Blockbuster Developed Into the Largest

Blockbuster developed into the largest chain of video stores in the United States during the era when videotape was the accepted format, and the company expanded the number of stores and changed the way many people rented videos. The company has never been the only such company in existence, and the Hollywood Video chain made inroads into the business without rally damaging Blockbuster's supremacy. However, the video business has changed just as the accepted format has changed, and the shift to the DVD was adopted by Blockbuster while trying to maintain the same rental structure for the business. This has become increasingly difficult because of new ways of delivering films to the consumer, new threats to Blockbuster's traditional business model, and ways in which Blockbuster has turned some of these threats into opportunities. At the same time, new threats are on the horizon and may test the ability of Blockbuster to survive.

Company Analysis

Changes in the rental business constitute one threat, as will be seen, but the response of the company at first was not directed so much at the rentals as such but more to controlling managers and employees. Performance evaluation long differed for managers and employees. Managers were monitored according to the overall performance of the individual store, while individual employees were monitored for performance by the manager based on general criteria for the chain and added criteria shaped by each manager. Managers were motivated based on a reward and incentive program that was not very extensive and not very effective. Indeed, the program seems to have lost much of its original promise because of changes in the industry. The chain started as part of a growth industry, but this is no longer the case. The growth was directed in two ways a few years ago. First, it was directed at increasing the number of stores, but managers believe this was overdone so that there are too many stores in a given area. This undercuts the business for any one store and so reduces the chance for managers to participate in profits. Second, growth was meant to increase the business for each store, but this was undercut not only by too many stores in each area but also by changes in the video industry and in the willingness of people to continue to rent movies when they can see much more on cable and pay-per-view. Controls have slackened as business has fallen off in the past two years or so.

Performance for each store is measured in terms of income as might be expected, but also in terms of the number of times a given film is rented. This applies especially to the first several weeks of a release, for the intent is to purchase a sufficient number of a given title to satisfy the customers while managing to rent that title enough times in the first month to pay for the video. If a manager orders too few of a given title, customers may be unhappy and go elsewhere. If he or she orders too many, the store will lose money because the title will not be rented sufficiently to pay for the purchase. This is a delicate balancing act based in part on judgment, in part on experience, and in part on guesswork. It is also the primary work of the manager and of the central office alike, and it is a determining factor in whether a given store succeeds or not and whether a given manager is rewarded or not.

Certain titles are assured popularity, and the central office suggests how many each store should have. Some titles may serve a specific clientele known to the manager. some titles may work in one area and not another. How well the manager assesses these differences is monitored over time.

While cable television and the number of film channels offered on cable and satellite undercuts Blockbuster's business to a degree, there remains a core of dedicated renters who can be relied on to seek the latest releases in the video store, perhaps sooner than those releases are shown on cab le, and perhaps on the basis of convenience so the customer can watch when they want and not on the schedule of a cable channel. Even this aspect has been undercut to a degree by pay-per-view and viewing on demand, meaning that cable companies are now able to show a film to the individual consumer when the consumer requests it. The consumer simply selects the film using the hand-held remote for the cable box and watches it right away. Some systems are able to empower the viewer to pause and rewind as well, just as if he or she were watching a DVD and not a signal from a central location. This is very convenient and immediate, and it may also be cost-effective when compared to driving to the video store and renting a film. This competitor is still limited in each, for not everyone is on a cable system that has this capability, though more and more will be in the coming years. Blockbuster has to be prepared for that eventuality.

An even greater threat might be found in the possibility of downloading films onto a home computer for burning or playing, though this technology so far is too slow for most uses. Even a small movie file can take more than two hours to download even with a cable connection, and larger films can take many hours. This is far too slow for most consumers and not convenient at all. However, as the bandwidth increases so that downloads become more viable, Blockbuster will have to recognize this as a real threat and will have to incorporate this competition into its business model. One way would be to crate its own download service.

Indeed, that is how Blockbuster has met competition from another source, that being Netflix. Netflix pioneered a system by which the consumer selects a list of DVDs from the company website and then the company sends a set of DVDs to the consumer. The consumer watches these and then returns them in the prepaid envelope. Blockbuster saw its rentals diminishing because of this system and undertook corrective action. First, Blockbuster stopped charging late fees, on the theory that part of the appeal of Netflix was that the consumer could keep the films for a while before sending them back and was not faced with any late fees. Then, Blockbuster developed its own mail-order system, using its website and sending films just as Netflix does. Indeed, recent television commercials state this openly, noting that Blockbuster and Netflix work essentially the same way. However, Blockbuster has also sought to increase its share and reduce that of Netflix by having an added element to appeal to consumes. On one level, Blockbuster online works the same way Netflix works. However, Blockbuster has something Netflix does not, that being actual brick-and-mortar stores. These have been seen as a liability, but in this case, Blockbuster has managed to make them an asset by giving consumers the option of taking the films received in the mail to a store, turning them in, and receiving a rental for each DVD for free. The returned DVDs are then input into the system so that the online store sends out replacement films immediately. This effectively gives the consumer twice as many rentals for the money, with added convenience for the movie-lover of getting films right away. In effect, Blockbuster has turned the liabilities of going to the store, renting films, and having to return them to the store into positives.