Tuesday, April 27, 2010
An article in today's Yahoo Finance proclaims Netflix defeated the former giant of the home video market (Blockbuster) through it's watch at home feature. I think the competitive advantage of Netflix goes much deeper. The two business models resemble more closely Amazon versus Barnes and Noble. One has thousands of brick and mortar locations upon which it primarily relies for sales and the other conducts its business exclusively on the web (backed up by decentralized shipping locations for customer fulfillment). The lean internet model is much more cost effective than Blockbuster's brick and mortar model. Netflix's "watch it now" feature was just the coup de grâce to the temple of a dead man walking. Netflix has better selection at a lower price. The one competitive advantage Blockbuster held in home movies was impulse purchases, especially new releases on weekends. With no home US postage delivery on Sundays, the weekend business favored Blockbuster. Although the Netflix "watch it now" feature closed the gap on weekends it's not a world-beater function. Netflix "watch it now" only offers older and more obscure movies, which means newer hit movies are not part of the "watch it now" lineup. That sub-category is now dominated by Redbox, a subsidiary of McDonald’s. Talk about low overhead. Redboxes spring like mushrooms at convenience stores, drug stores and supermarkets throughout America. At $1 per night for new releases, Redbox prices blow away Blockbuster. Although Redbox is a robust competitor, it poses no real threat to Netflix in my view. A single Redbox holds around 500 movies while Netflix allows you to choose from 65,000 titles. All hard-core movie junkies must go with Netflix.