Blockbuster Analysis Case

The Life of Blockbuster

History and Background

Blockbuster's origins date back to the mid 1980's when the video cassette recorder (VCR) was the new hype and families all over America were quickly turning to movie rentals as a form of in-home entertainment. David Cook, who previously started David P. Cook and Associates, Inc. to offer consulting and computer services, saw an opening in the quickly expanding movie rental business. Eager to start a business, he jumped in making Blockbuster the Wal-Mart of movie rentals offering a wide variety of movies to customers in a family environment with standout buildings and bright lights. From there, Blockbuster growth exploded bringing in external investors and national attention.

To facilitate the growth trends shown by Blockbuster since its inception, David Cook contacted H. Wayne Huizenga, a former colleague, as an investment opportunity. Huizenga bit at the opportunity and invested his own time and money as well into the expansion of Blockbuster. To summarize the extent of the growth of Blockbuster stores from the 1980s to 2002, gross revenue went from about $75,000 in the 1980s to over $6,000,000,000 by 2006. From the start of several stores in the 1980s, Blockbuster grew to as many as 5,803 as of the end of 2004. Additionally, the company has expanded into 29 countries including countries in North America, South America, Europe, and Asia. It has been estimated that there are more than 43 million American households with a membership to Blockbuster.

The twenty year journey of Blockbuster has not been without bumps, valleys, road blocks, and detours. Blockbuster has come under legal fire from Netflix, a major online competitor, the Free Trade Commission for attempting a hostile takeover of Hollywood Video, as well as major competitor encroachment from both aforementioned parties. To survive all these mishaps, battles, and court orders, Blockbuster has implemented some very interesting strategies. In this paper, I will discuss the strategies Blockbuster has implemented in the past, how those strategies ultimately affected the bottom line of Blockbuster, present and future strategies of Blockbuster, and recommendations on what Blockbuster should do to remain at the top of the video and game rental food chain.

Strengths

Blockbuster's strengths have evolved throughout the life of the company. In the beginning, Blockbuster's strengths were family centric, marketing innovation, and adaptability to the needs and wants of customers. Because they were much smaller, change, once noticed, was much easier to implement. In today's market however, Blockbuster's composition, business model, and economic status has changed quite drastically, especially in the last 5 years. Their largest strength today is goodwill or their name, and the connotation associated with the name Blockbuster. Another strength is their customer base, which reportedly has grown to over 43 million households across the United States. Because memberships are required at most video rental outlets, many customers are reluctant to change video rental stores merely for the hassle of creating an additional membership.

Blockbuster strengths at this point in the "video rental game" is a difficult topic. Despite the recent turn of events against Blockbuster by competitors such as Netflix and Hollywood Video, I believe Blockbuster has a lot going for it and will bounce back. To summarize, Blockbuster is resilient. And in today's market that is an important strength to have. Blockbuster is in the process of bouncing back from serious market share invasion by competitors.

Weaknesses

Although I believe Blockbuster has faced the worst of its business downturn, the road ahead will not be easy for Blockbuster and execution is crucial if Blockbuster plans to remain at the top. The biggest weakness Blockbuster is facing is the ability to change or to identify and incorporate change in a timely manner. Given the rapidly changing demands in today's market, such a characteristic is absolutely necessary. Another apparent weakness of Blockbuster is their revenue strategy. As the days of going to the movie rental store dwindle, the cost per DVD rental at the store increases because most other expenses stay constant. This increases Blockbuster's overhead and decreases their bottom line.

Arguably the largest weakness of Blockbuster right now is overhead. Compared to Netflix, a primary competitor, Blockbuster's overhead is much larger due to actually having stores for customers to go to. In order to continue to compete, Blockbuster will need to transition smoothly and try to control the drastic increase of this overhead.

Threats

At this point in the game, Blockbuster has several threats. First of all, credit problems. With the recent talk of bankruptcy, Blockbuster would be put in a very tight position if lenders are not willing to lend additional capital for Blockbuster expansion. As of September 2006, Blockbuster had a quick ratio of .48. To summarize, Blockbuster had half as much cash as was necessary to pay current liabilities for that period. Cash is the lifeblood of business, and unless Blockbuster gets a "blood transfusion" or heals itself, the future could be weary.

Another major threat is competition. Because video rentals are moving toward online stores, Blockbuster is a little late getting into the game. Netflix, founded in 1999, is the more popular choice for online video rentals. Currently, Netflix has nearly 6 million subscribers while Blockbuster has only 2 million. Despite Blockbuster's late start of Blockbuster Online in 2004, 2