Thursday, August 02, 2007

Why Netflix Has Already Won The DVD Rental War

There's been a great deal of discussion recently about how Netflix is struggling with its continued competition with Blockbuster and the online movie streaming sites. With the recent hit Netflix stock took (it hit its lowest point in over two years), lowering it's monthly fees by $1.00 and losing those profits and the recent 12-hour-plus website outage; many have been saying Netflix is in trouble and losing in the DVD rental war. I disagree. Matter of fact, I would argue that Netflix is not only winning the DVD rental war, but has already won. Here's why:

Even Netflix has said it's feeling the heat from competition. Blockbuster's Total Access program was a success in terms of stealing business away from Netflix. For the customer, Blockbuster offers a $17.99 per month package called Total Access that is similar to Netflix's DVD rental by mail service. You pick the movies you want online and Blockbuster ships them to you. Yeah Blockbuster is a little slower in delivery and turnaround, but with their Total access program, you could return the movie at a store and their system would reflect the returned movie and begin the process of shipping you a new one instead of having to wait for the dvd to return to them in the mail. Add to that, you could also rent a new in-store movie for free when you return your mail-delivered movie to the store. The Total Access program sounded like a win-win for both Blockbuster and for the customer, but the truth is a little different.

Online Rentals
For the customer, the turnaround time was painfully slow. For me it was even slower then it is with Netflix when Netflix throttled me. With the three out at a time plan I almost NEVER had three movies out at a time. Due to their slow processing and delivery time it was a two-out plan for the three-out plan at best. I received more wrong movies or damaged discs from Blockbuster in the three months I tried them then I did in the several years time I've been with Netflix. Another problem more common with Blockbuster was that many movies at the top of my queue kept getting passed over. Movies I wanted to see soon - especially new releases were often put under a wait and passed over for movies further down my queue.

In Store Returns and Free Movie - the Blockbuster Advantage
Still the idea of being able to pick up a movie instantly when you return your DVD mailer to the local Blockbuster appealed to me. Honestly, this is the one real advantage Blockbuster has over Netflix. The problem is with it goes back to the reason I went to Netflix in the first place. I don't like going to Blockbuster brick and mortar stores. Selection is light, its annoying to deal with some of the Blockbuster employees (I know they are just doing their job, but I don't really want to be asked how I'm liking Total Access every single time I rent a movie there.)

Is Total Access good for Blockbuster? Well at first it seems like a great plan for them. They can use the in-store edge to get customers back into their stores and away from netflix. The truth is though the program is not as profitable for Blockbuster as a company. Marc Lichtenfeld of the had this to say about Blockbusters Total Access Plan

Blockbuster calculates the benefits of Total Access costs at $2 per
subscriber per month. That's not including the $8 to $12 cost of free movies. So
it is likely the company's margins will decline as it rents millions of titles
for free each month.
Blockbuster realizes the Total Access segment is not as
profitable as the rest of its business. However, the company may be in the
process of shooting itself in the foot.

They hope to make up the lower margins by increasing the subscription price, but I don't see how they could stay in the game with higher prices. Blockbuster announced higher prices and more maximum rentals in a month just last month. This will almost certainly cause more and more customers to head back to Netflix. If you don't believe me, read some of the comments on this over at the HackingNetflix blog.

Other Netflix Competitive Advantages

Add to this the other competitive advantages Netflix has over Blockbuster. Netflix has watch-now movie streaming which admittedly has a fairly small list of older or less popular movies, but still it is an added value for the customer. Netflix has a much better website and queue system. They are adding features to the site all the time. Just check out the Netflix community blog where they have an open dialogue with their customers on new features and suggestions.

Netflix has a better service overall, they offer more value for your movie renting money and they don't have the massive overhead of the franchise and company owned stores. To quote a commenter on the Hacking Netflix Blog: "Blockbuster is just rearranging the deck chairs on the Titanic".

My prediction is that Blockbuster will either do another very major strategy reorganization or they will go down in flames. Netflix has already won the DVD rental war. Blockbuster just doesn't realize it yet.

UPDATE: This story was submitted to digg by taswizard - if you like it, please DIGG IT. Thanks!

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