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Blockbuster vs. Netflix

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konerko14
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Do you think Blockbuster will overtake Netflix as the most popular online rental service? They both offer the same plans at the same prices, but Blockbuster, I think, has a major advantage- they have tons of stores set up all around the country. So along with offering the exact same services as Netflix, Blockbuster also gives customers free in-store rentals(the amount depends on what plan you subscribe to).

At this point, Netflix has about 5 millions subscribers, and Blockbuster has 1.4 million for their online service. But I think Blockbuster may significantly increase their subscribers as time goes on, and could possibly eventually overtake Netflix as the largest online rental business. That is, of course, if Netflix doesnt figure out a way to gain a competitive edge. It will be tough for them to do this though, mainly because of all the stores Blockbuster has. Im sure it will create a fierce competition, however, which should make things very interesting.

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I spent some time comparing half a dozen online rental services with a friend, who is developing a similar service for a different type of media. I last logged into Blockbuster about six months ago, so some of my observations may be outdated.

Netflix has a few advantages over Blockbuster. Netflix has a larger and much more varied selection than Blockbuster. When adding or reviewing movies, Netflix offers better-tailored recommendations for similar movies. As best I can tell, Blockbuster makes recommendations based on other movies with the same actor or within the same genre and time period, while Netflix finds related movies enjoyed by other viewers with similar rental histories. Netflix also has faster turn around times, getting movies to me one or two days faster than Blockbuster, though both have shipping centers in my city.

Netflix has been aggressive in adding new features, while Blockbuster hasn't changed significantly since its launch. For example, Netflix now allows users to add each other as friends and to compare movie ratings, rental histories, and to exchange one-line notes (mini reviews) about films. Netflix also provides RSS feeds for queues, top rentals in various genres, and tailored recommendations. These feeds have resulted in free advertising as users add those lists to their homepages, and for users with news aggregators the service remains more a part of daily life.

Blockbuster's neighborhood stores might be an advantage if they were better-integrated with the online service. Right now however, you can't return your DVD at Blockbuster to speed up shipment of your next DVD, your store rental history isn't merged with the online rental history, you can't use spaces in your rental queue as credits for local rentals, and you can't even view your online queue or recommendations from within the store. Other than the easily recognized logo and some local store rental coupons offered to online members, there's no tie-in. There's a lot of potential there, but for whatever reason Blockbuster has been slow-moving. Perhaps they're worried about the online store cannibalizing the local stores and want to focus on new customers only?

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I wondered the same thing when I compared the two and ended up signing with Blockbuster Online. I preferred the BlockBuster deal, but if I were to evaluate them as businesses, I would make the following points:

1. NetFlix does Online thing better than BlockBuster, and has a better management.

1a. NetFlix has one feature which is really important to anyone with kids: multiple queue. With multiple queues, when the adults send back a movie from their queue, they would get a replacement from their queue; the same for the kids. As is is now, one has to constantly shift around items at the top of the queue in order to get stuff right. This is not a techincal issue, it points to a deep problem with BlockBuster management: a lack of understanding about how customers are using their product.

1b. NetFlix has the whole friends/sharing thing, which I would consider useful. Again, this is something that's simple to put in place; so, the lack of the feature points to management's lack of understanding about their customers.

1c. Finally, Blockbuster is much worse about not knowing their inventory position. So, they show that the movie at the top of your queue is available, but actually it is not. This would be okay if it were a simple matter of timing, (e.g. a lot of people suddenly ask for the same movie). However, the cause (as they explain on their web-site) is that they maintain inventory-info nationally, but supply from regional warehouses. They say they're working on it. I think I've been with them a year and nothing has changed. As someone who works on inventory-control software, it's my judgement that this points to one of two things: either their software guys can't deliver, or management does not put enough weight on the feature (which would, again, indicate that they're out of touch).

now about to release a new online interface. However, the beta that I've seen does not address the main weaknesses (though it may be something that comes in the final release).

2. Blockbuster probably has higher costs. The "free videos" that BlockBuster gives its customers have a cost attached to them. They have to stock that many more videos in their stores and they have to pay royalties for every movie taken out. So, NetFlix actually has the ability to undercut BlockBuster if they wanted to. Turns out that NetFlix has been growing their business each year (and each quarter this year). Also, they're profitable. Meanwhile, Blockbuster has been losing money every year for the last three years; and, while BlockBuster's revenues are much higher than NetFlix, they have been declining.

3. Blockbuster's free in-store foot-traffic can be cross-sold: BlockBuster probably hopes to cross-sell to people who come into their stores for their weekly or bi-weekly free-video. If these people can be tempted to pick up a paid video, or a game, or even some pop-corn, it might defray part of the cost of the free-video. In principle, the advantage of bricks-and-mortar is that there is a higher probability of an "impulse-buy".

In summary, BlockBuster store can be a strength if its management can figure out how to do online right, and how to make the store profitable. It is actually ripe for someone to come in, kick the current management out, and run the place properly. Recently, investor Carl Icahn took a large position in BlockBuster. He has a reputation for finding companies that have potential that is not being exploited by management; he comes in and starts turning the screws real tight. I'd say one cannot predict the outcome yet.

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Netflix has a few advantages over Blockbuster. Netflix has a larger and much more varied selection than Blockbuster.

Blockbuster online seems to have all the new releases and the recent ones. The older movies they may be lacking in slightly, Im not completely sure. Plus, Netflix supposedly is out of a lot of movies somewhat frequently. Blockbuster seems to have nearly all of their movies in stock.

When adding or reviewing movies, Netflix offers better-tailored recommendations for similar movies. As best I can tell, Blockbuster makes recommendations based on other movies with the same actor or within the same genre and time period, while Netflix finds related movies enjoyed by other viewers with similar rental histories.
Do you think customers really care that much about this feature? I think the main thing people look at is the price and service plan.

Netflix also has faster turn around times, getting movies to me one or two days faster than Blockbuster, though both have shipping centers in my city.

I heard, however, that customers who are renting quite a few in a short period of time, Netflix purposely slows down how fast they ship their movies out.

Netflix has been aggressive in adding new features, while Blockbuster hasn't changed significantly since its launch. For example, Netflix now allows users to add each other as friends and to compare movie ratings, rental histories, and to exchange one-line notes (mini reviews) about films. Netflix also provides RSS feeds for queues, top rentals in various genres, and tailored recommendations.
I dont think people care that much about these features. Maybe Im wrong, but thats how I feel about them.

Right now however, you can't return your DVD at Blockbuster to speed up shipment of your next DVD

Thats probably to prevent customers from ordering like 50 movies a month. If they added this aspect, they would probably need to put a limit to how many movies each customer can rent a month.

your store rental history isn't merged with the online rental history, you can't use spaces in your rental queue as credits for local rentals, and you can't even view your online queue or recommendations from within the store.

I guess youre interested in that stuff, but personally I could care less. I dont think its very important.

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I would note that the Netflix vs. Blockbuster competition has many of the same competitive characteristics as Amazon vs. Barnes & Noble. Netflix and Amazon are purely web-based businesses, that work hard to optimize the web-based customer experience. Blockbuster and Barnes & Noble are traditional brick-and-mortar businesses trying to leverage their brand names and infrastructure into the web space.

So far, Amazon seems to be holding its own against Barnes & Noble in the online space. I've shopped at both, and the experience at Amazon is just smoother and more pleasant. Things that should be easy are easy, and things I expect to be hard are often also easy. Whereas with Barnes & Noble, things I expected to be easy were not as easy as they could have been, and things I expected to be hard weren't possible.

I don't do the online movie-rental thing, so I haven't done a direct comparison of the Netflix site against the Blockbuster one. But I think the Amazon example shows that it is at least possible for a pure web business to compete successfully against a brick-and-mortar rival if it is run well and focusses on its own core competencies.

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Why does Movie Gallery not have an online rental service? Going to a movie store and renting movies is becoming almost obsolete it seems like, and something that confuses me even more is the price they charge for rentals which is about $3.50/rental, plus they dont have hardly any specials. They do have a program thats called Movie Value Pass, and that allows customers to rent unlimited amount of movies a month- it costs $25/month though. I dont think the majority of people want to spend that much on movies though, only the extreme hardcore renters(and they would run out of movies they would want to see fairly soon anyway, when they rent that many). Also, I see that they plan on opening 200 new stores in 2006- do you see any good from that?

Starting an online rental service would provide them with a good opportunity to make money again. They could put out similar prices and deals as Blockbuster, and begin working on other concepts that would put them ahead of their competition.

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  • 5 weeks later...

BlockBuster has upped the ante with something they're calling "Total Access" @ $18 a month. With this, one can return an online DVD to the neighbourhood BlockBuster store and get a new one immediately. In essence, they're using their stores to add more value. The most obvious NetFlix counter would be to cut the prices until BlockBuster hurts.

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  • 1 month later...
BlockBuster has upped the ante with something they're calling "Total Access" @ $18 a month. With this, one can return an online DVD to the neighbourhood BlockBuster store and get a new one immediately. In essence, they're using their stores to add more value.

I cant say it wasnt obvious that they would use their actual store buildings to their advantage. The Total Access plan allows online/mail renters to get the in-store movies immediately(the amount depends on how many online/mail movies you turn in to the store). Plus, they send out your next movies on your online list immediately too. Im pretty sure the Total Access applies for all the plans. I have the $14.99/month plan and I get it.

The most obvious NetFlix counter would be to cut the prices until BlockBuster hurts.

Would Netflix be able to afford that, and still make enough profit? And why wouldnt Blockbuster be able to lower their prices to those levels as well?

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Netflix is intelligently taking advantage of all of the innovative problem solving tecniques that the operations research community has to offer. Have you guys heard of the one million dollar prize to any team who could improve Netflix's present recommendation algorithms?

Consider what the operations research and algorithms communities have done for Google (case study link) and Amazon.com I have much rational confidence that this move will pay off immensely for Netflix.

Edited by DarkWaters
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Would Netflix be able to afford that, and still make enough profit? And why wouldn't Blockbuster be able to lower their prices to those levels as well?
Because BlockBuster has the cost of running the stores and someone has to pay for this. BlockBuster's "Total Access" does show that they're finally trying to compete seriously. However, revenue does not equal profit, and the highest-revenue company need not be the most profitable one. Also, I'm not sure how they pay the studios, but it is possible that a scheme that allows the customer to get more movies also ends up costing BlockBuster more in terms of royalties.

BlockBuster has had three years of losses, not profits. If one goes back further, in the last 8 years, they've had losses in 7 years. In contrast, Netflix has been profitable in the last 3 years. The stock market currently values BlockBuster as being worth about $1 billion ("market cap"), and NetFlix at around $1.8 billion. BlockBuster has changed hands a few times, so I don't know if the current management has been around for long. Sometimes, in situations like this, one finds that the newcomer (NetFlix) finally buys the old-timer (Blockbuster), and gets all its stores and all its existing customers in a fire-sale. Having done that, they combine the back-end operations, thus cutting costs further, and one ends up with a better, stronger company with a better management... and they might still retain the BlockBuster name!

Have you guys heard of the one million dollar prize to any team who could improve Netflix's present recommendation algorithms?
This contest was a great idea and is evidence of extremely good managers at Netflix. It's great that over 40 teams managed to beat the NetFlix benchmark within a month. Few managements have the guts to "expose" themselves that way, eat the humble-pie, and end up with a better business.
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This contest was a great idea and is evidence of extremely good managers at Netflix. It's great that over 40 teams managed to beat the NetFlix benchmark within a month. Few managements have the guts to "expose" themselves that way, eat the humble-pie, and end up with a better business.

But now they have to hand over a million bucks. Is that worth it just to get people to know about their quality recommendation system? I mean, you said it yourself when you agreed with me, that most people choose a certain company based on what plans they offer(most movies for the cheapest price), not so much for their website features.

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Did I say that? I chose them because of that; did I imply that others did? NetFlix has almost three times the number of customers than BlockBuster online, so others are choosing them for some reason-- I suspect it is largely to do with NetFlix being "first to market" and "top of mind" in this business. Strictly speaking, BlockBuster was not cheaper when I chose them, they offered more. So, they were cheaper on a per-movie basis, not on a monthly basis. Also, they offered an advantage of being able to get a couple of movies instantly from the store. If netFlix were to offer a deal on the same monthly-amount, but which had a better per-movie price, or benefits that countered BlockBuster's I'd switch. Truth is that BlockBuster's new and supposedly improved online interface is so bad that I might have switched, except that they sweetened the deal with "Total Access". Well, if they want to subsidize my movie-watching, I'll go for it!

As to the main question about the contest, I cannot say if $1 million would be well spent. To put it in context, this amounts to less than 40 cents per customer. (In contrast, their advertising and other acquisition costs works out to over $40 per new customer acquired.) The thing I have a question about is not the million dollars itself, but the fact that they intend to publish the winning algorithm for all to see! (As an aside, nobody has qualified for the $ 1 million prize yet. The teams that have crossed the benchmark have exceeded NetFlix's own algorithm by 1% or better. At the end of a year, the best of these will get $50,000. To get the million dollar prize, one has to be 10% better than NetFlix's current algorithm.)

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Did I say that? I chose them because of that; did I imply that others did?

Youre right. I tried to sneak that part in there. I shouldnt have done that. Speaking for myself, I think most people choose either company because of their main product, which is the movies and its prices.

NetFlix has almost three times the number of customers than BlockBuster online, so others are choosing them for some reason-- I suspect it is largely to do with NetFlix being "first to market" and "top of mind" in this business.

Also, I would say its because the Total Access program for Blockbuster is pretty much brand new and it will take some time for the amount of subscribers to add up for them. This will definitely entice a lot of subscribers of other online rentals services to consider switching to Blockbuster. Before, Blockbusters advantage they had over Netflix was only one extra in-store free rental a week, which I dont think was significant enough to get Netflix subscribers to switch over. Now, as we have already stated, Blockbuster gives you a couple in-store rentals a week, plus they ship out your other movies quicker. Definitely people who arent subscribers yet to any company and are going to decide on which one to choose, I see the majority choosing Blockbuster. And even some Netflix subscribers will switch over to Blockbuster too now. Thats why I think Blockbusters subscriber numbers will jump in the near future.

Truth is that BlockBuster's new and supposedly improved online interface is so bad that I might have switched, except that they sweetened the deal with "Total Access.
What dont you like about their new site? All I saw was that they changed the layout, but I only go on for a second to check my movie list, so I dont notice much.

The thing I have a question about is not the million dollars itself, but the fact that they intend to publish the winning algorithm for all to see!

Wont it be patented at that point though?

At the end of a year, the best of these will get $50,000. To get the million dollar prize, one has to be 10% better than NetFlix's current algorithm.

I see. Netflix knew nobody would beat them by 10%, so they had no risk of paying a million dollar to anyone. But they still get a lot of good advertising for the price of $50,000.

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It isn't clear if they intend to patent it. They say something to the effect that they want the algorithm published so that the academic community can use it.

I see. Netflix knew nobody would beat them by 10%, so they had no risk of paying a million dollar to anyone. But they still get a lot of good advertising for the price of $50,000.
It's unlikely that they "know" this, simply because it's probably not true. Nor have they got much publicity from this yet, except among the geek crowd trying to improve on their correlation computations. Further, knowing all about the contest, doesn't make me want to switch to NetFlix. I don't think anyone knows how low one can go, though there are ways to make some good guesses.
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I see. Netflix knew nobody would beat them by 10%, so they had no risk of paying a million dollar to anyone. But they still get a lot of good advertising for the price of $50,000.

This contest is not about advertising Netflix's recommendation system, it is about developing better data mining techniques to issue more desirable and accurate recommendations to customers to increase their revenue. Netflix presently has a problem where most customers join, rent all the movies they wish to see for a few months then quit the service after viewing all of the movies that they intended to see. Netflix would like to retain significantly more customers. The hope is that a data-driven recommendation system will further this end.

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  • 5 years later...

I'm not sure if anyone else followed the story of the Netflix prize, but I thought I'd post a link to a follow-up article. Turns out they used the algorithm which won an intermediate prize -- which won a prize for making improvements to their recommendations, but they did not implement the later one: the finalist that improved it even better. They say that the cost of doing so would not have outweighed the benefit.

Interestingly, they found that people rate a movie differently if they do so right after they watch it as compared to the next day etc. So, the rating people give to a movie they just streamed was different from what they gave a movie that they had received in the mail. Secondly, when people are streaming, they can abandon a movie and go on to something else. This means the value of a good rating is far less than to a customer who is getting the movie by mail and is disappointed if he does not like it. In addition, the fact that a customer stops seeing a streaming movie is something they can capture and use in guessing that he may not have liked it. So, as their business moved away from mail-movies to streaming movies, the value of implementing the prize-winning solution fell.

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