 Blockbuster
v. NetFlix: Innovation and Competition
Subject: Technology, Risk, Change, Adaptation, Competition,
Blockbuster, NetFlix, Innovation
As I write this article, the story of David (NetFlix)
and Goliath (Blockbuster) has yet to be played out. But, it is clear
from the new changes occurring in the market that competition, in the free
market, does indeed work.
Let me back up for a second. One of the
biggest consternations I've had over the years when renting a movie is those
damn late fee. Yes, I do accept the responsibility for not returning the
movies on time. But I know it has happened to you at one time or another;
you simply forgot to return the movie. Or worse, how about when you
returned the movie only an hour or so late and you still get charged.
Blockbuster kept the late fee policy in place because they were making millions,
YES MILLIONS off of those late fees. It is estimate that in 2004, they
would've made somewhere around $200 to $300 MILLION dollars just on late
fees!
So now, Blockbuster has decided to WAIVE their
late fees. Yes, no more late fees from Blockbuster. This move
would've been unimaginable a few years ago. What happened?
Competition happened! NetFlix happened!
About a year or so ago, a new video rental model
was being put in place. A company called NetFlix decided to rent movies
via mail and guess what, NO LATE FEES. You can rent up to three movies and
when you return one, they'll send you out another. For less than $20 a
month, you can rent as many movies as you want, and return them whenever you
want.
In a statement released by Blockbuster, here's how
they viewed or "rationalized" this new no late policy:
"For the past year, the company has been testing a
variety of rental options in markets across the U.S.... In
no-late-fees test markets, the increased rental transactions and retail sales
offset the lower level of revenues resulting from eliminating late fees."
Let me run this statement through the "No Spin
Cycle" for you so you really understand what is being said.
First Statement: "For the past year, the
company had been testing a variety of rental options in markets across the U.S..."
Translation: About a year or so ago we were
worried this would cut into our profits so we began investigating if NetFlix
could hurt us.
Second Statement: "In no-late-fees test
markets, the increased rental transactions and retail sales offset the lower
level of revenues resulting from eliminating late fees."
Translation: Even though we will lose an estimated
$200M-$300M in late fee revenues, we will probably make it up in increase sales
now that we don't have late fees...we hope!
When NetFlix CEO Reed Hasting decided to go into
the movie business, he didn't do it by going head-to-head with the Goliath
Blockbuster. Instead, he decided to sling DVDs through the mailbox and
undercut the giants hold on the market.
Lesson 1: Competition in today's market
requires a sense of the obvious. What is it that people really want?
Netflix is gaining market share because they understood that the bur under the
customer's saddle was the late fee. By addressing that specific issue,
Hastings is making a killing in the market.
Lesson 2: But here's the amazing thing,
he's not using NEW technology or some whiz bang gadget to do win. He's
using our old fashion mail service. Which shows that the answer to
competition isn't always to throw new technology at the problem.
When I think of NetFlix I also think of a company
like FedEx. Both companies set out to deliver a higher level of customer
satisfaction. Both companies broke with tradition by thinking outside the
box, but ironically enough, by using old traditional methods of delivery.
And judging by their revenues and profits, they are indeed delivering.
Eric Hoffer once said, "We are told that talent
creates its own opportunities. But it sometimes seems that intense desire
creates not only its own opportunities, but its own talents." Dare to be
different. Dare to think creatively. Dare to do it your way.
Please feel free to forward this article to a
friend or colleague.
Victor
Gonzalez, one of America's top business motivational speaker and author of “The LOGIC of
Success”. For more info go to: www.thelogicofsuccess.com
or by email
victor@thelogicofsuccess.com
Copyright © 2004 by Victor
Gonzalez All rights reserved. This article MAY be
reproduced in any form or by any means, electronic or mechanical, including
photocopying, as long as the author’s name, website and email address are
included as part of the article’s body. All inquiries, including
information on electronic licensing, should be directed to Victor Gonzalez,
victor@thelogicofsuccess.com
www.thelogicofsuccess.com
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