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Discussion Starter · #1 ·
Interesting article. http://www.business2.com/articles/we....html?ref=cnet


The highlights:
  • [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.
Quote:
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.

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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.
--Burke
 

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In an interview a couple of months ago the NetFlix president said movie rentals was only a way to capture customer access for the intended and much bigger business of VOD. Hope they get there soon because they have faltered on the mail rental business and are having a harder time retaining customers than signing new ones.


The dvd rental business is still challenged by the falling price of purchased dvds. It's still not clear that the studios see rentals as a good business, and without them it's not likely to survive.


Regards, Michael
 

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I have to say that I've never had a problem with Netflix, after almost two years with them. I don't think Blockbuster can ever compete with Netflix, because my local Blockbuster has *maybe* a couple of hundred DVDs. Netflix advertises they've got 8,000 or more DVDs. You sure can't rent Imax movies from Blockbuster!
 

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Discussion Starter · #5 ·
I love the NetFlix queue. I currently have over 300 movies in my queue. With NetFlix, I'll never run out of movies I want to watch. At BlockBuster, I very often have a problem finding anything I want to watch.


--Burke
 

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My local Hollywood Video is already doing this. For $20 a month I get to rent all I want. I can have two movies out at a time and exchange as quickly or slowly as I wish.


While their selection isn't as good as netflix (they have about 2000 DVDs), it is very nice to get a movie anytime I want (it's about half a mile away), rather than putting it in a queue, waiting for it to be available, waiting several days as copies exchange in the mail. Even with a 2 day mail rate, it's really 4 days (there and back) before you get your next movie.


The Hollywood Video has also started stocking both P/S and OAR of movies (i.e. JP III, Mummy Returns).
 

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Blockbuster and Hollywood Vid have it wrong....see many of us do NOT want to come to your store. Traffic is bad enough in Seattle...I'm not too excited about hopping into the auto to pick up some movies....send'em to my mailbox and I'm happy.
 

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I think if Blockbuster can come up with a program that offers a mix of internet orders/store pick-up and dropoffs/mail orders, I think they will kill Netflex quickly. I think the customer wants a choice of options. Sometimes if you need the flick that night, pickup is the only option and is more convient for many people who drive by blockbusters everyday.
 

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Quote:
Originally posted by SRR
Not to mention a lot of the BlockBuster tittles are P/S versions only.
Not any more at my local Block Buster. I quit going there for about 6 months and last weekend my wife just had to rent a DVD so I stopped in there and lo and behold, all the movies I looked at were widescreen and the price had dropped to $2.99 for new DVD rentals.


It's about time. If they keep it up, I just may rent from them again.
 

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Quote:
Originally posted by Marissadad


Not any more at my local Block Buster.
I never had a problem getting widescreen versions at my Block Buster. The biggest problem I had was when I would buy a used DVD, they would often put a P&S version in a widescreen case, but I always check now.


An interesting note, when Harry Potter came out, I went to Circuit City to buy it and they did not have one wide screen version in the store, but about a hundred P&S versions. When I asked a clerk he was shocked because he said they had a bunch of the widescreen versions earlier. I think people who buy DVD's tend to be the ones with widescreen TVs. People that rent tend to be the Pan and Scanners.
 

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Do you know if it is true that Blockbuster's movies are different then getting them elsewhere. What I mean is that Blockbuster's movies are edited differently to their standards. Kinda like what Disney does.
 

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Quote:
Traffic is bad enough in Seattle...I'm not too excited about hopping into the auto to pick up some movies....send'em to my mailbox and I'm happy.
Just to bring a different opinion, I would be thrilled if BlockBuster would adopt something in-store like what is being discussed here. That $20/month thing someone mentioned at Hollywood video sounds like a dream.


There are millions of us up here in Canada who do not have access to Netflix. We do have BlockBuster though.... ;)
 

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I owe my local Blockbuster a $20 late fee, I forgot to take them back prior to a business trip and left them in my car. If they would get rid of the STUPID fees as an income stream, they would have more loyalty in the marketplace, and Netflix would be a novelty. I agree with the $20 a month thing.
 

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Personally, I like my local library. The selection is getting bigger and the rental is 1 week for free. I was surprised to see how many R-rated flicks they have, too.
 

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I agree that the visit to the store is the killer. It's such a weak experience.
 

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We rent a lot of DVDs at two different Blockbusters. Problem is the lack of selection. I went in last night and nearly couldn't find anything I wanted to watch. There are lots of movies I want to see - classics, old musicals, etc., but none were available. Not a single one.


It's the lack of selection that will turn us on to Netflix. Blockbuster is frankly more convenient, but the selection is very weak. At least we get widescreen.

Leslie
 
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