Blockbuster Case Study

1. Analyze Blockbuster's current position (based on its brick-and-mortar business model) using Porter's 5-forces model. What are the conclusions of your analysis?

In Porter's 5 forces model, the five underlying forces for an industry's structural attractiveness are the barriers to entry for new competitors, the intensity of rivalry among existing competitors, the threat of substitute products or services, the bargaining power of suppliers, and the bargaining power of buyers. In analyzing Blockbuster's business model and current position, it is evident that it faces issues in all five areas.

Barriers to entry

In the brick and mortar movie rental industry, Blockbuster is clearly the leader. With the merger of Hollywood Video and Movie Gallery, that leaves on two major players in the brick and mortar movie rental industry. Essentially, this has created many barriers for traditional mom-and-pop video stores to maintain consistent revenues or expand and open new stores, ultimately driving many out of business. In the early '90s, there were some 70,000 stores nationwide that rented movies, compared to 18,000 today (Graham). The appearance of a new brick-and-mortar competitor for Blockbuster is an unlikely event.

Online however, Blockbuster faces different circumstances. In general, the internet will reduce barriers to entry for new companies by eliminating the need for an established sales force and existing channels. In addition, the internet makes applications difficult to keep proprietary. The internet has allowed Netflix to enter and become the leader in the online video rental business. Netflix has lower proportional upfront capital requirements than a chain of traditional movie rental stores. In addition, its distribution centers can be built in low-cost areas, and current distribution centers can cater to distant customers until local penetration rates justify building new ones (Jackson). Netflix, along with smaller players Wal-Mart and Amazon.com, have all become Blockbusters major online competitors. As a result, Blockbuster has used this ease of entry fashioned by the internet to create Blockbuster.com, a site also providing rentals online.

On the other hand, Blockbuster does face significant barriers to entry into new technology markets, such as Video on Demand (VOD). Major cable and DSL providers have already invested billions to develop their networks. To provide true VOD, cable and DSL providers will have to continue to invest even more money on these networks. Blockbuster will need access to these networks, as well as means of delivery, in order to provide this service. Blockbuster also faces the issue of cable and DSL providers cutting their own deals with movie studios. If VOD continues to gain popularity and providers begin to cut out Blockbuster as a middle man, this could create even more barriers to entry into VOD.

Rivalry among existing competitors

The internet, as well as new technologies, are intensifying and creating rivalries between Blockbuster and its competitors. The internet has expanded the geographic market for movie rentals and also created new competitors. Netflix, Wal-Mart, and Amazon.com are all competing with Blockbuster for online customers. With this new competition, Blockbuster was also forced to try and keep its brick and mortar side of the business as strong as possible. This caused a fight between Blockbuster and Hollywood Video for the acquisition of Movie Gallery, a fight Blockbuster ultimately lost.

These rivalries have also migrated competition to price. Netflix had been advertising its $17.99 price for its most popular three-movies-out, unlimited rental plan. Once Blockbuster entered the online segment, it cut its price to $14.99 for its three-movies-out plan, and then aggressively advertised it online. Netflix then began advertising an $11.99 price on Yahoo and other sites for its service, a move that seemed aimed at Blockbuster's $14.99 advertised price. Netflix never changed its price points on the three-movies-out plan and Blockbuster ended up reverting prices back to 17.99 their similar plan (Netherby).

On the horizon, Blockbusters number of competitors should steadily increase from new emerging technologies. If Blockbuster extends into the realm of VOD, Legal Movie Downloads, or Digital Video Recorders (DVR), it must realize there are existing and powerful players in these markets already. This new technology is shaping the market for many deals or partnerships. They will face fierce competition, but in the future, Blockbuster must not find it self on the outside looking in.

Threat of substitutes

There are basically six technology-driven threats to the traditional rental model: (1) Cable companies offering Video on Demand (VOD), (2) online movie downloads, (3) online movie rentals, (4) disposable DVDs, (5) illegal movie downloads and DVD copying, and (6) Digital (or Personal) video recorders (DVR). (Jackson) One could also consider traditional pay-per-view (PPV) as and additional substitute. Only one of these seven, online movie rentals has proven to be a major competitive substitute for traditional movie rentals. All other areas, except traditional pay-per-view are expanding rapidly, but some face significant challenges.

Unlike traditional pay per view, VOD, usually offered by a local cable provider, offers subscribers wider choice and the ability to start a movie whenever they want, instead of at a pre-arranged time. Up to this point, Video on Demand (VOD) is expanding, but expanding with reluctance from some major industry players. Movie studios are very reluctant to cannibalize there proven cash cow from DVD rental and sales. Because studios make about $2 on each VOD showing, they'd need about eight rentals to make up for just one $15 DVD sale lost (Liebermann). Rights issues, distribution agreements and fears of damaging existing revenue streams have retarded what had been presumed to be more rapid [VOD] rollout rates for cable (Sweeting & Kaplan). In addition, VOD has been unpopular because of its lack of recent new-release movies. Movie studios create a 45-day window which allows retailers to market, rent, and sell DVD's before they are available to VOD or PPV customers.

Another substitute showing potential is the DVR. The number of cable or satellite TV households owning DVR's, such as TiVo, are steadily increasing, but there has been some consumer reluctance to purchase movie rentals using this equipment. A DVR such as TiVo not only allows the recording and replaying of TV movies, but also the downloading of movies broadcast