Because of the power of negative word-of-mouth, and the ability for Netflix to leverage the “bad profits” that Blockbuster had been collecting from its customers for late fees, round one of Netflix vs. Blockbuster was a total knockout. I wrote about this in February (and first referenced the concept of bad profits for this blog) and then revisited the battle in June and in my most recent post on bad profits a few weeks ago.
Round two is getting a little more interesting, as Blockbuster finally starts to leverage their stores to create a potentially more positive word-of-mouth offering. In today’s Wall Street Journal, Blockbuster announced that they are letting subscribers of Netflix rent movies for free through Dec. 21 by simply walking into one of their stores and redeeming the tear-off address flap from the signature red Netflix envelope for the free rental. This is a promotion for Blockbuster’s new “Total Access” feature, which lets customers return DVDs rented through its online service, which competes directly with Netflix, in their stores. Blockbuster announced Total Access in the November 1 edition of the Wall Street Journal with the following quote from their CEO:

“Customers shouldn’t have to choose between renting online versus in-store, and they should never have to be without a movie,” said Blockbuster Chairman and Chief Executive John Antioco in a statement.

This is a smart strategy as it enables Blockbuster to leverage something Netflix doesn’t have – 8,500 stores located across 29 countries. It will ultimately lead to some positive word-of-mouth for Blockbuster, and a new competitive differentiator against Netflix. I, for one, plan to try this out over the holidays as the only downside to my Netflix subscription is sometimes I don’t plan far enough ahead to have the movie I want when I want it.

However, it is hard to imagine that this will lead to a long-term competitive advantage for Blockbuster. The next wave that will hit is movie downloading, which will solve the only real challenge Netflix has (the wait time). And Netflix is planning to lead in that wave. Check out Reed Hastings’ recent interview on 60 Minutes. And don’t get me started on how great of a job Netflix does in creating high switching costs (or “community stickiness”) with all of its great ratings and social networking features. Even though I will try Blockbuster again as a result of this promotion, it is unlikely I will dump Netflix.

What is the lesson learned here? Leverage your multichannel assets, like Blockbuster is finally doing, to earn “good profits”, especially in the face of a competitor acting on your source of bad profits. This will help offset the negative word-of-mouth that your bad profits have generated with positive word-of-mouth. Also, reducing your sources of bad profits now will help prevent disruptive upstarts in the future. This is much harder to do than it sounds, and the book The Innovator’s Dilemma does the best job of any I have read in explaining why.

Update: I just saw that Reed Hastings won the “Innovator of the Year Award” from the NRF (National Retail Federation), the parent of Shop.org.

10 Responses to “Netflix vs. Blockbuster: Round Two”

  1. Brett Hurt

    Leila, there is no doubt that Blockbuster Total Access is going to be preferred by those that want the in-store experience. Some venture capitalists and pundits at the height of the boom in 1999 predicted that the physical world stores would vanish to be replaced almost entirely by eCommerce. They said that only stores of “local value” like groceries and local culture (like turquoise jewelry in New Mexico) would remain. Obviously that didn’t happen. However, I think when video game and movie downloading becomes easy in people’s homes, there will be less people that opt to go into the store. But there will clearly be some that still choose to do so for at least a generation.

  2. Brett Hurt

    Leila, there is no doubt that Blockbuster Total Access is going to be preferred by those that want the in-store experience. Some venture capitalists and pundits at the height of the boom in 1999 predicted that the physical world stores would vanish to be replaced almost entirely by eCommerce. They said that only stores of “local value” like groceries and local culture (like turquoise jewelry in New Mexico) would remain. Obviously that didn’t happen. However, I think when video game and movie downloading becomes easy in people’s homes, there will be less people that opt to go into the store. But there will clearly be some that still choose to do so for at least a generation.

  3. Brett Hurt

    Leila, there is no doubt that Blockbuster Total Access is going to be preferred by those that want the in-store experience. Some venture capitalists and pundits at the height of the boom in 1999 predicted that the physical world stores would vanish to be replaced almost entirely by eCommerce. They said that only stores of “local value” like groceries and local culture (like turquoise jewelry in New Mexico) would remain. Obviously that didn’t happen. However, I think when video game and movie downloading becomes easy in people’s homes, there will be less people that opt to go into the store. But there will clearly be some that still choose to do so for at least a generation.

  4. I wanted to add my two cents and say that I am a mother of 3 and signed up with Blockbuster Total Access a few weeks ago with a 1 month free code to try it out (1944TA). I really like the balance between having DVDs delivered to my home and my husband taking the kids up to the store b/c they still like to walk around the store. With the recent addition of 1 free video game rental from the store, it really adds a huge customer benefit for our family and has saved us quite a bit of money.

  5. Brett Hurt

    From the Shop.org blog, where this post also lives.

    dfloyd Says:

    December 12th, 2006 at 11:02 am
    Netflix has jumped past Blockbuster for more reasons than just lack of surcharges. Netflix doesn’t have to invest in expensive real estate. Blockbuster has always had to establish themselves in densely populated areas. These areas are generally pricy since they need to be in well-traveled residential/commercial locations. That’s a substantial operational difference.

    But to the consumers benefit, Netflix took advantage of the infinite flexibility of the web, the inexpensive costs of DVDs and cheap postal rates. The Netflix site is interactive and informative and you can dig through user comments to help determine what to request. And should the movie you receive be a dud, the payment structure makes it feel like less of a sting than when you get in your car, drive to Blockbuster and pay $6. Lastly, about 50% of the time, interacting with the Blockbuster staff is a frustrating experience. In this case, it’s what Netflix DOESN’T offer that contributes to its competitive advantage. Frankly, I don’t know how Blockbuster has survived this long! There must be quite a lot of impulse movie renters! Sadly, on-demand will likely finish Blockbuster off for good.

    Brett Hurt | Bazaarvoice Says:

    December 18th, 2006 at 11:12 am
    dfloyd, you make very good points. There is no doubt that they have some of the same advantages as many online businesses have over offline. Remember that they do, however, have 40 distribution centers around the U.S. that all need to run like clockwork (see the 60 Minutes video at Yahoo! to watch how this is done). Granted, this is easier than running 8,500 stores in 29 countries, but it still has some challenges:
    http://cosmos.bcst.yahoo.com/up/news?ch=334515&cl=1331588&lang=en

    To your second point, Netflix has executed brilliantly on its community initiatives. I regular use my “friend’s list” and their recommendations to find the movie that I want to rent next. Netflix’s recommendations engine has turned into a long-term strategic asset, and they are leveraging it as such. Netflix formed Red Envelope Entertainment to leverage this data asset by using it to find “long-tail” movies that will have a guaranteed, significant following. You can read more about this at Wired, I find it fascinating: http://www.wired.com/wired/archive/14.09/netflix.html

  6. Brett Hurt

    From the Shop.org blog, where this post also lives.

    dfloyd Says:

    December 12th, 2006 at 11:02 am
    Netflix has jumped past Blockbuster for more reasons than just lack of surcharges. Netflix doesn’t have to invest in expensive real estate. Blockbuster has always had to establish themselves in densely populated areas. These areas are generally pricy since they need to be in well-traveled residential/commercial locations. That’s a substantial operational difference.

    But to the consumers benefit, Netflix took advantage of the infinite flexibility of the web, the inexpensive costs of DVDs and cheap postal rates. The Netflix site is interactive and informative and you can dig through user comments to help determine what to request. And should the movie you receive be a dud, the payment structure makes it feel like less of a sting than when you get in your car, drive to Blockbuster and pay $6. Lastly, about 50% of the time, interacting with the Blockbuster staff is a frustrating experience. In this case, it’s what Netflix DOESN’T offer that contributes to its competitive advantage. Frankly, I don’t know how Blockbuster has survived this long! There must be quite a lot of impulse movie renters! Sadly, on-demand will likely finish Blockbuster off for good.

    Brett Hurt | Bazaarvoice Says:

    December 18th, 2006 at 11:12 am
    dfloyd, you make very good points. There is no doubt that they have some of the same advantages as many online businesses have over offline. Remember that they do, however, have 40 distribution centers around the U.S. that all need to run like clockwork (see the 60 Minutes video at Yahoo! to watch how this is done). Granted, this is easier than running 8,500 stores in 29 countries, but it still has some challenges:
    http://cosmos.bcst.yahoo.com/up/news?ch=334515&cl=1331588&lang=en

    To your second point, Netflix has executed brilliantly on its community initiatives. I regular use my “friend’s list” and their recommendations to find the movie that I want to rent next. Netflix’s recommendations engine has turned into a long-term strategic asset, and they are leveraging it as such. Netflix formed Red Envelope Entertainment to leverage this data asset by using it to find “long-tail” movies that will have a guaranteed, significant following. You can read more about this at Wired, I find it fascinating: http://www.wired.com/wired/archive/14.09/netflix.html

  7. Brett Hurt

    From the Shop.org blog, where this post also lives.

    dfloyd Says:

    December 12th, 2006 at 11:02 am
    Netflix has jumped past Blockbuster for more reasons than just lack of surcharges. Netflix doesn’t have to invest in expensive real estate. Blockbuster has always had to establish themselves in densely populated areas. These areas are generally pricy since they need to be in well-traveled residential/commercial locations. That’s a substantial operational difference.

    But to the consumers benefit, Netflix took advantage of the infinite flexibility of the web, the inexpensive costs of DVDs and cheap postal rates. The Netflix site is interactive and informative and you can dig through user comments to help determine what to request. And should the movie you receive be a dud, the payment structure makes it feel like less of a sting than when you get in your car, drive to Blockbuster and pay $6. Lastly, about 50% of the time, interacting with the Blockbuster staff is a frustrating experience. In this case, it’s what Netflix DOESN’T offer that contributes to its competitive advantage. Frankly, I don’t know how Blockbuster has survived this long! There must be quite a lot of impulse movie renters! Sadly, on-demand will likely finish Blockbuster off for good.

    Brett Hurt | Bazaarvoice Says:

    December 18th, 2006 at 11:12 am
    dfloyd, you make very good points. There is no doubt that they have some of the same advantages as many online businesses have over offline. Remember that they do, however, have 40 distribution centers around the U.S. that all need to run like clockwork (see the 60 Minutes video at Yahoo! to watch how this is done). Granted, this is easier than running 8,500 stores in 29 countries, but it still has some challenges:
    http://cosmos.bcst.yahoo.com/up/news?ch=334515&cl=1331588&lang=en

    To your second point, Netflix has executed brilliantly on its community initiatives. I regular use my “friend’s list” and their recommendations to find the movie that I want to rent next. Netflix’s recommendations engine has turned into a long-term strategic asset, and they are leveraging it as such. Netflix formed Red Envelope Entertainment to leverage this data asset by using it to find “long-tail” movies that will have a guaranteed, significant following. You can read more about this at Wired, I find it fascinating: http://www.wired.com/wired/archive/14.09/netflix.html

  8. Sharkelady

    I felt I should reply to this. I was a former Netflix user and a few months ago switched to Blockbuster. A few days ago I learned how Blockbuster treats their employees and was horrified. I have since canceled my service and told them I would not use their store again. Go Netflix.

  9. Sharkelady

    I felt I should reply to this. I was a former Netflix user and a few months ago switched to Blockbuster. A few days ago I learned how Blockbuster treats their employees and was horrified. I have since canceled my service and told them I would not use their store again. Go Netflix.

  10. Sharkelady

    I felt I should reply to this. I was a former Netflix user and a few months ago switched to Blockbuster. A few days ago I learned how Blockbuster treats their employees and was horrified. I have since canceled my service and told them I would not use their store again. Go Netflix.

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