i
Draft Table of Contents
ii
LIST OF FIGURES
Figure 1: Blockbuster Inc. Timeline
iii
1.0 INTRODUCTION
Blockbuster, Inc.’s (Blockbuster) origins date back to 1985, when David Cook sought
to fill a niche market for customers wanting to rent a variety of VHS titles. The enterprise was
highly successful, and over the next two decades Blockbuster transformed itself into a world-
class operation with thousands of locations and billions of dollars in revenues. Throughout this
paper, the story of Blockbuster will be chronicled — from its early financial performance, to
how the company performed as a unit of Viacom, to how it has performed since going public
again in 1999. A timeline showing this sequence of events can be seen in Table 1.
1
store chain, opened the 3,000th Blockbuster location in New York City and also added Super
Club Entertainment Corp., a top music and video retailer. In 1993, he bought additional rival
chains and opened stores around the globe at the rate of one every 24 hours.
In late 1993, Blockbuster became an acquisition target for Viacom. The $4.7 billion
deal ran into difficulties when talks stalled as Viacom was positioning itself to purchase
Paramount Communications. While the merger eventually took place, stocks in both
companies dropped as investors lost confidence. This in part led to Huizenga turning over
control of Blockbuster to pursue other opportunities.
After Huizenga’s departure, Blockbuster suffered a great deal under the leadership of
Steven Berrard and later Bill Fields. Although the business suffered, one positive initiative
during this time was the launch of a corporate website in 1995. In addition, an arrangement
with Sony Electronics, Inc. to create in-store promotions introducing the DVD was made in
1996. Even with these positive initiatives, the turmoil left Blockbuster worth $4.6 billion, which
was half of its 1993 market cap.
In 1997, John Antioco became chairperson and CEO. Blockbuster’s headquarters
moved back to Dallas. From there, Blockbuster then headed in a positive direction.
Antioco forced the movie studios into an agreement that changed the way movie rentals
were transacted —revenue sharing reduced costs and enabled Blockbuster to offer more
copies for less money.
In 1998, horizontal integration occurred with the creation of Blockbuster Music.
Under Antioco’s reign, additional acquisitions of competitors such as Video Flicks stores in
Australia were made and incentive programs such as Blockbuster Favorites were initiated.
In August of 1999, Viacom made a decision to take Blockbuster public again with
an IPO of 18% of its stock. This time Blockbuster would be trading under the BBI symbol,
whereas BV had been used prior to 1994. The offering raised only $465 million.
Nonetheless, things were looking up in 1999. Blockbuster served its first official
sponsorship for the Sundance Film Festival, was named number one franchiser in the
2
Video/Video Games Stores category by Entrepreneur’s magazine, and ranked number 13 in
Brandweek’s magazine of the top 2,000 brands in America.
Keeping up with technology and arrangements made with Sony, Blockbuster added
the higher margin DVDs to stores worldwide by the end of 1999. Two years later, DVDs
had replaced 25% of the VHS and video game inventories. Despite higher revenues,
Blockbuster continued to post losses during this time. Alas, one of the biggest hits to the
bottom line occurred in 2002, when a change in accounting rules forced Blockbuster to
write-off excess goodwill for the first time. Even with these setbacks, Blockbuster
continued to buy out competitors. In 2003 — Movie Trading Company, a used DVD
retailer was purchased to study the used DVD business.
Overall, 2003 was an interesting year. While revenues were up 6.2% from 2002
($5.91 billion), the company posted a net loss of $845.2 million. The loss stemmed from an
accounting charge of $1.3 billion due to the write-off of goodwill per FAS standards.
These standards eliminated the practice of amortizing goodwill and instead compare book
value against fair value, with a mark down resulting when fair value is lower. Excluding
this charge, Blockbuster actually posted an increase in net income of 41.4% from 2002 to
$267.8 million.
Other highlights of 2003 include: an addition of 224 company operated stores, a
200 basis point increase in total gross margins leading to $3.52 billion in gross profits, an
increase in the rental portion of gross profits of 390 basis points to $3.17 billion, driven by
the higher margins on DVD rentals, and an overall decrease in interest expense, partially
driven by lower rates. These positives were offset by a worldwide downturn in same store
revenues of 2.2% and an increase in other operating expenses.
For the first quarter of 2004, total revenues decreased 1% from the same quarter in
2003 to $1.5 billion, with net income of $75.5 million after excluding the recognition of a
one-time tax benefit of $37.1 million. Worldwide same store revenues were down 7%, and
total rental revenues were down 3.7% to $1.1 billion. However, rental gross margins were
up 390 basis points and total margins were up 300 basis points bringing in $76.1 million in
3
retail gross profits. Interestingly, total margins were lower than rental margins as retails
sales increased as a percentage of total revenue.
Ever since going public with Blockbuster in 1999, Viacom has been seeking to
divest itself of the remaining 81% stake it holds. It recently announced plans for a stock
swap at a to be determined ratio that will complete the spin-off by late 2004. Although
Blockbuster has been contributing to Viacom’s cash flow, concerns over Blockbuster’s
growth prospects prompted Viacom to sell its remaining stake.
From humble beginnings in 1985 to over 8,900 stores today, Blockbuster continues
to grow. In nineteen years the company has grown into a $900 million company, however
new technologies and clever competitors will keep the blockbuster of video games, movies,
and other entertainment media on their toes.
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2.0 BOUNDARIES OF THE FIRM
In this section we look at the changes that have occurred in Blockbuster through
vertical integration and diversification. Further, we will examine the possible explanation
for the level of vertical integration and diversification management has elected and the
economic cause and effect of such decisions. In essence, we will look at how
Blockbuster’s management decided to confront such issues as: what should the firm do,
how large should it be, and what business should it be in?
5
enough copies of popular titles. Antioco referred to this as the “Customer Dissatisfaction
Model”. His belief was that customers should not come to rent a video and expect not to
find it in stock. In Antioco’s words, “The dynamic of going to a video store expecting not
to get what I wanted was finally enough for me to stop making the trip…What other
business treats you like that?” Because of this, customers would frequently substitute less
popular titles, or even worse, leave the store without renting anything at all. According to
a Time Warner survey, 20% of customers were unable to rent their preferred video on a
typical trip to the video store.
The studios were initially hesitant, but Antioco successfully integrated upstream by
forming a strategic alliance with the movie studios. Through contracting, videos are now
purchased at a much lower rate and the total revenue is shared. According to one source,
Blockbuster keeps 45% of the revenue, the movie studio gets 45%, and the remaining 10%
goes to Rentrak, Blockbuster'
s distributor.
An enormous gamble that quickly paid off for both Blockbuster and the studios,
this action restored Blockbuster’s profits (in both level and growth rate) and increased
market share. Revenue sharing has allowed Blockbuster to increase its inventories of
recent releases seven fold. This allowed Blockbuster to launch a successful "Go Home
Happy" marketing campaign, in which customers are guaranteed that a select list of videos
will be in stock.
In this example, Antioco’s move shows how strategic alliances bound by a clear
expectations of tasks in the form of contracts, play a useful role in vertical integration, and
how revenue sharing, combined with a low input price, aligns the incentives along the
vertical chain.
6
Blockbuster negotiating a revolutionary revenue sharing agreement with the studios in
1997. This is a classic example of how Blockbuster was able to “hold up” the movie
studios and negotiate more favorable terms on tape purchases.
Hold up prior to 1997 was relatively easy because as Blockbuster purchased video
rental chains, they also rid themselves of potential competitors, essentially creating a video
rental monopoly. Movie studios relied on Blockbuster to reach consumers and if the
studios did not agree with negotiated prices, Blockbuster had the leverage to get what they
demanded. “Viacom can wheel out Blockbuster to keep vendors in line,” said author of
Information Week, Ida Picker shortly after the acquisition. And, “We never would have
been able to do that without Blockbuster,” said Frank Biondi, former Viacom CEO.
From the movie studios perspective, the biggest investments in producing a video
tape rest in creating a tape master, setting up the duplication process, designing cover
artwork, distribution and advertising. After taking into account the large fixed cost
investment, the variable cost associated with one additional unit is minimal. Leading up to
1997, the studios had ramped production capability to fill the large number of tapes needed
for Blockbuster’s inventory. This essentially put Blockbuster in the position of being able
to coerce the studios into the revenue sharing agreement, as the studio’s ability to produce
a large number of tapes was in effect a relationship specific asset dependent upon
Blockbuster’s purchase of the tapes for rental inventory.
With a huge investment in the fixed cost associated with tape production, the
studios could not risk losing Blockbuster’s business. As long as the studios were able to
cover the variable cost of a tape, they would still be better off selling to Blockbuster for a
lower price as they could offset the fixed costs investment. Knowing this, Blockbuster was
able to negotiate a lower price for tapes, and in return share a percentage of the rental
income with Hollywood. This additionally shifted some of the risk that a title would not
rent well to the studios.
7
A potential side effect of this strategy was distrust and a compromised relationship
between the movie industry and Blockbuster. Based on the success of the agreement, the
relationship between Blockbuster and the movie industry appears to have remained intact.
2.2 Diversification
Firms can diversify, or produce goods and services, for numerous markets and in
many ways. Internal growth, strategic alliances, joint ventures, and mergers or acquisitions
are the most common modes. The primary pathways for diversification at Blockbuster
identified are internal growth and acquisition.
Although Viacom is not the primary subject of discussion, it is relevant to briefly
discuss the thought process that led to their acquisition of Blockbuster in 1994. The
internal growth strategies will be discussed in somewhat greater detail.
Aquisition
Although Blockbuster has acquired many competitors in its quest to gain market
share, Viacom’s acquisition of Blockbuster represents diversification in that Viacom
purchased Blockbuster in an attempt at synergy between movie making, video sales and
cable television operations.
Regardless, the result reinforces the skepticism in the ability of diversification
strategies to add value.
Internal Growth
The second front on which Blockbuster expanded while it was a unit of Viacom
was through horizontal integration. Horizontal integration took place on several fronts;
most notably in music, video games, and DVDs. Why did Blockbuster diversify its product
lines into these areas? Let us first examine Blockbuster’s foray into the video game and
DVD arena.
A large chunk of Blockbuster’s operating expenses comes from maintaining its
thousands of retail outlets around the globe. The cost of these retail stores is a largely fixed
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expense, which is recouped mainly via rental revenues. As the nineties wore on,
Blockbuster was experiencing a downward trend in VHS rentals. In order to make up the
revenue from fewer VHS rentals, Blockbuster would have to raise prices, or find some
other way to generate revenue from its stores. Given the exploding video game market in
the 90’s, it made sense for Blockbuster to horizontally integrate video game rentals into its
stores. This would allow them to leverage the economies of scale and scope within the
existing infrastructure and spread the fixed store expense across games as well as VHS
titles. Likewise, as DVDs grew in popularity during the period, the addition of DVD rentals
to the product line continued to spread costs over more products, while simultaneously
expanding the revenue base. Plus, there was a natural correlation between VHS, video
game, and DVD rentals as all three were relatively expensive items that had enough
demand for short-term low price rentals.
The expansion into music, on the other hand, did not take full advantage of
Blockbuster’s existing retail store locations. Instead, Blockbuster Music locations were
often separate outlets. So why would they pursue this course of action? We believe that
Blockbuster sought to use its brand power to attract customers to its music stores. Not
only would Blockbuster be able to diversify its revenue stream by capturing music sales,
but it could also cross promote its video products. Given its eventual divestiture of
Blockbuster Music, this plan was obviously not 100% successful.
Perhaps Blockbuster was overly confident in its ability to expand into music. While
it relates to movies and games, which proved to be highly successful, music was not. The
segregation of music from the movie/game store was a likely hindrance. The name
Blockbuster was not synonymous with music. Best Buy, Circuit City and clubs such as
BMG and Columbia House hold greater presence in the market. Also, the growth of
consumers who began illegally downloading music put all outlets of music retail at a great
disadvantage.
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Finally, and most recently, Blockbuster has diversified from being primarily a rental
outlet to one that also produces a substantial amount of retail sales. The move to
horizontally integrate sales is driven by several factors.
First, Blockbuster recognizes a purchasing advantage due to its size, and can offer
products that are very competitively priced. Second, it is able to bundle products to
effectively increase revenues across the board. Examples of this include promotions such as
receiving 10 free rentals when buying a hit DVD. Third, by offering previously viewed
DVDs or previously played video games for sale, Blockbuster reduces the operating costs
associated with the disposal of old inventory while at the same time drawing more price
conscious consumers into its stores.
When combined, the increased emphasis on retail sales increases overall revenue,
and once again spreads the fixed cost of operating a store over yet another product line.
This is quite an effective strategy, and has been a key driver in Blockbuster’s recent
comeback in the marketplace. According to The Digital Entertainment Group, selling
previously viewed tapes has become extremely profitable and collectively will likely surpass
one billion dollars this year.
10
Harvard Business School, consumers spent $21 billion in 2001 on video rentals and sales
and $10.5 billion of that was in rentals. When you compare this to the fact that $7.9 billion
was spent on movie theatre tickets, it is not difficult to see how important video rentals and
sales are to the industry. The technology driver behind this revolution was the VCR.
The first video recording media sold to consumers was the Sony Betamax in the mid
seventies, but it was soon replaced by the VHS-VCR which was created by a division of
JVC and sold and marketed by RCA. The Betamax device touted a hefty price tag and
could only hold about an hour of recorded material. Although VHS tape quality was less
than that of its Betamax competitor, it could hold up to two hours of video and the market
power of JVC and RCA helped to push out Betamax by making the VHS-VCR readily
available, providing a longer recording time, and a lower cost to consumers. The sole
purpose of these units at the time was to allow consumers to tape shows that they would
normally miss and allow them to watch later2. Hollywood (and Universal Studios in
particular) felt threatened by the possibility of duplication and sued for copyright
infringement. The lengthy case was lost and the stage was set for the video industry.
Shortly after the VCR was introduced, Twentieth Century Fox predicted the trend
and began to license copies of pre-recorded movies. These titles were limited to older
material, and were sold through magazine ads and other limited retail methods. Others,
including Universal soon followed suit.
Companies didn’t believe that people would rent videos at first, but as rental
advocates appeared, this quickly changed. Proponents felt that unlike music, you would
not want to purchase and watch a video over and over. A few times was enough, and the
idea of renting videos started catching on.
The earliest video rental stores were small independently owned and located in large
cities. Successful businesses tended to be clean-cut, provide flexible hours, and had
extensive selections. The rental prices started out high and began to drop as more and
more consumers purchased VCRs and began renting movies. In turn, more and more
players entered the market, setting the foundation for the industry. Thus, the 1970’s and
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80’s were considered the formative years for the video rental industry.
The video rental industry surged in the 1980s and 1990s, even though it was predicted
that substitutes like cable and satellite would lead to its demise. 2000
Industry Structure
The industry structure consists of the content creators who create movies and shows.
These content creators then distribute the content to schedules/packagers (generally
television and cable venues) and pipelines (movie theaters, video rental stores, and retail
outlets) (Harvard Business School, 2002). Each of these links in the value chain is an
integral part of and defines the structure of the video rental industry. Within eighteen
months after the release of a movie by a studio, the product has generally been through
home video, pay-per view, and pay cable distribution channels before making final
transition to basic cable and television networks.
The trend to vertically and horizontally integrate within the entertainment industry
has combined all three links in some cases. Regardless of ownership, content travels from
the creators to the distribution channels and we will discuss the role of each.
Creation of content (especially movies) usually entails large capital investments and a
good deal of risk. This may explain why six large entertainment companies (including
Viacom) generated over 75% of box office revenues in 1999 and 2000 (Harvard Business
School, 2002). Content creators traditionally had the leverage to control and maximize
revenues through the distribution channels (schedulers/packagers and pipelines). As
previously described, Blockbuster’s entrepreneurial innovation to negotiate with the
content creators under the direction of Antioco led to a power shift in the industry.
In the scheduler/packager distribution channel, networks or stations air content
produced in-house or material licensed from others. Companies such as Viacom’s CBS
Television Network, AOL Time Warner’s Turner Broadcasting, and Disney’s ABC
Television and the Disney Channel are examples of such distribution channels.
Pipelines deliver movies and other content to consumers and traditionally include
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movie theaters, home video stores, and retail outlets. Blockbuster falls into this category.
The emergence of new technologies that can provide product to the consumers digitally
includes pay-per-view and video on demand. This has caused more traditional pipelines to
redefine themselves in order to compete within the industry.
3.2. Competition
As more and more consumers rented videos, the small independent stores or small
regional chains dominated the industry until the 1990s when the large rental chains
developed under the flagship for the movement (Blockbuster). As stated previously,
Blockbuster grew from 1,500 stores in 1990 to over 5,500 stores in 2001. Hollywood
Video followed in Blockbuster’s footsteps and gained a significant share of the market
(1,800 stores) during the same time period.
When it comes to rental and sales revenue in 2003, Blockbuster holds first place with
$5,815.1 million. Amazon.com, Inc. (Amazon) runs second with $5,263.7 million, however
this figure reflect revues for all products sold on Amazon. Hollywood Entertainment is
third with $1,682.5 million. Movie Gallery Inc. (Movie Gallery) is fourth at $692.4 million
and Netflix is fifth with rental revenues of $272.2 million.
Hollywood Video is Blockbuster’s primary physical competitor though the video
rental and sales store channel. The company is from Oregon and owned by Hollywood
Entertainment Corp. (Hollywood Entertainment).
Blockbuster and Hollywood Entertainment held meetings in 2001 to discuss, in
essence, ways to keep the online companies out by merging but the Federal Trade
Commission raised antitrust concerns. Due to the inability of the merger, Hollywood
Entertainment partnered with Amazon. Because Hollywood Entertainment owns one of the
Internet'
s most popular film sites, Reel.com, beginning in 2002, consumers are linked to the
Amazon.com website when they visit Reel.com. This partnership and innovative strategy
led to sales of $1.5 billion in 2002 for Hollywood Entertainment.
Movie Gallery ranks third in the video rental business. Their niche is to focus on
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small cities and rural areas. There are 2,200 stores. Movie Gallery acquired Video Update,
Inc. in 2001 which helped to secure its place in the top five list.
Virtual sales and rental competitors include Amazon and Netflix. Both companies
are Internet based and take advantage of web-based distribution. Amazon sells mainly
books, videos, and music. However, this competitors product line is quite broad; they even
sell clothing.
A relatively innovative concept was implemented by Netflix. Customers can pay
around twenty dollars a month for three video rentals via the Internet, eliminating the need
to travel to rent the video. Netfilx has twenty distribution centers across the country in
major U.S. cities. The niche of Netflix is the provision of access to anyone with an Internet
connection, the elimination of travel time and overdue rental fees. The Netflix channel
model allows consumers to rent three movies at a time or more for a higher price. The main
draw back is the wait time in processing and shipment.
The real competitor, as defined by some industry analysts, will be VoD (Video on
Demand) due to the fact that the technology allows customers to access their preferred
video almost instantly.
The competition dynamic in the video rental industry had matured from many
independent rental stores to several large firms. Many of these firms, through acquisition,
integrated vertically to take advantage of being able to deliver content directly through the
pipeline. There has been mixed success with this strategy. Emerging trends seem to focus
on technology as a means to provide rental products to the costumer when and where they
want to do business.
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leadership. This achievement has been accomplished primarily through excellent marketing
and branding strategies. The loyalty of consumers as well as reputation is a direct result of
these efforts. Geographically, frequency of locations makes Blockbuster widely available
compared to competitors. Up to a few years ago, Blockbuster was able to eliminate
competition by acquisition. The dynamics have changed, and alternate channel strategies
have evolved.
15
Although the five forces framework has limitations, it is a useful tool to asses the
current status of the video industry. The impact of each of Porter’s forces will be
examined, and the extent to which the industry is impacted by that force will be reviewed.
16
allows them to offer flat fee rentals, while maintaining a profitable margin. Netflix may not
need market share as desperately as Blockbuster in order to avoid increasing average costs.
However, Netflix does recognize that if it can steal enough market share away from
Blockbuster that it will place Blockbuster at a price disadvantage. Thus, this leads to
intense competition and firm rivalry as well.
Other factors influencing firm rivalry in the video rental industry include the fact
that the industry itself is stagnant. Since the size of the market is not expanding, the only
real alternative for growth is to increase market share. This obviously intensifies
competition. Further, movie/game rentals are a highly undifferentiated product. A rental
from Blockbuster is the exact same as a rental from Hollywood Video or Netflix. There is
little or no switching costs for consumers to move between firms. This intensifies price
competition to gain market share. Finally, there are strong exit barriers for firms such as
Blockbuster. As a result, Blockbuster will continue to match prices with Netflix or others
as it struggles to survive, intensifying the competition even more.
Entry
Prior to the explosive growth of the Internet in the late 1990’s, a strong argument
could be made that there were high entry barriers in the video rental industry which limited
competition. This would include the relatively large economies of scale required to operate
retail locations which did not operate at a cost disadvantage relative to Blockbuster.
Another entry barrier was the high brand loyalty enjoyed by Blockbuster, which was the de
facto place to go for movie rentals. Lastly, new firms would also face Entry barriers in the
form of needing to generate sufficient volume in order to gain access to revenue sharing
agreements with the studios similar to those which Blockbuster had in place.
All of this changed however with the evolution of the Internet. As the technology
allowed companies such as Netflix to reach a nationwide (or even worldwide if it so
desired) audience without a physical presence, the retail location entry barrier disappeared.
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The brand loyalty barrier was overcome mostly via chance: Blockbuster had alienated many
of its customers by not keeping enough copies of popular movies in stock, among other
aforementioned reasons. The barrier of needing to have high enough volume to negotiate
revenue sharing agreements with studios simply became moot. DVDs had replaced VHS,
and DVDs were priced for retail sale (less than $25, unlike VHS which was rental priced in
the $70-$90 range). This meant Netflix did not have to negotiate revenue sharing like
Blockbuster did in the VHS days (although any agreement reached on DVDs would serve
to lower costs even more). As a result, there are now few entry barriers in the video rental
industry, which has served to increase competition further.
18
however, it is going to have to also make sure that it maintains competitive advantage.
19
challenges. While the company has previously been successful in managing through these
obstacles, the number of competing technologies and rival firms has never before posed the
level of threat that it does today. Video on Demand (VoD), Pay-Per-View (PPV), and
Disposable Rentals (EZ-D DVD) are worthy challengers to the traditional rental, but
Antioco clearly views Netflix as the most potent threat (Source: USA Today June 22,
2004). To ward off this foe, Blockbuster has a two part plan. It is introducing its own
online rental service, and is increasing the number of stores selling used, inexpensive DVDs
in an attempt to draw more customers to retail locations. The merits of competing online
will be discussed later. As for increasing previously viewed DVD sales, it is our opinion
that this move in and of itself is insufficient. If Blockbuster is to be successful with its Brick
& Mortar (B&M) locations, then it needs to reassess its fixed cost infrastructure. We have
performed such an analysis, and our recommendations are presented below.
20
Impact of lower FC on AC Curve
(Figure 4-1)
AC
Avg Cost (Orig Fixed Cost) Avg Cost (Reduced Fixed Cost) Avg Cost (MES)
So, how does Blockbuster reduce its fixed costs? Several options were considered
including: reducing the number of retail locations, leasing out space, and partnering with
other retailers. Each will be discussed below.
21
fixed store costs will be down.
22
lower its fixed cost structure.
Internet Rental
Netflix has proven that the Internet is the preferred channel for many customers.
Blockbuster can take advantage of Netflix’s investment in the learning curve for Internet
distribution. To increase its chances of success in this new venture, Blockbuster has entered in a
partnership with MSN Movies for online rentals and for VoD with CinemaNow, which offers
2,000 titles at a cost of $3.99 for a 24-hour download. Blockbuster also has an agreement with
AOL to establish portals (links to their website) with intent to move into account management
23
in the future. This move is not new (Netflix has their own portals), but it will help to increase
brand recognition in this new channel.
Netflix may remain a fierce competitor in this market due to branding and well
established partnerships and VoD ventures like TiVo. Netflix’s success has grown of
Blockbuster’s customer dissatisfaction and the loyalty of its customer base is still emerging.
Video on Demand
Whereas a successful model exists for renting videos online, VoD is considered bleeding
edge technology. Blockbuster is currently in the process of establishing relationships with
VoD’s providers because they understand that they cannot afford to ignore this technology.
In just a few years, industry leaders predict that customers will be able to easily
download a wide selection of titles from home computers or kiosks. The DVD will not likely
disappear completely (look at the CD industry), but for many customers this will be the only
way they will allow Blockbusters to be part of their life.
The advantages in the creation of value through niches and customization with VoD are
endless including the possibility of advertising to help offset technology costs. The real key
remains in understanding the concept of entertainment and how marketing looks to create
opinion through entertainment. Under clever customization, the Internet has proven a great way
to create powerful messages for its users.
24
stressing the convenience factor of B&M rentals is recommended. A carefully planned mix
will be necessary to achieve maximum effectiveness.
In-Store Promotion
The company has had marked success with loyalty programs and another
incentive programs could be designed to target those customers who choose to frequent
the store more readily than via the Internet. A point system could be introduced where each
time a customer rents or buys a movie from the physical location double point(s) are
earned. Singled points could be offered online. Once a pre-determined amount of points
are reached, the B&M customer will receive a free movie rental and if an ending to such an
incentive program is needed, the customer who receives the most points wins an all
expenses paid trip to the Oscars or other movie awards ceremony.
A time-limit buy would be a managerial duty. If a manager looks at the sales figures
from the previous year for a given day and determines sales are down for the current year
of the same day, frequent customers could be called or more likely, sent an email, offering
up to 3 movies half-off from 5 – 7 P.M. for that day only. The recipient would need to print
out the offer with special code, etc. and bring it in. The idea would be to make this a
random act. This will likely boost sales when they would otherwise be stagnant, creating
incremental revenue. This could also work for the virtual store model.
Advertising
Another option is for the online Blockbuster to solely target a niche audience.
The target of such an audience would include people who favor foreign films and other
hard-to-find movies. People who enjoy these types of movies are more likely to be
technologically inclined as well as follow a Netflix-like model.
For the B&M Blockbuster locations to compete against Netflix and similar model
types, an integrated media campaign involving print, television, radio, and Internet, should
stress the message of immediacy in retrieving a Blockbuster movie. The fact that days pass
25
before a person receives a movie due to the vulnerable process of Netflix shows the power
of Blockbuster in which a person has basically no wait time for a movie.
If Blockbuster were to go with a niche such as foreign film movie seekers as
previously mentioned, we do not think this should be advertised as heavily as the B&M
campaign if at all. The shoe company Converse has not advertised in years until recently.
Their target audience was anti-commercialism. Perhaps their target is changing and is this
why they are beginning to advertise more. However, we think this may back fire as would
be the possibility if Blockbuster were to advertise their ‘underground’ website for foreign
and other hard-to-find films under the name Blockbuster.
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http://research.thomsonib.com
Yahoo Finance; Various Press releases; 2004 http://finance.yahoo.com/q?s=bbi
_______. “Videotape Rental.” Encyclopedia of American Industries (2004). U of Florida
Business Lib., Gainesville, 20 July 2004 http://www.galenet.galegroup.com/servlet/BCRC.
_______. “Video Tape Rental and Retail.” Encyclopedia of Global Industries (2004). U of
Florida Business Lib., Gainesville, 20 July 2004
http://galenet.galegroup.com/servlet/BCRC.
Wagner, Holly J. “2003: a breakout year for previously viewed: top previously viewed
retailers.” Business & Company Resource Center (2004). U of Florida Business
Lib., Gainesville, 20 July 2004 http://galenet.galegroup.com/servlet/BCRC.
Table 1. Timeline
1985 David Cook opens first video store in Dallas, Texas
1986 Blockbuster becomes official company name
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1987 Wayne Huizenga acquires Blockbuster Inc. / corporate headquarters move to Ft.
Lauderdale, Florida
1990 Blockbuster acquires Errol’s Video Inc. and Major Video
1992 Blockbuster opens 3,000th retail store in New York City
1993 Super Club Entertainment added to the Blockbuster company (New locations
average one every 24 hours)
1994 Viacom buys Blockbuster/ Huizenga leaves Blockbuster/ Profitability drops due to
lack of leadership
1995 Blockbuster website established
1996 Introduction of DVDs through in-store promotions/ Complications lead BBI to sink to
half 1993 retained earnings
1997 John Antioco becomes chairperson and CEO/ Headquarters moved back to Dallas/
Revenue-sharing with movie studios considered/ Various charitable activities
1998 Integration of Blockbuster Music/ Video Flick stores of Australia acquired
1999 BBI publicly traded/ DVDs offered at stores worldwide
2000 Partnership with NAACP for charitable cause
2001 Over one million dollars raised for Children’s Miracle Network/ Despite greater
revenues in 2001-2004, BBI continues to post losses
2002 Over 8,000 Blockbuster stores worldwide/ Changes in accounting standards force BBI
to write-off excess goodwill for the first time
2003 Movie Trading Corporation acquired, a used DVD trading retailer in order to study
the used DVD business
2004 Twenty-four stores scheduled to close in Hong Kong within 18 months due to the
high cost of rental property/ Viacom intends to sell-off BBI due to concerns with
growth of the company
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