shows (see Exhibit 1), Blockbuster faces competitive battles on a number of fronts. It appears as though Blockbuster understands the need to expand into other fast-growing services and technologies. Antioco is determined to â€Å"deliver entertainment to consumers homes almost every way but down the chimney†. He has called his plan the ultimate bricks, clicks and flicks strategy. He cut deals with major studios to share revenue from rentals, which lowered the companys acquisition costs for tapes and ensured it would have more copies available for rental. And he spent heavily on getting the message out to customers that Blockbuster had cleaned up its act. Of the approximately 88 million U. S. households, about 45 million are an active Blockbuster account, which means its rental business still has room for growth. And Antioco said the retail stores and its strong brand, as well as the data that it has gathered about consumer preferences in movies and other entertainment, are assets Blockbuster can leverage as it moves into new areas. Antioco has put the company into the satellite business with DirecTV Inc. Customers can buy satellite TV systems in Blockbuster stores, and the company offers Blockbuster movies on a pay-per-view basis. In 2003 Blockbuster acquired Movie Trading Co. , a used DVD trading retailer with 18 stores, in order to study the used DVD business. In 2004, Blockbuster acquired American Satellite and Video, operator of 40 southeastern Rhino Video Games stores that buy, sell, and trade video games. This was a late effort to combat rival Hollywood Video’s venture into the gaming industry, which started in 1999 with the creation of its successful â€Å"Game Crazy† brand. Blockbuster is also on the Internet. Theres the company Web site, Blockbuster. com, where new movies on video and company promotions are listed. Blockbuster also has an alliance with America Online Inc. Blockbuster promotes AOL products and services in Blockbuster stores. `The new management team has done a great job of taking their current assets and ensuring that they have a role no matter what technology develops in the future, said David Reidel, president of equity research for Salomon Smith Barney. If satellite develops more rapidly than broadband, they have access to that. As the Internet becomes more important, they have exposure through AOL. But they also have a very strong base of retail. Blockbuster entered into Internet subscription service with â€Å"Total Access† to compete with the success Netflix was having. Antioco had initially been skeptical of consumer demand for the mail-order concept, but after Netflix signed up millions of customers, Antioco changed course. Carl Icahn, Blockbusters top shareholder, criticized Antiocos slowness to act. While Blockbusters service, which allows customers to return mail-delivered movies to their local store, has proved popular, it still has fewer than half the number of customers Netflix has . What is surprising is that Hollywood Video didn’t jump into this fast-growing market as well. And that might be because Internet subscription services have their drawbacks. The customer is never assured of getting the exact movie they are interested in. They are sent a movie from a list that they set up online. New movies that are usually attainable at the local video store require the Internet customer to be very patient. But it seems that Blockbuster has a clear advantage over Hollywood Video by entering the Internet subscription market first for rental stores (but after Netflix) and providing the advantage of in-store drop- off. This added convenience to the customer can be looked at as a first to market strategy. Hollywood Video introduced a program called the Movie Value Pass which allows customers to rent unlimited amounts of movies. The pass allows customers to have up to three movies checked out for free at any one time. The major restrictions on the pass are that customers must wait an average of four to eight weeks for new releases to be added to the list of MVP available titles. Customers are also still limited to five day rentals and will pay late fees on their free rentals if they are not returned on time. MVP Premium was started in November 2005 and allows customers to rent any movie in the store for a maximum of fifty days. The difference between the two MVPs is that Premium costs either $24. 99/month or $29. 99/month in order to have either two or three free movies out at a time, respectively. Antioco said he doesnt believe the basic rental business will completely go away. It will continue to grow, but it will be slow growth driven over the next couple of years by DVD. Even if it were to shrink, with sales of $10 billion a year, its a long way from extinction. And he added â€Å"Opening new channels for delivering entertainment just increases the public appetite, home video didnt kill the movies, and pay-per-view hasnt killed rentals. The market for movies viewed at home through rentals and other methods has grown to $20 billion-plus over the past 20 years, and we believe it can grow to $30 billion over the next five years. â€Å" Economic Factors The early 2000’s were a boon for the video rental industry. â€Å"By 2001, VCR’s had become an entertainment staple, with over 96% of U. S. TV households equipped with at least one VCR†, according to Peter Coughlan (Exhibit 3). An unbelievable 74% of these households rented videos each year and 63% purchased videos in any given year. Clearly, Blockbuster was a winner with these statistics and one can understand how their revenue climbed to over $5 billion in 2001. That was then and the situation now is a sharp decline in video rentals throughout the industry. Innovation Development Strategies Blockbuster is striving to innovate to remain competitive. They are trying to get ahead of the curve with video downloads. The proposed system will enable consumers to pick a film and download it onto a memory stick or card, meaning it can then be viewed on a portable mobile device or laptop. Blockbuster is also looking at online downloads and video-on-demand services. Competition is causing a lot of innovation in the DVD rental industry. Netflix has launched a new feature called Watch Now that will enable subscribers, at no additional cost, to watch movies immediately on Netflix. com. The new service does not limit the number of movies a customer can watch, instead it gives users 1 hour of video for every $1 they spend monthly (18 hours of online video is free with the $17. 99 plan). Customers can watch 5 minutes of a movie, decide that they dont like it, and switch to another without penalty (many online movie rental options require atching a movie within a certain time period, such as 24 hours or 14 days, or the movie will have to be re-rented at additional cost). Blockbuster has a history of innovation but not all its ventures have worked out. Former Wal-Mart executive Bill Fields took over the chain in the mid-1990s and was gone soon after when his idea to sell more general merchandise in stores flopped. The chains Blockbuster Music venture du ring that same period suffered an early demise, as did its short-lived video-on-demand venture in 2000 with Enron (yes, that Enron! ). Supply Chain Strategy In the early days of video, the release process was fairly straightforward. A movie would play in theaters for six months or more. Eventually, after a stint on cable or airplanes, it would show up on videotape in stores and rental outlets. The initial purchase price would be too high for most consumers to afford, so the tape would be geared largely toward the rental market. When the demand for rentals subsided, the distributor would drop the price and offer the movie for sale. That gave rental stores like Blockbuster a window of near-exclusive access to customers. With the advent of movies on DVD, everything changed. Today, rental and retail DVDs are released simultaneously, so Blockbuster and Hollywood Video must compete with a growing ownership market. And the retail side has a simpler supply chain. DVDs for sale go through a standard pick, pack and ship process before reaching store shelves. Rentals, however, involve several additional steps, including the printing of a store-specific insert, placement of the insert into the outer sleeve of a separately produced, lockable case, and transfer of the DVD from its original packaging into the new case. The whole process must be tightly scheduled, to make sure that each of Blockbuster’s U. S. stores gets product in time to meet release dates. Demand volatility gives Blockbuster additional challenges. Depending on the number and popularity of new DVD titles in a given month, the company’s labor needs at its distribution center can vary sharply. Up to now, it has solved that problem with temporary workers, who are expensive to train on short notice. Blockbuster is responding to these problems with a new approach to DVD packaging. Beginning in 2006, the company got rid of its familiar blue-and-white rental boxes and replaced them with lockable cases that look just like rental units, complete with factory artwork. A plastic backer card remains on the shelf when all units of a particular DVD are rented. Extra work is still required to place the disks into these new cases, but Blockbuster has turned to technology to cut costs. Five high-speed machines, located at the company’s sole distribution center near Dallas, automate the process of opening an empty case, inserting the disk, printing and applying store-specific labels to the cover, inserting additional coupons or disks, and placing each order into totes on conveyors. As a result, work at the distribution channel can be completed in less than half the time, with 75 percent less labor. That adds up to savings in excess of several million dollars a year for Blockbuster. The project’s success relies upon cooperation with suppliers. Blockbuster convinced its distributors to ship DVDs without cases, on spindles in stacks of 100. That eliminated the need to remove them from retail packaging. Artwork, which must be cured for two days to prevent warping, is shipped separately as well. Tight collaboration with vendors was also required to determine the right kind of plastic mold for the cases, and sticker for the cover. To keep distribution costs down, Blockbuster divided the U. S. and its surrounding territories into 50 regions, or pool points. The distribution center keeps a close watch on pickup schedules, so that it can expedite shipments if a movie is in danger of missing an in-store date. All of these measures have helped the company to stay competitive in an industry that is constantly changing, with an ever-growing number of options for consumers. Sales, Service and Promotion Strategy Rentals are still the key revenue source for Blockbuster, but theyre no longer the only category Blockbuster has to rely on. During the past few years, the chain has been working to reinvent itself as a true retailer instead of a rentailer. That process began in early 2002 when the chain began selling video game consoles and video games in stores for the first time. Later that year, Blockbuster introduced new signs to promote DVD sales, marking its first concerted effort to sell new video releases in stores. The results of that strategy showed in the first quarter of 2004, when Blockbuster posted $119 million in DVD sales, a 74% increase from $69 million the same period the previous year. During a recent conference call with analysts, John Antioco made a point of highlighting those numbers. We sold 5. 2 million DVDs in the first quarter alone and were clearly on our way to becoming a destination for DVD buyers, said Antioco. Video game sales also skyrocketed during the first quarter of 2002 with $62. 5 million in sales compared to just $9. 7 million the first quarter of 2002. Overall, merchandise sales accounted for 19. 7% of the chains total revenue for the quarter compared to just 14. 6% in the same period last year. Antioco said the results were the start of Blockbusters long-range goal to become both a retail and rental destination. The rapid adoption of DVD altered the buying habits of consumers and the industry in general. Analyst Tom Adams said Blockbusters strategy is a sound one given the state of the industry. The rental market has been relatively flat the past 10 or 12 years, so during that time Blockbuster has been growing by adding more stores and gaining market share, said Adams, president of Adams Media Research in Carmel, Calif. But now theres only a limited amount of space left and they have to look for growth elsewhere. Adams said using merchandise sales to spur growth is a great idea that takes Blockbuster back to the halcyon days of video. Back in the early 1980s, most video stores were consumer electronics stores that got into renting videos on the side, so they were the place to go to check out new technology, said Adams. Thats where video started so I think its a great way to go. Blockbuster has floated several new ideas designed to increase its market share. In June 2003, the chain introduced its Freedom Pass program that allows unlimited video game rentals with no late fees for $19. 99 per month. The chain also opened new video game stores-within-in-stores in the United Kingdom and is testing the same concept in some U. S. outlets. Besides Hollywood Video’s Movie Value Pass program, mentioned earlier, they began accepting Trade-Ins to be sold as Previously Viewed in June of 2005. To trade in a movie, a valid membership is required. In addition, only titles and editions carried by Hollywood Video are acceptable for trade-in, therefore most Full-Screen DVDs were not accepted. In June of 2006, Hollywood Video started carrying both full and widescreen copies of major titles to offer customers a choice, so now most DVDs can be traded in regardless of format. In August of 2006 Hollywood Video began a new program called Play Guard which is essentially an insurance policy for your rentals. For a fee of twenty five cents per individual rental (DVD, VHS, Game) guests can purchase Play Guard to protect them from paying charges for a broken or cracked item. In the past if a guest rented an item and they broke it, the guest was responsible for paying for the item at its previously viewed price. Now if they purchase Play Guard any item that is broken while in their possession may be returned without any obligation to pay for it. For its inaugural month all proceeds went directly to the Starlight Starbright Foundation, since then and from now on 10% of the proceeds will go to the foundation. Conclusion Since I began working on this report, Blockbuster CEO John Antioco has announced that he is leaving the company. Apparently he was at odds with the top shareholder of Blockbuster for some time. Appendix Exhibit 1