Netflix vs. Blockbuster Revisited

Netflix vs. Blockbuster Revisited

By Davis Freeberg

Editor’s note: It should be disclosed that Davis Freeberg is both a current customer and shareholder of Netflix. This post should not be construed as providing financial advice.

A year ago, I took issue with Wedbush Morgan analyst Michael Pachter’s pessimistic views on Netflix and his optimistic outlook for Blockbuster Video. Surprisingly, Pachter actually took the time out to respond with clarification on his view back then that Blockbuster would be a better investment than Netflix. The whole thing was Slashdotted under the headline The DVD Race Analyzed and since 12 month price targets, are, well, 12 month price targets, here we are one year later.

A year ago Pachter had placed a 12 month price target of $3 per share on Netflix’s stock and a 12 month target of $13 per share on Blockbuster’s stock. Had Pachter been correct this would have represented a 75% decline in Netflix’s market cap and a 45% increase in Blockbuster’s market cap. What happened instead was that Netflix ended up executing very well on their business and shareholders ended up achieving a 157% return compared to Blockbuster shareholder’s 52% loss.

Over the last 12 months, Pachter has raised his target price on Netflix twice. The first was on 07/26/05 when Netflix was at $19.01, he increased his 12 month price target to $6.50 per share and again on 1/25/06, with Netflix trading at $28.59, he increased his price again to $10 per share, where it stands today.

If you compare this with Blockbuster you can see that he adjusted his price target three times. The first was 11/09/05 when he brought it down from $13 to $10. At the time Blockbuster’s stock price was $4.11. On 03/10/06 he updated his target to $5.25, when Blockbuster was at $3.65 and then raised it again on 4/27/06 with the stock at $4.76 to where it stands today at $5.60.

If Pachter is correct, it would mean that we should expect to see Netflix face some pretty turbulent times over the next 12 months. While his $10 target isn’t as aggressive as last year’s dire 75% prediction, it would still represent an erosion of 65% to Netflix’s market cap. His expectations for Blockbuster on the other hand are still more moderately rosy this year. Instead of a 45% increase in Blockbuster’s stock price, he thinks shareholders should expect a more modest 17% increase in appreciation.

I think he’s wrong.

Again.

Netflix has fundamentally changed the video store rental industry forever and has shown no signs of slowing. Video on demand will be an issue for the company, but Blockbuster will not be immune to the same issues. Netflix has developed a VOD solution, but still needs to convince Hollywood to give it’s approval. Netflix management has made very few mistakes along the way and they’ve always been quick to correct them when they have come up.

Netflix’s cohesive management team has allowed them the flexibility to move very quickly in an emerging market, whereas Blockbuster is a more bulky ship for CEO John Antioco to steer. Blockbuster has proven that they can follow the market, but so far they haven’t been able to lead. Over the last year, Antioco has had to deal with quite a bit of internal issues. He slashed staff to try and create cost savings and had to survive a brutal proxy fight with Carl Icahn — meanwhile nervous bond holders have kept a tight leash on how the company operates. Only recently has Antioco been able to committ his undivided attention to running the business instead of dealing with political pressures. And perhaps most personally disappointing for Antico this past year he had his fat $7,000,000 million per year pay package cut to $1.63 million. Ouch.

Recently, Blockbuster has been in liquidation mode. Last March they sold off their Spanish operations and currently they are selling off the remainder of their Austrailian locations. In the 1st quarter alone they closed 131 stores. Over the next year store tipping will accellerate and they are going to be forced to downsize their retail prescence even more. For every store that goes out of business, it creates a big opportunity for Netflix to expand into their market. Blockbuster might be able to move some of these customers online, but the loss of the higher transaction revenue will certainly be felt as Antioco & Co. continue to dismantle the company piece by piece.

Recently, Blockbuster has been able to demonstrate some improvement in how they compete online. Specifically, they announced that they are going to redesign their website which should help them shift demand further to archived DVDs and away from new releases. This is important because it can help them start tapping into longtail economies. They have also done a good job of differentiating their online service from Netflix by offering free weekly rental coupons to their online subscribers. This has helped to bring online customers back into the store and offers Blockbuster an upsell opportunity for their online subscribers. Both of these initives will help Blockbuster further solidify their online offering and are important steps for them to take. Blockbuster Online has become an important strategy for the company, but Blockbuster is running out of time, if they closed every store it would take 30 million subscribers to replace the $6 billion and shrinking in revenue that they make each year. They may not need all 30 million to survive, but it’s going to be difficult for them to increase their subscriber base as fast as their revenues fall.

The stand alone video store is facing a similar crisis to what the cineplex faced prior to the explosion of the multi-plex. The Cineplex could only offer limited amounts of movies and had to have a staff for the whole theater. The mutli-plex on the other hand offered more choice and cost savings. Eventually the Cineplex was forced to yield to the more efficient business model. Over the next year, Blockbuster will continue to face the same pressures. Netflix offers more choices then what they could ever hope to stock in a store and because it’s all done through the mail, they don’t have to staff 9,000 locations.

The video store business model will eventually fail because of simple economics. They have a high fixed cost and Netflix and VOD has a variable cost to their business. If a video store has traditionally made 10% profit margins on their business and 20% of their customers go away, they still have to pay their fixed costs, but if Netflix sees a decline in their subscriber base business, they can more easily adapt because most of their costs are tied to usuage not infrastructure. This allows them to be more nimble in tough markets and more aggressive in emerging ones.

Since the launch of Blockbuster’s online dvd rental program in August 2004, they have added 1.3 million customers, but over the last 6 months alone, Netflix was able to add
almost as many subscribers. Each customer that Netflix acquired represents pure growth for the company, but of Blockbuster’s 1.3 million subscribers, how many of them represent former retail store customers?

According to Blockbuster’s most recent quarterly filing, revenue for the 1st quarter of 06′ declined 7.7% compared to the 1st quarter of 05′. Between the canibalization of their own customers and competition from new alternatives, Blockbuster could soon find themselves in a postion where it will be tough to make profits at many of their stores.

If you compare the balance sheets of both companies, you can see that Netflix currently has $227 million in cash on hand, $392 million in total assets and only $155 million in total liabilities. Blockbuster’s hasn’t officially filed their 10-K for the most recent quarter, but according to their 8K they had a cash position of $223 million, they had $1.03 billion in assets, but also had $1.07 billion in debt and $413 million in accounts payable. Blockbuster’s cash position was helped tremendously by an infusion of $150 million from Carl Icahn last year, but the price Blockbuster had to pay for the money was the issuance of preferred stock that they have to pay a 7.5% coupon on in cash or stock and it has a convertible feature that allows the holder to convert the bond to stock at a $5.15 stock price until November 20, 2010. At the time of it’s issuance Blockbuster’s stock price was at $4.20.

Contrast this to Netflix most recent announcement that they plan on issuing another 3.5 million shares in a secondary offering. Not only do they not have to take on debt to obtain capital, but they also don’t have to resort to conversion features in order to raise the working capital.

In his response to my article last year, Pachter pointed out two advantages that he saw Blockbuster having over Netflix. The first was that Blockbuster’s service was $3 cheaper then Netflix and the second advantage was that he saw a cost advantage once Blockbuster began shipping from the retail stores.

A year later, not only did Blockbuster get burned by the price war that they started, but they also lost all control over pricing. If Netflix wants to raise prices, Blockbuster would gladly follow, but Netflix has hinted that they might go the other direction. They’ve already begun price testing and have said that they would consider lowering prices if they could do so and still hit earnings guidance. Whether or not Netflix decides to lower prices for the next year is irrelevant though. What matters is that they get to control how and when the DVD online market becomes a cash cow. With Blockbuster unable to compete on price, Netflix’s brand name gives them a huge advantage over the negative long term image that consumers associate with Blockbuster’s brand.

Last year, Blockbuster did begin mailing DVDs from their retail stores, but Netflix also began work on their own secret weapon. In July the company announced that they were making an investment for new postal sorting machines. At the time Hastings promised to update investors on what type of cost savings to expect in 2006 and has quietly forgotten to mention the impact since then. While I don’t know the amount of savings the machines have generated, I suspect that Pitney Bowes has helped Netflix to to negate some of the cost advantage that Blockbuster might have from the retail level shipping.

Over the next year, as video store margins continue to detoriate, Blockbuster will have no choice but to continue to close their stores. Each store closing will reduce Blockbuster’s revenue and will make their debt payments more and more difficult to make. Over the last year, Blockbuster has sold off a number of assets and the loss of these stores will also contribute to a decline in overall revenues for the company. Netflix on the other hand, continues to add subscribers each quarter and are predicting that they will exceed 6 million customers by the end of this year. Netflix is also predicting $35 million in net earnings this year and 50% earnings growth for the next several years.

Despite my own pessimistic outlook on Blockbuster, I don’t think that it still too late to save the company. In a digital world innovation can always occur. One of Blockbuster’s bright spots is their ability to leverage their real estate portfolio. This allows them to be more aggressive about closing stores and gives them some flexibility in exiting unprofitable stores. The only way that I can see Blockbuster expand revenue, but increase store closings would be for them to negotiate the rights to do burn on demand DVDs at kiosk locations nationwide. Blockbuster has had some success at negotiating revenue sharing arrangements with the studios and if they could offer a business model where you could go to your favorite supermarket and burn any of 50,000 DVDs on demand or ahead of time, then the company could survive the digital transition.

Blockbuster has explored kiosk relationships in the past, but have never committed to a strategy. Movie Gallery on the other hand has developed an early kiosk strategy, but so far it doesn’t include the rights for burn on demand functionaity. Last fall Joe Malugen, the CEO of Movie Gallery said that they were planning to launch their own kiosks at an unnamed grocery store chain, but the deal failed to materialize and has been put on hold due to their debt issues. While it might not be too late for Blockbuster, unfortunately for Movie Gallery, even burn on demand kiosks might not be enough to save them. If Blockbuster could secure the rights to this technology then I would rethink my thesis on the company, but as it stands now Blockbuster hasn’t shown any signs of being innovative and Antioco is only now starting to understand how Netflix leverages the long tail to maximize profits.

Last August, Pachter said that Blockbuster had “a chance to eat Netflix’s lunch“, but I don’t think that Netflix needs to worry as much about Blockbuster as Blockbuster does about Netflix. The online DVD rental market is a growing market and Netflix will gain customers regardless of what Blockbuster tries, but Blockbuster on the other hand is sitting on a one billion dollar time bomb that will have to be dealt with further down the road. Over the course of the last year I’ve seen a lot of writers refer to Netflix as a struggling company. They paint a picture of desperation, but the truth is that Netflix can afford to run at breakeven for ten years, if that’s what it takes to turn the video store market entirely upside down.

Update: Editor’s Note: Wedbush Morgan Analyst Michael Pachter responded to Davis Freeberg’s article with the note below.

First, to be fair, I was wrong about Netflix last year, and have been wrong so far this year. To paraphrase Mark Twain, my prognosis of Netflix’s imminent demise was greatly exaggerated. I also said that I would rethink my assessment if Netflix was able to compete on price, and Netflix did indeed compete successfully on price. I have rethought my assessment, and have reached a similar conclusion, albeit over a
longer time frame.

Second, I said that if Blockbuster revenues fell, they would face a credit crisis. Their revenues have fallen, but they’ve managed the expense side well and have raised additional capital, and I do not believe that they face a credit crunch.

As to one-year price targets, you’re absolutely right, I have probably been too harsh with Netflix and have been too optimistic about Blockbuster. In the case of these two, I have a long-term thesis about the market, and it’s impossible (at least for me) to predict exactly when this will play out (see the attached note), but I have a great deal of conviction that it will play out. Regardless, my overarching thesis is that there aren’t that many people who will ultimately opt in to a Netflix-type service, and Netflix and Blockbuster are rapidly approaching full saturation of that market. I may have been naive in assuming that they would saturate by mid-2006, and may continue to be naive in thinking it will happen in mid-2007, but I continue to think it will happen inevitably.

With that said, I think many of the conclusions you reached in your blog are poorly reasoned. Netflix has a cost of delivery (postage and fulfillment), and that cost is actually quite high. Its gross margins are significantly lower than Blockbuster’s, at around 35% compared to around 60%. The difference (25% of sales) pays for a lot of overhead. Yes, I know that Blockbuster’s overhead is twice this amount, but the difference between Blockbuster’s overhead (around 50% of sales) and Netflix’s (around 35%) isn’t that great. If Blockbuster can increase store efficiency (smaller footprint), it becomes more competitive. That’s what I think will happen.

Does that mean Blockbuster will be more profitable than Netflix? No, and especially not on a per customer basis. However, if you want to compare my price targets, I have Netflix earning $45 million in net income, so my $680 million market cap target is a 15 multiple. Same as my target for Blockbuster.

One thing you don’t discuss is the role of OTHER brick and mortar in how this plays out. I think that Movie Gallery has some problems, and at a minimum will close stores. I also think that the footprint for retail will shrink, with much smaller stores lowering overhead and providing similar service. Blockbuster stands to gain a lot more from store closings than does Netflix.

Also, your rationale on VOD is way off the mark. See my attached note. In summary here, Amazon missed out on digital downloads of music, and there is no way that they miss out on digital downloads of movies and allow Netflix to dominate.

We’re going to continue to differ in our views about the size of the market,
and I might continue to be wrong. Much in the same way that I think our
President is wrong about teaching democracy to middle-easterners, and I
think he will continue to be wrong. However, I never question his
conviction nor his consistency.

Update #2 – Slashdot has weighed in on the debate between Blockbuster & Netflix and Independent Insider runs the math on what it would have cost you if you would have shorted 1,000 shares of Netflix and purchased Blockbuster instead.

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34 comments on “Netflix vs. Blockbuster Revisited
  1. Dave Zatz says:

    Nice write-up Davis!

    In defense of Blockbuster, if those screenshots I captured truly indicate a new TiVo partnership that might juice things up a bit.

    I wonder what would happen if Netflix took some of their cash and purchased say Akimbo to break into VOD – hardware, distrubution, and even a few customers already exist. Paint the box red, tweak the pricing model, and call it Netflix On Demand.

    I have no idea how Pachter’s Bush non-sequitor relates to mail order DVDs.

  2. Fazal Majid says:

    One thing about Blockbuster is the incredibly inefficient use of space in their retail locations.

    Compare with DVDstation – instead of wasting space on yard upon yard of shelves with an eye-glazing line-up of box after box, they have kiosks where you can actually see trailers for the movies available, make your selections, pay for them and you can then pick them up from the counter where they are all kept in a compact plastic case in drawers, taking very little space.

    I cancelled my Netflix subscription long ago and was renting from DVDstation at the Metreon, which is conveniently close from work. Unfortunately, they shut down that location (was Sony getting greedy?).

  3. Aron says:

    Firstly, nice core dump on the situ Davis.

    Secondly, it’s nice to see a response from Pachter as his frequent quotes in public continually mystify me and I haven’t had access to his more detailed reports. If he can continue to weather the slings and arrows, I’d welcome him to join and supply commentary on the Netflix Motley Fool board following any discussions here.

    I wonder Mr.Pachter if you are aware of Blockbuster’s recent dismissal of downsizing stores (ala Movie Gallery’s recent plans). Here is an exact quote from the Q1 transcript:

    “As far as downsizing opportunities, it isn’t a new topic for Blockbuster. We have consistently worked to optimize our real estate portfolio, and we have been moving towards smaller stores for years. As a result, we don’t see downsizing holding huge opportunities for us going forward, especially downsizing through subleasing, which for the most part can be expensive, disruptive, and inefficient.”

    Perhaps your thesis regarding saturation in 2007 is correct, but I wonder why you would choose to use 2006 earnings as your basis for valuation. Were Netflix to reach saturation do you expect them to continue spending 20% of revenue on marketing, and hence carry an 80$+ SAC? Where does that money go?

    I’m left wondering how one can anticipate such early saturation when Y/Y subscriber growth actually accelerated to 61% this last quarter from 2005, and at a time when consumer awareness of the company is still registering fairly low.

    The dissolution of Movie Gallery stores would certainly be a boon to Blockbuster, as it would be for Netflix. With Netflix adding 700k subscribers in the last 3 months, compared to 100K for Blockbuster, who is best prepared at this moment to grab customers that had already chosen (for whatever reason) not to go to Blockbuster stores?

  4. Anonymous says:

    I’m not sure I buy the argument that Blockbuster can easily reduce overhead. How? By shrinking their stores? Then the stores are more crowded, have less titles, and generally offer less to the consumer.

    There’s also an inherant problem with Blockbuster’s online scheme: it competes with the local stores, which are generally owned by franchises. I’m sure there is some profit sharing arrangement, and I’m also sure it is insanely complicated and hated by the franchise owners.

    I think there is some truth to the claim that the online market is only so big, and eventually it will become saturated. The same is true of the rental market.

  5. insider says:

    Great report Davis. Not to rub salt into Pachter’s wounds but we took your analysis and put some numbers behind it. Let’s just say the result was not pretty unless one was in need of a massive short-term stock loss.

  6. doc45 says:

    I subscribe to both Netflix and Blockbuster. Tonight I cancel Blockbuster.

    Why?

    Because Blockbuster is practicing fraud. When I signed up for the 3 DVD service, I created my queue. The first 3 DVDs were shipped. When they were returned, only 2 DVDs were shipped. I waited 5 days. No email arrived to explain why I had not been shipped a third DVD.

    I emailed the service dept and was told that even though the DVDs in my queue were listed as available, Blockbuster had a policy that they would not ship a DVD if it could not arrive in 3-5 days. They made the decision that none of the 30 DVDs in my queue would arrive in that period because their Las Vegas location, the one they shipped to me from, did not have any of the DVDs in my queue on hand. So they just did not ship anything and did not notify me as to the reason.

    That is clear fraud — they mark a DVD as “available” in your queue when in reality it is not. And they know it’s not.

    After a series of emails, which I still have, they shipped my third DVD 7 days after they got the prior one back.

    This has happened 3 times in the the last 30 days. I judge that it takes them on the average at least 3 days to send out a DVD after they get one back, sometimes
    as long as 5 days.

    I have never experience that with Netflix.

  7. Dave Barnes says:

    If you want to see kiosks in action, then visit my local McDonalds. $1/night DVD rentals.
    This is a huge threat to Blockbuster.

  8. Dave,

    I agree that Redbox is a big threat to Netflix and Blockbuster, but I still think that the industry is in it’s infancy. So far Redbox is only testing their boxes in six cities and while they’ve done a good job at signing agreements, most of their partners are still in the testing phase. My belief is that we will continue to see this market develop, but that it won’t be until 2007 when some of the early test results come back. So far I’ve been impressed and with Redbox having 20% market penetration in the Denver area, it’s a clear example of what they can accomplish with good support. Now imagine if they could rent any DVD instead of just the top 50 that they carry, this would really make their service compelling. I think that the first one to get burn on demand dvds will have a big advantage going into the kiosk wars.

  9. Anonymous says:

    I use intelliflix, it’s cheaper than both, and have had no problems! You should put them in the comparison too.

  10. Anonymous says:

    For what it’s worth, I’ve maintained my Netflix subscription since 2001, and part of that is because of Netflix’s deep library which has consistently been larger that Blockbuster’s (and remains so), and is certainly better than anything BB can offer at a retail location.

    Then there’s the issue of service. My father and brother have switched to BB, and run into consistent problems with shipping delays and the like. I’ve never had an issue with Netflix, esp. since their ship depot is about 75 miles away. I’ve not run into the “throttling” issue, but Netflix had better watch their Ps and Qs on that one.

    Then, finally, there’s inertia. I’ve developed a rental queue that recently topped 400. I have no urge to dump that and be required to recreate it elsewhere. Sad, I realize, but it does figure in.

  11. Anonymous says:

    Who suggested Intelliflix? Do you work for them or something? Intelliflix is EVIL. Just Google for their former name, “DVD Barn”.

    They offered me a FREE months rebate if I returned as a paying member. I did. They never mailed the check. Customer Service is buried and uses form-replies for all questions (and don’t care to match form replies to the question (too bad).

    Re: my missing check, since customer service would not respond to polite inquiries, in desperation I Googled the company president using info found in the WHOIS, and got a prompt response and apology, with a promise to “turbo” my ancient request back to the CS manager. Never happened. AVOID INTELLIFLIX.

  12. I can only speak as a consumer. Our video rental history:

    1) 1980s – We rented videos from a locally-owned store and got great tips from knowledgable employees about tapes we might enjoy watching but probably wouldn’t have picked out on our own.

    2) 1990s – Blockbuster bought out the local store’s location and became “the only game in town.” Fewer non-mainstream choices, draconian late fee policies, bored workers who knew nothing.

    3) 2001 – We moved. There was a Hollywood store closer. Multi-day rentals but about the same selection. Slightly better than Blockbuster overall, but not great.

    4) 2004 – Discovered Netflix. Huge selection, cool recommendations, friends and co-workers who found a great movie could email us the Netflix info and – click – we could stick it in our qeue. Tres cool!

    5) 2006 – Decided that, what with Netflix, we no longer watched the cable TV premium channels (HBO, Showtime, etc.) enough to justify paying for them, so we shut them off.

    Netflix is the most cost-effective, interesting, and time-efficient “canned” entertainment service we
    have ever used.

    The chain video renters (especially) Blockbuster) worked hard to earn our dislike and disloyalty, but in the end they succeeded so well at this goal that they are unlikely to get our business back until they are at least 50% better/faster/cheaper than Netflix, and even then we’d think long and hard before trusting them (especially Blockbuster) with our credit card numbers again.

  13. I can only speak as a consumer. Our video rental history:

    1) 1980s – We rented videos from a locally-owned store and got great tips from knowledgable employees about tapes we might enjoy watching but probably wouldn’t have picked out on our own.

    2) 1990s – Blockbuster bought out the local store’s location and became “the only game in town.” Fewer non-mainstream choices, draconian late fee policies, bored workers who knew nothing.

    3) 2001 – We moved. There was a Hollywood store closer. Multi-day rentals but about the same selection. Slightly better than Blockbuster overall, but not great.

    4) 2004 – Discovered Netflix. Huge selection, cool recommendations, friends and co-workers who found a great movie could email us the Netflix info and – click – we could stick it in our qeue. Tres cool!

    5) 2006 – Decided that, what with Netflix, we no longer watched the cable TV premium channels (HBO, Showtime, etc.) enough to justify paying for them, so we shut them off.

    Netflix is the most cost-effective, interesting, and time-efficient “canned” entertainment service we
    have ever used.

    The chain video renters (especially) Blockbuster) worked hard to earn our dislike and disloyalty, but in the end they succeeded so well at this goal that they are unlikely to get our business back until they are at least 50% better/faster/cheaper than Netflix, and even then we’d think long and hard before trusting them (especially Blockbuster) with our credit card numbers again.

  14. Dave Zatz says:

    I thought RedBox would be a threat too… but after about a year, they ripped it out of my local McDonald’s parking lot because no one was using it. Strange really, since the restarant got a lot of traffic and it was located across the street from a subway stop on many people’s way home. Actually they removed it in phases – first they took out the convenience store items machine, then a few months later the DVD machine went away too. Go figure!

  15. I think that Redbox is still very much in the testing phase. I’m not sure why they would have pulled out the box near you, but I’ve heard that they have high customer satisfaction rates. I think that Redbox’s strategy is to try to conquer markets one city at a time. Right now they are focusing on Las Vegas with plans to expand into New Mexico and Utah.

    I think that there will be issues with the lack of selection, but Redbox is rolling out online scheduling capabilities shortly and if they really wanted to get serious they could start a DVD by mail campaign to compliment store based rentals. With only 500 DVD capacity this means that each machine can only stock 50 titles (less for older machines) and this limits the appeal. The technology to do burn on demand is here today, Hollywood just isn’t ready to accept it. I know that Target, Walmart and Best Buy all have lobbied for this, but so far the studios refuse to have anything to do with it. It would be pretty simple to operate, although there would be delays for customers who didn’t plan ahead. Consumers could schedule their movies by the net and then pick it up on their way home or they could order it and come back when they are done with shopping at wherever the kiosk is at. The beauty of the kiosk is that you could put one in 20 stores within a town that would normally only have 1 Blockbuster. So far Redbox isn’t profitable yet, although they do say that the machines pay for their own cost.

  16. Anonymous says:

    /.

  17. Anonymous says:

    Nice read, I agree with much of what you said except for the kiosk bit. It’s one thing to run a kiosk and burn off new releases, but then DRM comes into play. DivX anyone? That was a catastrophic failure.

    Hanging 50,000 titles ready to burn in a kiosk is wildly unrealistic. You are talking up to 240TB of space. Even with new seagate 750gb drives, that’s 320 hard drives in a kiosk. That’s $192,000 in just hard drives for 1 kiosk.

  18. Anonymous says:

    Last year I also had concurrent Netflix & BB memberships. I wanted to see who was better and go with that. Last summer, after several months, I was ready to go with Blockbuster – their turnaround time was much better than Netflix’, and the in-store coupons sealed the deal.

    Then, inexplicably, BB changed their queue algorithm such that even though a DVD was available somewhere in their system, it would re-sort your queue based on delivery time; the DVDs that took the shortest time to get to you would be sent first. Thus I could never predict what they’d send. I would get DVDs at the bottom of my queue, while the DVDs at the top – which were the ones I really wanted to see – would never be sent, even though they showed as available. It drove me nuts, so I let them go.

    That being said, what I’ve noticed about Netflix is that they have it timed so I *never* get more than 3 DVDs per week (I’m on the standard 3-at-a-time subscription). I’ve moved and their facility isn’t that far away (65 mi), but even if I watch a DVD the day I get it and mail it the following day, I won’t see its replacement until the following week. They definitely throttle.

  19. insider says:

    Similar to a commenter above, I’m kind of a TV junkie and considered having every premium channel (HBO, Showtime, Starz/Encore, Cinemax, etc.) to be an acceptable monthly expense. However I have found that with Netflix our family rarely uses anything more than HBO (and that is for their original series).

    By the time I had come to this realization our cable bill was going over $120/month. I just whacked $30/month by eliminating every premium movie channel other than HBO–something we could not have done without Netflix. Much like TIVO-the DVD-by-mail system has changed the way we experience media–something that is certainly not going to change by kiosks in McDonalds.

    I suppose we could have gotten a similar benefit from Blockbuster but the people I spoke to that tried them were wholly disastisfied and never have seen a reason to switch from Netflix.

  20. Jeremiah says:

    Kiosks??? You mean, like, ON-DEMAND?!??

    Ain’t gonna happen, friend. Kiosks are FAR too expensive to maintain (they’ll break constantly), be subject to vandals, hacking, etc. Not to mention the infrastructure required to support it…not to mention insuring the machines and the precious shiny discs they keep.

    Blah. Netflix has it locked….for the time being…

    …with one exception: Games.

    Games are not like movies in that they take far longer (hopefully) to “consume” or experience. People who rent video games (try before buy, etc) want the game NOW – a video game rental is impulsive…I want to play “Oblivion” NOW…not in three days when Netflix gets it to me.

    Beyond that, I don’t know how BB is hoping to survive without a “me-too” play in the DVD’s-by-mail space.

    On preview: Y’know, one thing BB *DOES* have (I think i’ve mentioned this before) is they can stock rental HD-DVD players in their b&m; stores. I bet that would help push the HD format forward as it would give people a try-before-you-buy experience with HD…hopefully convincing them the additional resolution is worth the investment in a new player/TV. Netflix can only support customers that already own HD players.

    THoughts??

  21. Nick says:

    I’m not sure the comparison to Cineplex vs. Multiplex is 100% appropriate. Single-screen cinemas are (very regrettably) being forced out of existence by multiplexes, but it’s not because the multiplexes offer better service, cheaper tickets, or any improvement in overall moviegoing experience (except the Arclight, but that’s really in its own category).

    On the other hand, Netflix genuinely does offer better and cheaper service than Blockbuster. It might be a better business model, but nobody outside of Wall Street cares about that — what matters to the rest of us is that it’s a better experience for the consumer. Aside from the instant gratification of picking up a movie immediately, there is absolutely no aspect of Blockbuster that is better (from a customer’s perspective) than Netflix.

    Besides, Blockbuster destroyed the concept of independent video stores over a decade ago, so it’s about time it got its comeuppance.

    Anyway, interesting stuff and thanks for emailing the link!

  22. cocoboywonder says:

    Davis:

    Just to continue our dialogue from hackingnetflix.com, I’ve been thinking over the last 24 hours about your burn-on-demand solution.

    I certainly think it is an interesting perspective. I see only one fundamental problem with it. How do you burn on demand in a store? How do you service all of the customers while they stand around and wait for you to burn the disc(s)? How do you queue people or is it just a mad rush to the machine, first come first serve? As the quality of the content improves (e.g., more HD, more extras), the burn times will only get longer. I know eventually the technology will catch up, but what are retailers to do in the interim? I think the lack of any real solution to this problem prevents all companies, including those known for their cost-effective solutions (i.e., Wal-Mart), from offering this to their customers.

  23. Coco – I’m not exactly sure the best way that you would implement burn on demand technology, but it wouldn’t necessarily have to be limited to kiosks. I like kiosks because of their inherent cost advantages, but if Blockbuster could implement BOD at their retail stores, it could still be a powerful force. BOD would help to remove the selection advantage that DVD by mail has over the retail strategy. Right now Blockbuster has to make important purchasing decisions and if they misread demand it impacts them directly. If they could burn dvds as demand increases or decreases for them, they could offer an entire catalog of films in a quarter of the space they are using now. This type of program could be deployed in a couple of different ways, but if I was put in charge, I would start by allowing consumers to pre-order and pay for their DVDs over the web and then use the stores or kiosks to deliver the finished product later in the day. You could either restrict the program to only pre-orders over the web or you could allow burn on demand at the point of purchase for consumers who don’t mind waiting.

    You could also keep a stock of the most popular movies so that you wouldn’t need to burn 100% of the films you rent. This strategy would help cut wait times at the store level and would give alternatives to those who aren’t willing to wait.

    I would also use the technology as a way for Blockbuster to increase the prices they charge for rentals. If customers want to come into the store and get one of 2,000 dvds, they can do that but for $1 more you could let them burn any TV show or movie. I think people would be willing to pay extra to know that the movie they want won’t sell out and the extra $1 could be used as an incentive for Hollywood to play ball.

    From the kiosk level, I’m not entirely convinced that waiting is such an issue. In someways, making people order their DVD and then wait 10 – 15 minutes would be a good selling point for retail partners. I have a funny feeling that if you make customers wait at Target for 15 minutes that more then a few will end up buying something that they never intended to in the first place. Making customers wait wouldn’t be ideal obviously, but it’s better then driving all the way to the video store only to find out that the hot new release is out of stock and having to settle for that TV movie that went straight to DVD instead.

    As far as VOD, Bluray and HD-DVD go, I think it’s a big question mark. I specifically didn’t focus on VOD in my post because I believe that VOD is further off then most people believe. Yes Hollywood is making big bucks on mp3 sales, but it’s peanuts compared to what they used to bring in from CD sales. If you look at Virgin, Sam Goody, Wherehouse and a whole host of music retailers you can see the effect that mp3′s had on the business and I’m skeptical that the studios are really serious about doing this to their movie sales as well.

    Having said that, VOD will be an issue further down the road. It will be a big threat for Netflix, but because of Blockbuster’s fixed costs, they have less flexibility then Netflix when it does hit. Bluray and HD-DVD would be harder to do a burn on demand strategy, but for at least the next 12 months, HDTV DVDs will be practically non-existant and I think it will take at least 3 years before we see penatration levels high enough to justify Blockbuster using store space for these movies. It’s funny because I’ve seen Netflix and Blockbuster both point to HDTV DVD’s as being their salvation, but I don’t buy into it. Blockbuster can only afford to stock these titles online as is, which only drives less cost sensitive customers to lower gross margins online and if the format war continues it will be awful hard for Blockbuster to stock 3 different formats of the same movies.

    Burn on demand technology exists today. Movie Gallery has the capability to add it to their kiosks and Redbox was testing downloads and burning until Hollywood made it clear that they were going to have nothing to do with licensing their films in this way. Walmart, Best Buy & Target have all lobbied Hollywood for the rights to do this and they’ve continually said no. I think that they might be more willing to talk with Blockbuster because Hollywood more then anyone doesn’t want to see Blockbuster fail, but even that might be a long shot for a company that has never shown an ability to lead with technological innovation.

    One thing we do know though is that as VOD becomes more popular it will be the final nail in the coffin for the video store business model (including Netflix’s DVD by mail program.) Even without factoring in the failure of Blockbuster’s competitors, I think the true value of Blockbuster lies in it’s cash flow over the next 12 – 36 months and how the company uses the cash that they can bring in will be key to their success or failure. If bond holders force Blockbuster to use this cash to protect their interests then it will be hard for Blockbuster to expand until they can calm their creditors, but if they are allowed to use this cash flow for growth, then I would need to rethink my outlook for the company.

    So far I’ve seen Blockbuster management waste money on bloated saleries and terrible super bowl commericials (I seriously hope they fired their PR agency after this last year)instead of using that cash on being innovative and bringing growth channels to their business model.

    If Blockbuster can figure out a way to bring all 60,000 movies that Netflix has to every single video store, it would go a long way in preserving their sales (if not increasing them.) If it buys the company time to solve their debt problems and to come up with a long term VOD solution, then it would be a good investment on Blockbuster’s part.

    I think that you’re right that Blockbuster is absolutely huge and even if they can make small profits this can add up to enormous profits for the company, but over the last year, I’ve been anything but impressed with how management has dealt with the downturn in their market and until I start to see them execute, I would be nervous about owning a stock that could be bankrupt in six years.

    I see Netflix as a growth stock, but Blockbuster could be a small cap value play if they can successfully turn their company around. Thus far I’ve been unconvinced that Blockbuster managment has the skills to do this, but I do think innovation could go a long way towards saving the company.

  24. jl says:

    I don’t think the war will be between Netflix and Blockbuster. The guys who control the content–the studios–will be swayed by who controls their revenue and profits. That entity is Walmart.
    Walmart is by far the single largest customer for studio content as the biggest seller of dvds. Sales of DVDs are significantly greater than rental.
    Comcast is another real threat to NetFlix and Blockbuster. They already have the pipe to the consumer’s home.

    This isn’t necessarily about brand image. It is about leverage with the studios and technology adeptness and adaptability. Walmart’s buying power will offset their temporary lack of technology smarts–so they pose a real threat. Comcast has the pipe and knows who their customers are.

    NetFlix and Blockbuster aren’t even in the game.

  25. Anonymous says:

    I have tried them both simultaneously. Here are my results…

    Netflix comes faster for the newer releases, but not as fast as using the free in-store coupons at Blockbuster that you get once a week with Blockbuster Online.

    Older titles come about the same, with BB coming a day faster on some titles.

    User Interface is better at Netflix.

    Prices are the same.

    Pound for pound, I prefer Blockbuster. Perhaps the main reason why is that I found two loopholes. First, you can “send” your movies back as soon as you get them by clicking them as sent. They’ll get the next ones out immediately, which I’ve used to get 6 out at a time instead of 3.

    Second, the in-store promotion cards can be used every month. You get them for $10, use them to sign up, and then cancel before they bill you. Then you get another card for the next month. You can use the same address and billing info — you just have to use a different email address. They reset after 3 months, so I’ve been rotating 3 emails and getting my DVDs 6 out at a time (plus the in-store weekly rentals) for $10 per month.

  26. shilohope says:

    A Side-by-Side Comparison and Conclusion

    When comparing Netflix with Blockbuster Online, there are so many similarities that it may seem like a toss-up. The giants of the online DVD rental explosion are feeding off each other’s ideas, spawning lawsuits and smearing campaigns that rival the cola wars of the mid-1980′s.

    Both programs allow us to pay a monthly fee, for which we receive DVD movies sent through the mail. When we return them in the postage paid envelopes, we receive more DVD’s. It’s an ongoing cycle that fits almost perfectly with the current American need to get the most out of the least — more movies for less money, less effort, and less time.

    Side by side, they are almost identical, but here is how they stack:

    Speed of Delivery
    Netflix used to have the clear edge here, but expansion to include more distribution stores has brought Blockbuster up to par. Still, for those who rent less, Netflix “ramps” the movies to these higher priority customers, pushing the heavier renters further down the list. To this, they have admitted. Blockbuster has not admitted to this practice, but their denials are not firm. Still, Netflix will have a higher overall percentage of 1 day turns on movies than Blockbuster.
    Edge: Netflix

    Cost
    There is not a current difference in cost, though this seems to change every few months. When one lowers, the other matches. When one raises, the other follows. It is similar to airlines manipulating the markets towards their own unintended dooms. In the short run, Blockbuster offers a free month while Netflix offers 2-weeks. Blockbuster also has a customer service crew that offers discounts and “mishap compensation” more easily.
    Edge: Blockbuster Online

    Selection
    Netflix is approaching 60,000, while Blockbuster is closing in on 55,000.
    Edge: Netflix

    Website
    From talking to many users, it seems that while the concepts of listing movies on a queue and searching for movies in several different ways is the same for both, Netflix has the superior overall layout and useability. Its website seems smarter, though sometimes a bit slower during peak periods.
    Edge: Netflix

    Fringe Benefits
    Netflix has none. What you see is what you get. The fact that Blockbuster offers a free in-store rental every week is extremely helpful in getting the newest releases. With both programs, you sometimes have to wait weeks to get the hottest titles, even if it is at the top of your queue. Being able to walk in and grab that week’s best title is something that Netflix cannot touch.
    Edge: Blockbuster Online

    Intangibles
    Netflix has more experience with online DVD renting, both in regards to time and sheer mass of customers. Blockbuster, as mentioned before, has superior and more responsive customer service. Having a human being available at the local store to help during problems is a big benefit. If there was a large enough gap in any of the above mentioned criteria, I would say that they supercede the intangibles. In this case, there is no substantial difference. The more human aspect of Blockbuster makes it the choice.
    Edge: Blockbuster Online

    When all is said and done, Blockbuster online seems to be the choice. If you want to give it a shot, email me and I’ll send you a promo code for a free month.
    fedexkinkos1@yahoo.com

  27. Johnny says:

    I am amazed that Blockbuster didn’t see this coming. Upon a short inventory of thier sins it is appearant that they have no place in the modern digital media age

    1: Their sadistic late fees of the 80′s and 90′s were deplorable. On many an occasion I paid $25 for a late movie with no negotiation. When I returned a movie a day late they reported the late fee to a collection company and blemished my credit record. In my home Blockbuster = Ballbuster. Their beligerent attitude makes their clients proactively seek their competitors. Sound familiar Comcast, Verizon, Microsoft, Etc..

    2: At the apex of thier power they would edit movies to remove artistic content that was too racy for them. Now in the new millenium they look as foolish as the temperance movement of the early 1900′s.

    3: They never saw DVD coming. I had a DVD player for 3 years before I could even walk into Blockbuster and rent and movies. Then for another year they carried such limited supplies of DVD’s that renting an new release was hopeless.

    My prediction is that the assets will be purchased by Starbucks as a stategic real-estate aquisition. With the crippling debt, and foolish management there is no doubt that they will change hands soon for pennies on the dollar.

  28. Anonymous says:

    Who rents the old, obscure movie titles anyway?? The market is way larger for the mainstream titles.

    I tried Netflix and BB online, but shipping took too long. At the most, I got 12 movies a month. I now use Blockbuster unlimited in-store rentals at $25 a month and GamesnFlix.com at $16 a month. I can rent 2 movies and 6 xBox 360 (PS2, PS, GC, Movies, Books, etc.) games at a time all for under $40 a month. I can get a total of 60+ movies a month since I just drive to the store. Plus, I never buy games anymore which cost $50+ each.

    This is the best value for me and I think it will be the future if they can be profitable with this buisness plan. Here’s to hoping and loving my current services.

  29. Anonymous says:

    NETFLIX. Tried BB. Had same 2 at top of queue for over a month. Got it NEXT DAY after signing up for NETFLIX. I don’t know how they did it. Amazing. Plus the DVDs from Blockbuster looked like someone had been playing frizbe golf with them.

    One man’s experience. I’d look out for opinions on sites that have signup links (commissions? $$$).

  30. Anonymous says:

    I was a Netflix fan for a long time, and then I switched to Blockbuster. I loved the ability to turn you movies into the store to get new ones right away. Unfortunately Blockbuster has put a cap of 5 exchanges on it now.

    Here is a poll: Blockbuster or Netflix http://www.apopularitycontest.com/display_poll.php?ID=4669

  31. Anonymous says:

    This comment has been removed because it linked to malicious content. Learn more.

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  33. Hi,

    We are one of Blockbuster and Netflix’s largest and direct providers of customers online. We offer the highest payouts and would like to briefly discuss working together. Please contact me at your earliest convenience. Thanks.

    Tom Petropoulos
    VP, Business Development
    Adteractive, Inc.
    350 Sansome St. Suite 925
    San Francisco, CA 94104
    P: 415-271-8304
    F: 415-543-2513
    AIM: tom adteractive