y

How strong are the competitive forces in the movie rental marketplace? Do five-forces analysis to support your answer.

Firms in Other Industries Offering Substitute Products There is a small amount of possibilities for substitutes. The only substitutes would be illegally obtaining the movies by downloading or streaming, purchasing bootleg DVDs, or waiting until the movie is aired on public or cable TV stations.

Rivalry among Competing Sellers Suppliers of Raw Materials, Parts, There are very few competitors in the movie rental industry of which consist of Netflix, Consisting of only a small number or suppliers, buyers do not have the upper hand. If suppliers run out of stock or decide to cut supplies short, there are not many alternatives to obtain DVDs or right to a movie. The seller has the power to control distribution and prices. Blockbuster, and small businesses. These few control overall market share of the industry. The main competition is between Netflix and Blockbuster. Blockbuster is currently the leader in movie rentals until Netflix introduced their DVDs by mail program and subscription based business model. Buyers have limited powers and options. An avid movie renter is limited to the selection available in store or library on line. The movie rental companies are limited to the supply they can purchase and stock their stores with. They are unable to control prices, but larger companies do have the upper hand since they can order larger quantities to get a better deal. Buyers Components, or other Resource Inputs

Potential New Entrants There are little to no potential entrants into this industry. A recent entry into the movie rental industry is Red Box; they are a vending machine style movie rental. This market requires entrants to have large capitals to acquire movie rights along with fresh new ideas of movie delivery options.

In my opinion, they are not strong at all. There are very few competitors that do control market share and a number of small businesses represent the remaining market share in the movie rental market place. Rivalry among competing sellers is common; the top competitors are Netflix, Blockbuster and local movie stores. Large stores such as Blockbuster have physical stores, unlike Netflix, are able to stock their stores with a larger number of available rentals for new releases, while small stores order much lower quantities. The threat of Potential new entrants into the

movie rental marketplace places a strain on the current controlling powers, such as Red Box. Red Box is based on an idea that Blockbuster employed, which deployed 50 tester vending machines that rented movies. With new entrant, there is a threat for losing market share. Buyers have limited power, the more you buy, the lower the purchasing price. Also, if there is a demand which the seller is unable to supply, movie rentals stores are readily available through other means. Now, we are able to request the movie online, select for the movie to be mailed or even illegally downloading or streaming the movie from another third party. Substitutes there are not many substitutes available. Buyers can either wait until an illegal bootleg version is available for sale or find other means of getting movies for free via the internet or waiting until the movie is viewable on cable channels through Starz, HBO, etc. Entrant barriers are low, in this industry, but require a large capital. If there is not supply, and demand is high or limited, the seller has the power. If supply is high, and demand is low, the buyer has the power. With movies, since they are copyrighted by specific companies, the seller has the power to control distribution and prices. 2. What forces are driving changes in the movie rental industry and are the combined impacts of these driving forces likely to be favorable or unfavorable in term of their effects on competitive intensity and future industry profitability? Several forces that are driving change in the movie rental industry are: A. Limited Options There are a limited number of available options which mainly consist or the small video stores, Blockbuster, Netflix and Red Box. Many renters are forced to choose from one of these this is also aided by large numbers of buyers. This I believe is favorable because this will help these companies control market share over video rentals. B. Convenience consumers are always looking for easier and more convenient ways to do things. With all movie rental industry competitors moving in the same direction, it will ensure that there are choices for everyone. With Netflix and Blockbuster making most movies available online, there is no need for inventory and inconvenience of running out of copies per movie.

C. Economy with many people that like to watch movies, but find going to a theatre to watch a movie too expensive, this is a cheap and easy alternative to view the movie. The only downside is waiting anywhere from 3 to 8 months for the movie to be available on DVD. As rentals are priced affordably, it makes renting an inexpensive alternative. D. Changes in Lifestyle As people mature, people will change the way they live. Some people will stay home more, and it goes hand in hand with watching a movie. E. Changes in cost and efficiency Lowering costs of inventory by purchasing rights to a movie is more efficient because it will create less waste in the long run and be more economical. The few forces that were discussed combined are favorable to the movie rental industry. There will always be a demand, as long as there are limited entrants into the industry, market share between the leading competitors will remain even. 3. What does your strategic group map of this industry look like? Which company is best-positioned Netflix or Blockbuster? Why?

Low High Price/Performance/Reputation

BlockBuster Netflix Small Business Red Box Small # of Product Lines to Large # of Product Lines

On my strategic group map, Netflix is best positioned due to the lack of having a large physical inventory like Blockbuster, to supply its physical stores. Although Blockbuster has the advantage when it comes making sales on other items aside from video rentals. They also offer games and other

perishables which has contributed a percentage of their revenues. Blockbuster also has another slight advantage because not everyone knows how to use a computer. Netflix is can only be accessed via computer with at the very least, broadband connection. Netflix also has more subscribers than Blockbuster does at the end of 2007. It also seems like they both offer similar rental plans, except that Blockbuster offers games and in-store returns and exchanged. Overall, I believe that Netflix is best positioned due to the lack of venturing with different areas and excess liabilities with physical locations. 4. What key factors will determine a companys success in the movie rental industry in the next 3-5 years? How quickly will technology and availability of a product drive a companys success? There are a limited amount of competitors, and since most consumers are decision are made through the idea of convenience and price. No one wants to pay high prices nor do they want to make sacrifices. Technology is and has been used to extend the reach to attain more subscribers and at farther distances. Netflix and Blockbuster are no longer limited to retailing within the U.S. Blockbuster also has over 1,000 locations out of the U.S... But as streaming as well as having a large quantity of available media has helped these companies prosper. 5. What does a SWOT analysis of Netflix reveal about the overall attractiveness of its situation? Strengths y y y y y y y y Ability to have small inventory. No large debts. Introduced Subscription based services as well as DVDs by mail. Many competitively priced options or plans. Ability to ship DVDs to a customer in 1 business day. Have brand image and known nationally. Ease of cancellation or suspension of plan; no contract necessary. No more late fees was introduced by Netflix, can keep DVDs for as long as they want. Weakness y y y y Limited in products offered - DVDs by mail and media streaming. Limited selection online. No physical location for those who cannot use a computer.

Opportunities y y Potential to grow and become internationally known. As long as movies are being produced, there will always be a market for movie rentals. They can offer other features, such as more foreign movies or offer their website in other languages to attract a different demographic of customers

Threats y A slowing economy if many people are losing their jobs, they will cut out unnecessary expenses, such as entertainment. Entrants that can steal subscribers. Cables Pay-Per-View. Internet streaming website that offer free but illegal viewing of movies or pirating.

y y y

A SWOT analysis of Netflix shows that they do not have many weaknesses or competitive deficiencies. They do not have own large debts. They are very narrow in what they offer. Netflix has the potential to grow and become internationally known. They would need to branch out and contract with other countries to grow larger and also find more funding to do so. They do have the opportunity to grow. As a customer of Netflix, I have little to complain about, but I do feel that their database for movies and shows are limited. They do not offer many popular shows on TV or popular movies that are commonly requested. Recently in 2011, Netflix split their pricing plans. They separate their streaming and mailing divisions charging each service independently to generate higher revenues. Their core competencies are that they provide quick delivery whether you are receiving DVDs by mail (approx. 1 day) or streaming the videos online. They also created a program called Silverlight which is an easy to use technology that allows you to stream videos. This program is compatible with different operating systems. They are very well known, as a national brand. They provide excellent customer service over the phone as well as online. Their website is simple to use and also provides recommendations based on your previous selections and other customers ratings. They also do not require a contract; it is as easy as clicking a button to suspend of cancel your service. A threat would be a slowing economy. As many are losing their jobs, they are cutting their costs. Things that are not found to be a necessity are the first to go such as entertainment. The movie rental industry requires entrants to have large capitals due to movie and copyrights. As long as movies are being made, this industry will continue to strive. Netflix has the opportunity to expand its reach.

They are able to cut many expenses out due to not having physical locations and a small staff to maintain efficiency. Netflix depends wholly on their suppliers and movie rights. The movie industry is small and expensive. If Netflix is in violation with their suppliers, it would weaken brand and cause many problems. The introduction of rentals via mail, they captured many of Blockbusters sales. Netflix also introduced the idea of No Late Fees, renters were allowed to keep the DVD for as long as they like. 6. What is your appraisal of Netflixs operating and financial performance based on the data in case Exhibits 2, 3, and 4? What positives and negatives do you see in Netflixs performance? Use the financial ratios in the Appendix of the text as a guide in doing the calculations needed to arrive at an analysis-based answer to your assessment of Netflixs recent financial performance. Based on the exhibits, Netflix has had a steady increase on revenues and subscriptions form 20002007. From operating at a loss in 2000 of $58.5 million, by 2004 they increased their profits and earned income. In 2000, they had a debt to equity ratio of 1.38, and by 2007 decreased to .955. Every year from 2004 and on, Netflix received a net income as opposed to a loss from 2000 to 2002. From 2000 to 2007, the number of subscribers also increased, doubling each year. Profit margins in 2000 - -1.63 2002 - -.14 2004 - .043 2005 - .062 2006 - .049 2007 - .056 Positives performances for Netflix were that they were able to repurchase million in outstanding shares of common stock. Netflix also cut back on marketing expenses from $223.4 million in 2006 to $216.1 in 2007 which did not affect their revenues.

y y y y y y

7. What does a SWOT analysis of Blockbuster reveal about the overall attractiveness of its situation? Strengths y y y Large selection of movie titles including independent films. Stocks large number of new releases. Physical stores, employees can speak to customers and entice them, allow them to sell a product to the customers. Offers several products from movies to games, TV shows, drinks to junk food, game consoles and movie memorabilias Great online database for movies, if not available online, they can help locate the DVD at a local store. Over 1,000 international stores open in 2007. Strong distribution system. Weaknesses y y y Large liabilities due to having physical stores and inventories. Slow to innovate into online plans and services Inconsistent with changes proposed some store revoke and did not follow the No late fees policy. Took many years to convert to online DVD mailing program. Realized large losses before they took any action.

y y

Opportunities y Possibility to continue growing outside of the U.S. Blockbuster already has stores outside of the country Expand their online media library. Can enter into foreign markets. There are many other countries that do not have a movie rental industry. Combine the market and globalize it. The U.S. is a growing and diversified country.

Threats y y y Netflix Blockbusters biggest competitor. Lack of innovation. A slowing economy if many people are losing their jobs, they will cut out unnecessary expenses, such as entertainment. Entrants that can steal subscribers. Cables Pay-Per-View. Internet streaming website that offer free but illegal viewing of movies or pirating.

y y

y y y

In a SWOT analysis of Blockbuster, it seems like they lagged behind when it came to affordable movie rentals and joining the internet boom. Blockbuster did not introduce the DVD mail in program until 2004, much later than Netflix, in 2000. Blockbusters strengths include the having a large selection in stores as well as online. They sell a variety of items, not only rent movies. They have over 7,000 stores open nationwide and approx 1,000 of those stores are outside of the U.S. They are weak because they lagged behind and were not innovative enough. It took them many years to catch up to Netflix. It is possible for them to expand if they choose to delve into foreign films. Which would help them attract more subscriptions. They have similar threats to Netflix, while Netflix being

their largest potential threat. Netflix is currently the leading competitor in the movie rental industry. 8. What is your appraisal of Blockbusters performance as shown in case Exhibit 5? What pluses and minuses do you see? Use the financial ratios in the Appendix of the text as a guide in doing the calculations needed to arrive at an analysis-based answer to your assessment of Blockbusters recent performance. With Netflix on the rise, Blockbusters revenues have declined. On their acquisition of a Game station, they planned investing in games to pull in other forms of rental income. Blockbuster dominated the movie rental industry controlling 40% of market share. In 2004, before Blockbuster split with its parent company, Viacom whom owned 81.5% of Blockbusters stocks declared a $5 dividend, setting off a major downfall for Blockbuster. Also in 2004, Blockbuster was at their peak for number of stores at 9,094. It wasnt until 2004 before Blockbuster announced its online rentals program. Blockbuster took large losses before trying to catch up to their rival, Netflix. Debt to Equity Ratios 2007 2006 2005 2004 2003 2002 .715 .72 .748 .646 .274 .289 Profit Margin -.015 .007 -.102 -.206 -.216 .044

9. How does Netflixs competitive strength compare against that of Blockbuster? Do a weighted competitive strength assessment using the methodology presented in Table 4.2 of Chapter 4 to support your answer. Does Netflix have a sustainable competitive advantage over Blockbuster? Why or why not? Competitive Strength Assessment Netflix Key Success Factor Importance Weight Strength Rating 9 Score 0.9 Blockbuster Strength Rating 4 Score 0.4

National or global distribution 0.10 capabilities

Short delivery time capability Strong e-commerce capabilities Overall low costs Convenient locations Ability to provide customer services after

0.20 0.10 0.25 0.10 sale 0.05 0.10 0.05 0.05 1.00

9 7 9 1 5 4 3 5

1.8 0.7 2.25 0.1 0.25 0.4 0.15 0.25

6 6 4 5 7 7 6 5

1.2 0.6 1 0.5 0.35 0.7 0.9 0.25

Fast and accurate rental assistance Lost protection Copy right licensure Sum of importance weights

Weighted overall strength rating

6.8

5.9

Yes, Netflix does have a competitive advantage against Blockbuster. They have better delivery times compare to Blockbuster. Blockbuster has a better ability to provide good customer service due to having physical stores. They also can keep overall costs low due to lack of a large physical inventory and providing for a large staff like Blockbuster. As long as Netflix is able to continue on with keeping their costs low and keep short delivery ties, they will be able to sustain their competitive advantage.

10. What 2-3 top priority issues does Netflix management need to address? What 2-3 top priority issues does Blockbuster management need to address? Netflix 1 Larger movie selection Blockbuster Making delivery times of Mailed DVDs match Netflixs 1 days guarantee, and make turn around times shorter Advertising expenses are too high Lower costs of selling and lower fees.

2 3

Advertising expenses are too high Limited product lines.

11. What recommendations would you make to Netflix CEO Reed Hastings? At a minimum, your

recommendations should cover what to do about each of the top priority issues identified in question 10. One recommendation would be for Netflix to expand their current movie selection. They claim to add more movies all the time, but many movies that I have searched are only available for rent by mail. Their selection online is limited and do not have as many movies as it sounds like it does. Its selection should include more TV shows, Foreign and Independent films, as well as short films. Decreasing the cost of advertising and putting that money into purchasing more movie or TV rights. I think that TV shows are a growing demand and Netflix does not carry many of these shows. Advertising is costly, and sometimes unnecessary if a company is well known and has a good reputation. TV advertising is costly and unnecessary during peak hours, when costs for advertising are most expensive. Internet advertising is more effective since Netflix requires that a customer is computer friendly. They should also increase the types of products available. Most of their sales stem from rentals but they should also try to sell some excess DVDs or introducing games into their product mix. Since they do not have a physical location to advertise at, they can give special promotions such as giving incentives to customers to refer their friends to join. Similar to DirecTvs plan called friends and family. Every time they refer a customer, they get a free month of service. 12. What recommendations would you make to Blockbuster CEO James Keyes? At a minimum, your recommendations should cover what to do about each of the top priority issues identified in question 10. One recommendation would be to make delivery and turn around times shorter. Since there are no late fees, and subscribers can keep the movies as long as they want, another person with the same movie in their queue might need to wait over a long period of time to watch the movie. If customers were given an incentive, they would be enticed into returning the DVDs sooner like their in store exchange program, which they began charging extra for due to an increase in popularity. They could also offer them extra movies out from their queue when then have a continuous track record for returning movies rather quickly.

Another this is advertising costs. They should cut their advertising budget by a small percentage each year. They already have brand imaging and loyal subscribers which can allow them to cut back on advertising costs. The money could be better spent on acquiring more movie rights and attracting new customers. When Blockbuster first introduced their subscription based plan, their plan affordable. After several months, they increased their fees and it became expensive to most subscribers, most of them converted to Netflix. If Blockbuster could offer more affordable plans to dollar conscious consumers, I believe they would be able to increase their sales. For example, they could cut costs of advertising and offset the costs of subscriptions.