Interesting article. http://www.business2.com/articles/we....html?ref=cnet
- [Netflix] expects to be able to provide one- or two-day delivery service to at least 90 percent of the U.S. population by the second half of 2002.
- [BlockBuster] might be considering an all-you-can-eat DVD-rental offering to counter the services offered by Netflix.
- Depending on which program they sign up for, Blockbuster customers will be allowed to hold on to two or more movies for at least a month, and forgo the dreaded late fees.
|Blockbuster Takes On Netflix|
By: Eric Hellweg
Date: May 29, 2002
Blockbuster -- the 800-pound gorilla of home entertainment -- has launched an all-you-can-eat DVD plan of its own.
Last week's successful Netflix (NFLX) IPO -- like the PayPal (PYPL) IPO of a few weeks before -- triggered euphoric cries that tech companies are on the rebound at last. To both firms' credit, their initial public offerings have fared well. Not quite as boffo as those of their late-1990s progenitors, perhaps, but then again, PayPal and Netflix may be less likely to meet the fate of companies such as LoudCloud (LDCL), which went public in March 2001 and now trades for about 20 percent of its opening price. As a result of its public offering, Netflix, which provides a subscription-based service that allows customers to rent DVDs by mail, raised some much-needed cash and now boasts a market cap of about $750 million.
But like its dotcom cousins before it, Netflix has yet to show a profit, and according to its S-1 filing, it has no plans to show one in the foreseeable future. That said, the company possesses some attributes that could make it the feel-good hit of the summer.
First, revenues have grown tremendously. Netflix took in $75.9 million last year, up from $35.8 million the year before and $5 million the year before that. Second, on April 23, the company announced that it had surpassed the 600,000-member mark. Not bad, considering that the company claimed 300,000 members as recently as last September. As the market for DVD players continues to explode, Netflix is well positioned to capture at least some of the action. The company has marketing arrangements with Best Buy (BBY), and Netflix's advertising inserts are packed into DVD player cartons from manufacturers such as JVC, Panasonic, and Philips. Third, the service boasts a unique alchemy that turns many customers into evangelists. My girlfriend is a subscriber, and she -- like so many of her friends -- passionately touts the service to anyone who will listen.
That's the good news. But across the aisle, there are a few thumbs-down.
Right now, the majority of Netflix's customers live in the San Francisco Bay Area. In fact, Netflix boasts that 2.6 percent of all Bay Area households subscribe to its service. As the company looks to move nationwide, it must increase its number of fulfillment centers across the country, so members can receive DVDs within a few days of ordering them. Currently, Netflix has eight fulfillment centers across the country.
As everyone (including Amazon's (AMZN) Jeff Bezos) now knows, opening, staffing, and maintaining such distribution centers is a costly and time-consuming endeavor. In its S-1 filing, Netflix states that it can set up regional centers for approximately $60,000 each. This seems shockingly low. Rick Sneed, a Netflix spokesman, said that this figure includes only the initial cost of leasing a facility and getting it up and running. Though Netflix certainly won't build $25 million centers like the ones that erstwhile online grocer Webvan constructed, it will have to spend a chunk of change to establish a nationwide presence. Netflix seems up to the challenge, however, saying in its filing, "We expect to be able to provide one- or two-day delivery service to at least 90 percent of the U.S. population by the second half of 2002."
"These challenges are very real," says Jared Blank, an analyst with Jupiter Media Metrix (JMXI). "The quality of service is worse if you don't live near a distribution center."
The company also faces less obvious challenges to its business model. On June 30, for example, postage for first-class mail will rise an average of 7.9 percent. Any company that ships as much product as Netflix will be adversely affected, and already slim margins may shrink even further -- unless those costs are passed on to consumers.
But perhaps the biggest danger Netflix faces is the specter of increased competition from the biggest name in home entertainment: Blockbuster (BBI). During an April 24 conference call with analysts, Blockbuster CEO John Antioco hinted that the company might be considering an all-you-can-eat DVD-rental offering to counter the services offered by Netflix. Those programs will soon see the light of day. "We're rolling out tests this summer in a few markets," says Karen Raskopf, a Blockbuster spokeswoman. "New York City is one of the markets, and they'll be kicking off in a couple weeks."
Unlike Netflix's direct-mail model, Blockbuster's trials allow consumers to pick up their movies at Blockbuster's neighborhood locations. "We've studied the direct-mail model, and we continue to study it, but we still haven't found a way to make money with it," Raskopf says. Depending on which program they sign up for, Blockbuster customers will be allowed to hold on to two or more movies for at least a month, and forgo the dreaded late fees.
Blockbuster claims to have locations within a 10-minute drive of 64 percent of the U.S. population. And according to Raskopf, Blockbuster's studies show that most customers make movie-renting decisions based on impulse, not advance planning. "Eighty-seven percent of the people in our survey planned to rent the same day they rented," Raskopf says. If consumer demand indicates that a direct-mail option would be desirable, Raskopf says, then any one of the company's several thousand U.S. locations could serve as a distribution point.
Imitation may be the sincerest form of flattery, and perhaps Netflix should be blushing at Blockbuster's sudden attention. "The fact that Blockbuster is toying with a competitive service means they perceive Netflix as an encroachment," says Rich Peterson, chief market strategist at Thomson Financial.
Netflix's Sneed says the company welcomes the competition. "We're glad that they're coming into the business," he says. "It helps substantiate that the subscription model is a good one." If Netflix hopes to sustain its IPO-fueled momentum, it will need to exorcise the ghosts of the Internet business models that came before. Ominously, first to market has often meant first to fold.