Porter\'s Five Forces Movie Rental

Porter's Five Forces

movie rental industry and competition

Porter's Five Forces: The movie rental industry

The threat of new entrants

The movie rental industry as a whole has relatively low overhead, particularly in these post-Blockbuster times. Movie rental companies such as Netflix occupy virtual space rather than exist as brick and mortar stores. This would seem to make the risk of new entrants fairly high. But Netflix must pay postage to support its business model of unlimited shipped-to-consumer movies, and Redbox must maintain kiosks in prominent areas to encourage consumers to rent from its vending machines. Hidden entry costs to challenge the main industry competitors are higher than they might seem, given the size of Netflix and its few main rivals, which allow them to operate on economies of scale. But new entrants can gain entry, either selling illegal, bootlegged copies of films, which are growing increasingly sophisticated, or simply diversifying their brand offerings, such as Facebook and Amazon, who are making encroachments into the rental market (Bond 2011).

Rivalry

Rivalry is considerable, given the frequent similarity between the two products being sold: many existing movie rental companies offer the same films, with little distinction between their services other than price and method of delivery. Netflix offers unlimited rentals by mail; cable companies offer Movies on Demand to subscribers who pay fees only for the films they want, and Redbox offers a pay-as-you-go model through rental kiosks.

Buyer power

Buyer power is considerable given that no one 'needs' to order a film, and there are many available substitutes on the market. Buyers can rent movies for free at the library or watch television. The availability of new technology means that the venues to see films may grow even more diverse, giving buyers increased leverage. The day after Warner Brothers. announced an agreement with the online social media website Facebook to allow Facebook users to stream the Dark Knight for $3, Netflix's stock dropped 6% (Bond 2011). Netflix stock had already dropped 17% when Amazon.com announced "it was giving away streaming movies to its subscribers of Prime, Amazon's discount shipping initiative" (Bond 2011). Buyers seem to have an infinitely expansive array of was to see films. Even YouTube made a deal with Lionsgate films in 2010 to stream many popular movies for free (Salter 2010).

Supplier power

The example of Warner Brothers and Facebook also illustrates the tremendous power that companies have in deciding how to distribute their movies. Netflix cannot afford to refuse to disseminate Warner Brothers films as leverage with the company, given that this will only drive consumers away from Netflix services, and cause them to explore other rental venues. Movie suppliers have a strong interest in finding as many new and innovative ways to release their product and create buzz and excitement about films. Netflix and other companies cannot demand many restrictions and exclusive arrangements from suppliers because so many other distribution venues exist.

Redbox is even more restricted in its supplier relationships -- it does not charge a subscriber fee and disseminates films via kiosks, which allows for low-commitment consumer impulse purchases. It stocks far fewer films than its rivals and depends upon convenience and other store locations to promote its product (Red Box, 2009, NY Times).

As suppliers themselves, one way in which 'postage-based' rental movie companies have attempted to secure leverage from buyers is slowing down the turnover rate between rental times and shipping times. 'Throttling' has been one way that Netflix prevents the costs of shipping the rentals to the movie-goer exceeding the shipping fee -- in other words, delaying shipments to its highest-volume users. Netflix only recently publicized the fact that the fewer DVDs customers rent, the higher the priority they receive in being sent their movie selection. They did so "after a San Francisco subscriber filed a class-action lawsuit alleging that the company had deceptively promised one-day delivery of most DVDs" (Frequent Netflix customers, 2006, MSNBC). Through using this practice, Netflix garnered a great deal of negative publicity.

Threat of substitutes

The threat of substitutes -- spanning from other forms of media such as the Internet and television, to the library, to bootlegged copies, to films seen online and 'good old fashioned theater' seen in-house -- is considerable.

Critical success factors for Redbox, Netflix, and Movies on Demand

Virtually every element of the 'Five Forces' for these companies is a resounding negative influence upon the industry. To survive, it is critical that the existing Redbox, Netflix, and Movies on Demand provide a unique 'value' through the services they provide to customers that cannot be offered by competing venues online, on television, or potentially through new entrants such as Amazon and Facebook. "CSFs are the essential areas of activity that must be performed well if you are to achieve the mission, objectives or goals for your business or project" (CSF, 2011, Mindtools). "Netflix has been aggressively pursuing the next generation of distribution channels -- web streaming, game consoles, and other connected devices" (Salter 2010). Netflix is seeking to stream more of its content to subscribers instantly online to compete with YouTube, but there is always the danger that it may be refused or heavily gouged by distribution companies for rights fees (Salter 2010).