Blockbuster's Business Model: Threats, Adaptation & Strategy

Introduction: Blockbuster's Rise and Changing Market

Blockbuster developed into the largest chain of video stores in the United States during the era when videotape was the accepted format. The company expanded the number of stores and changed the way many people rented videos. It was never the only competitor in the space — the Hollywood Video chain made inroads into the business without seriously damaging Blockbuster's supremacy. However, the video business changed along with the accepted format, and the shift to DVD was adopted by Blockbuster while the company attempted to maintain the same rental structure it had always used.

Maintaining that structure has become increasingly difficult because of new methods of delivering films to consumers, new threats to Blockbuster's traditional business model, and the ways in which Blockbuster has sought to turn some of those threats into opportunities. At the same time, new threats remain on the horizon and may yet test the company's ability to survive.

Company Analysis: Internal Operations and Performance Evaluation

Changes in the rental business constitute one major threat, but the company's initial response was directed less at rentals as such and more at controlling managers and employees. Performance evaluation long differed for managers and employees. Managers were monitored according to the overall performance of their individual store, while individual employees were evaluated by the manager using general criteria set by the chain along with additional criteria shaped by each manager. Managers were motivated through a reward and incentive program that was neither extensive nor particularly effective.

Indeed, the program appears to have lost much of its original promise because of shifts in the industry. The chain began as part of a growth industry, but that is no longer the case. A few years ago, growth was pursued in two directions. First, it was directed at increasing the number of stores — but managers believe this was overdone, leaving too many stores in any given area. An oversaturated store network undercuts business for each individual location and reduces the chance for managers to participate in profit-sharing. Second, growth was intended to increase business for each store, but this was undercut not only by too many nearby locations but also by broader changes in the video industry and by a declining willingness among consumers to rent movies when cable and pay-per-view offer so many alternatives. Controls have slackened as business has fallen off.

Inventory Management and the Rental Balancing Act

Performance for each store is measured in terms of revenue, as might be expected, but also in terms of how many times a given film is rented. This applies especially to the first several weeks after a release, since the goal is to purchase enough copies of a given title to satisfy customers while renting that title enough times in the first month to recoup the purchase cost. If a manager orders too few copies, customers may be dissatisfied and go elsewhere. If too many copies are ordered, the store loses money because the title will not be rented frequently enough to justify the purchase. This is a delicate balancing act based partly on judgment, partly on experience, and partly on informed guesswork. It is also the primary responsibility of both the manager and the central office, and it is a determining factor in whether a given store succeeds and whether a given manager is rewarded.

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

Competitive Threats: Cable, Pay-Per-View, and Digital Downloads

While cable television and the expanding number of film channels offered on cable and satellite undercut Blockbuster's business to a degree, there remains a core of dedicated renters who seek the latest releases at the video store — sometimes sooner than those releases appear on cable, and often on the basis of convenience, since the customer can watch when they choose rather than on a cable channel's schedule. Even this advantage has been eroded by pay-per-view and video-on-demand services, which allow cable companies to deliver a film to an individual consumer at the moment the consumer requests it. The consumer simply selects the film using the cable box remote and watches it immediately. Some systems also allow the viewer to pause and rewind, much as if watching a DVD rather than a broadcast signal. This is highly convenient and may also be cost-effective compared to driving to a video store. The limitation is that not every cable system yet offers this capability, though more will in the coming years, and Blockbuster must be prepared for that eventuality.

An even greater threat lies in the possibility of downloading films to a home computer for playback or burning, though this technology has so far been too slow for most consumers. Even a small movie file can take more than two hours to download over a cable connection, and larger films can take many hours — far too slow to be convenient. However, as bandwidth increases and downloads become more viable, Blockbuster will need to recognize digital delivery as a real threat and incorporate it into its business model. One response would be to create its own download service.

Response to Netflix and the Online Rental Strategy

Netflix pioneered a system by which consumers select a list of DVDs from the company's website and the company then mails a set of discs directly to the consumer. The consumer watches the films and returns them in a prepaid envelope. Blockbuster saw its rentals declining because of this system and undertook corrective action. First, Blockbuster stopped charging late fees, reasoning that part of Netflix's appeal was that customers could keep films for as long as they liked without penalty. Then, Blockbuster developed its own mail-order service, using its website to send films in the same manner as Netflix. Recent television commercials acknowledged this directly, noting that Blockbuster and Netflix operate in essentially the same way.

However, Blockbuster sought an edge by leveraging something Netflix does not have: actual brick-and-mortar stores. What had been viewed as a liability was recast as an asset. Blockbuster gave consumers the option of taking films received by mail to a physical store, exchanging them in person, and receiving a free in-store rental for each DVD returned. The returned discs are entered back into the system so that the online queue immediately ships replacement titles. This effectively doubles the number of rentals a consumer can enjoy for the same subscription price, while offering the added convenience of immediate in-store access. In this way, Blockbuster converted the perceived liabilities of physical stores — travel, returns, and limited hours — into competitive advantages over a purely digital competitor.