Blockbuster's Offensive Against Netflix Flops

bigtallmofo writes "With over four million subscribers, Netflix was an obvious target for rival Blockbuster. In 2005, target them they did. Introducing their own DVD-by-mail service and (for a while) undercutting Netflix's price point, Blockbuster went for the jugular. A year later Netflix shows a market value of $1.5 billion with no debt compared to Blockbuster's $684 million worth with $1.0 billion in debt. Is there still a DVD-by-mail war or has Netflix won?"

The Jugular? *snork*

[deacon]

With what, a floppy rubber claw? Foam rubber teeth?

I've stress tested both. Netflix was able to push out 9 movies a week for 6 weeks, and then throttled down. Blockbuster managed 4 movies a week, for the less that a month I kept them.

Now I just borrow what I want from the library system. Reserve online, get it all pulled and sent to a library near where I am during the day. No limit on the number of DVDs I take out.

Based on my Blockbuster experience, I would not even consider them again.

Re:Does Netflix have a future?

[blakestah]

That's exactly what Netflix is concerned with. They beat Wal-Mart AND Blockbuster in the online market. But the execs at Netflix are concerned with the content-over-broadband market. They view that as their primary threat.

Rupert Murdoch's DirecTV will begin delivering content from Murdoch's empire, and anything else they can get their hands on, over the DirecTV lines to their DVR, both as trickle download and OnDemand.

Comcast is working on OnDemand.

And then there is the Netflix-TiVO-Comcast arrangement, in which TiVO programs the trickle download so Netflix subscribers can rent movies onto their TiVO box. After all, the only better way to rent a movie from Netflix would be to have it available, nearly instantly, on your TiVO box. And that is what is coming. You'll be able to view a few movies from your TiVO box. When you delete them, the next ones will be able to be viewed. TiVO's engineers are using their broadband boxes to download the moves, 6-8 hours each.

Now, OnDemand can beat that turn-around time, but only with limited content. Netflix can deliver ANY of their content. And, with content protection, the consumer will see ZERO download times (unless you delete 2-3 Netflix movies rapidly, then you will need to wait for the download).

The Future? Who knows? But OnDemand and trickle download models are emerging, and a lot of money is being spent trying to determine the video equivalent of the iPod.

So let's not forget them. The new video iPods can store 15 movies. You could download from iTunes store and carry it with you. Neat-o.

I switched to Blockbuster

[Mean_Nishka]

I switched from Netflix to Blockbuster's mail service last year and haven't yet felt the need to switch. I'm still on the original $14.95 pricing plan for three movies out at a time. Yes, Blockbuster's UI is inferior, the selection might not be as vast, and it might take an extra day or two to receive a flick over Netflix, but the real deal are the coupons.

Blockbuster gives two in store coupons every month good for a game or movie rental. With their game rentals hovering in the $8 range, it pretty much pays for itself every month. Blockbuster also credits the value of the coupon against the 'keep it' price for any video or game rented at the store. Good deal (for me at least).

Re:The Red Envelope

[dirty]

That's not entirely true. A number of franchises never participated in the program, and many that did are cancelling it. Basically they need the late fees as an incentive to get people to return videos and games, without them they were having trouble keeping new releases in stock.

Re:Does Netflix have a future?

[Anonymous Coward]

A few points.

There was no Netflix-TiVo-Comcast deal.

There was a Netflix-TiVo deal. There is a TiVo-Comcast deal. The two deals are entirely unrelated.

Also, the Netflix-TiVo deal is on indefinite hiatus, because they could not get the content owners to cooperate. So until that happens, no deal.

Other problems: the existing TiVo Series 2 boxes don't support Dobly 5.1 sound and bandwidth limitations prevent full DVD quality video. So given current TiVo hardware limitations, and limitations in bandwidth, the quality of these downloads would have been substandard. Even had the content owners played ball, its questionable if the market for existing TiVo/Netflix users with broadband access is large enough to support the deal and make it profitable.

This will change as TiVo hardware gets better and can fully support DVD standard audio and video, and as more and more people get broadband (and faster broadband becomes more available).

Re:The Red Envelope

[Pfhreakaz0id]

but, I bailed on BB way back because there late fees were excessive. I checked them out again with there "no late fees" thing (and they are like, 6 blocks from my house). And I switched stores to them. I get a WEEK grace with no late fees, even on a 2 day rental (and video game rentals). And I've actually used the "convert to purchase" a few times on kids/family movies. For instance, I rented Robots, my kids liked it, I read the recipt that it was only $12.99 more to buy it,just kept it and paid the bal. next time I was in. that really is pretty nice.

Hollywood Video

[akac]

We stopped using both Netflix and Blockbuster. BB because of its insane fees and costs, and Netflix just because renting a movie for us is an impulse action. Instead we use Hollywood Video. Its cheap. Quality. And I can find nothing that BB does better.

Re:They each have thier own issues to deal with...

[rolfwind]

I think it's their fault for advertising it when they know the postal service doesn't deliver it within a day (I don't believe the postal service guarantees or implies 1 day service.)

However, despite the nonreality of the 1-day service, I have no problem recommending them. When I used to have their service, I intended to cancel with them before going on a 7 month trip to Europe (mostly because of a lack of anime in their inventory at the time....). Apparently I didn't, when the person keeping my finances in order gave me the CC bills^_^;;;;; - one phone call later, without being put on hold, they gave me my money back in short order without hassle (because there was no account activity) and with still being friendly.

I think the only thing that might occur within the next ten years is that Netflix's current business model will become obsolete (like Blockbusters) due to bittorrent downloads (and if the studios start offering legal ones).

I would never use Blockbuster

[beforewisdom]

Blockbuster edits the movies they rent.

If a movie has scenes that are offensive to the ownership of Blockbuster ( usually sex, they don't seem to have a problem with violence, go figure ) Blockbuster reserves the right to edit that scene out of the movies they rent.

While they will admit to it if asked directly, they will not advertise it in their stores.

Apparently telling the truth (fairly representing their products) values of Blockbuster's owners.

Re:And I really wanted to stay on the sidelines he

[Moofie]

"You're raising my rates,"

Wah.

" and it's totally illegal as well"

What? Blockbuster doesn't decide what is and is not against the law.

Re:Blockbuster may have a chance...

[Fulcrum of Evil]

Blockbuster still has one ace up its sleeve - porn.

BB doesn't do porn - they have a 'family friendly' reputation, so no Jenna Jameson for you. Meanwhile, Greencine [greencine.com] does.

Re:They each have thier own issues to deal with...

[rfunches]

I think it's their fault for advertising it when they know the postal service doesn't deliver it within a day (I don't believe the postal service guarantees or implies 1 day service.)

USPS's fastest shipping option is Express Mail, which is overnight to two-day service (depending on the origin and where you're sending it to) with a money-back guarantee. I haven't seen Netflix's advertising but if they note that proximity to a Netflix warehouse is the primary factor in delivery time, then there's no false advertising; I don't expect a package from Nevada to arrive in Northern Virginia after a package from New Jersey or Kentucky (Amazon and several other online sites have warehouses in these states).

Dear everybody

[Anonymous Coward]

Please note that $1.5 billion equity value is less than $684 million equity value and $1 billion debt value. Therefore, the value of Blockbuster is $1.7 billion, in fact, larger than NetFlix. Furthermore, since Blockbuster is more leveraged, if both firms pursue the same strategy in the same industry, you should expect a higher return from Blockbuster stock, as its assets would have the same risk, and Blockbuster would be 'levered up' versus NetFlix.

That being said, Blockbuster is no NetFlix.

Re:Th problem is...

[apparently]

This combined with their editing of movies

They don't [custhelp.com], nor have they ever, edited movies.

Debt is not necessarily bad

[Anonymous Coward]

I couldn't help but to notice how people here seem to think that debt is something bad. I think somebody already pointed to the Modigliani-Miller theorem, but here is a brief introduction for dummies:

Firm market value = Market value of equity + Market value of debt

In case of Blockbuster: $684M + $1000M = $1684M

In case of netflix: $1500M + 0 = $1500M

So the market values seem about equal. Now, of course making a loss is not good, but that has more to do with the operation than the capital structure choice.

The modigliani miller theorem is of course a simplification and in reality debt can have both negative and positive impacts. On the positive side interest payments on debt are tax deductible while equity dividends are not, so by having debt, tax savings can be made. Also debt can help discipline management and prevent them from diverting too much of the cashflows on perks for instance. On the negative side, in case of risks of bankruptcy, the debt can create incentive problems. Depending on the situation the firm may end up not making profitable investments or make unprofitable investments because of the effects of the debt.

http://en.wikipedia.org/wiki/Corporate_finance [wikipedia.org]

Blockbuster has(had) monopoly intentions.

[member57]

Blockbuster undercut many Mom & Pop, and small chain video stores back in the early ninties. After putting them out of business they jacked their rental fees right back up, sometimes more than previous said businesses. I will NOT do business with Cockbuster at all. I like to see them getting their asses handed to them, serves them right!