The rise of Netflix, the Demise of Blockbuster

As technology advances around the world, consumer’s expectations grow about the products they are buying. Consumers are also expecting to be able to get what they want more conveniently. Shopping through the Internet has become the new trend. Why drive all the way to the store to buy something when you can stay in the comfort of your home and purchase something through the computer? When two companies are producing virtually the same service, the consumer will almost always choose the more convenient of the two. This works towards the favor of companies such as Netflix, Hulu, and RedBox. The new technology and convenience of Netflix has made them the powerhouse in the category of movie rentals. This in turn has put Blockbuster on the brink of bankruptcy.

While Blockbuster stuck to an outdated business model, Netflix took advantage of the rent-by-mail and streaming video service. Blockbusters decline in numbers show us very clearly why they are on the decline. By the fourth quarter of the year 2009, Blockbuster’s total sales were down 16%. Their revenues were down 18%. This equated to a $425 million loss. By the end of 2009, Blockbuster had totaled $964 million in total losses. Hidden in those numbers are debts that Blockbuster owed to multiple large corporations such as $21.6 million to FOX, and $20 million to Warner Brothers.

Economist Ludwig Von Mises once said that if a business is unsuccessful, it is often because they have failed the consumer. Many customers feel as though they have been treated unfairly by Blockbuster, mainly pertaining to lack of customer service and late fees. Late fees themselves were what actually caused the creation of Netflix, resulting in the demise of Blockbuster. Reede Hastings, the CEO of Netflix, created Netflix after returning a movie he rented from Blockbuster late and receiving a $40 late fee. Hastings founded Netflix, which boasted no late fees. Customers could return movies whenever they pleased.

Blockbuster’s share price reached an all time high of $19 a share in 1999. By 2010, each share was worth a mere $0.30. In 2003, Blockbuster declined to purchase Netflix for only $50 million. Netflix and Blockbuster began to separate and increase and decrease in revenues, respectively, was 2003. Attached below as the second link is a chart showing the stocks of Blockbuster and Netflix. As Blockbuster profits began to plummet, they got rid of late fees, which cost them around $300 million annually. They ended up reintroducing late fees in 2010 in attempt to make up for those losses. By 2010, Blockbuster was only worth $24 million.

It is very apparent that Blockbuster’s success is in the past and Netflix and similar companies are on the rise and are the future of movie rentals. Netflix’s ideas and strategies of delivering movies to consumer’s houses without adding on any unfair late fees have made Blockbusters services obsolete. Although Blockbuster has filed for chapter 11 and is attempting to stage a comeback by virtually copying Netflix through their “online DVD rentals”, it is very hard to imagine this happening: currently one Netflix share is worth $72 and Blockbuster’s is worth 35 cents. Although Blockbusters original business plan was very successful, companies must always tend to their consumers and think of ways to please them. No amount of money can fix a broken business scheme. It is clear that Blockbuster’s successful days are behind them.

http://www.bgr.com/2010/02/25/blockbuster-continues-its-decline-posts-425m-loss-in-q4/

Graph- http://consumerist.com/2010/09/everything-you-really-need-to-know-about-blockbusters-bankruptcy.html