Benjie

6743 Words Jul 6th, 2016 27 Pages
Blockbuster Video or Netflix
This case started as Blockbuster Video but has morphed to include Netflix. The issues facing the two companies are similar, so you can choose to address the case from the perspective of either company. Just specify which perspective to use.
In 1985, Blockbuster Video (now a subsidiary of DISH Network ticker: DISH) quickly became a sensation. Households had just begun to acquire video-tape players in earnest. Few people were willing to pay $85 to buy Hollywood videos. Cable TV existed, but most people still watched broadcast television stations, and only a few premium Cable channels existed.
Satellite receivers existed, but the huge satellite antenna was generally only used by people who lived in the
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With the new approach, customers only cared about the new releases. That meant that Blockbuster needed to buy hundreds of copies of a single title. But, at $65 a tape, those costs were high—and after about a month, people moved on to rent the next release, so the store no longer re-ceived money to cover the original purchase price.
In 1997, CEO John Antioco found a solution. He negotiated a deal with the leading
Hollywood studios. Blockbuster would purchase tapes for $6 upfront, then give the studios
40 percent of the rental revenue. The deal gave Blockbuster a huge advantage in the market for new releases. Blockbuster advertised that customers would always find specific new-release titles in stock, or they would get a free rental on the next trip. Competitors could not match the cost savings. About 2,500 of them (10 percent of the U.S. market) went out of business [Harnish 2003]. The deal also required Blockbuster to carry every title released by the studios [The Wall Street Journal 2001].
The interesting point of videos is that by 2000, the movie studios were making more money at the rental counter than at the theater. Home video was bringing in $2.9 billion in revenue, versus $2.2 billion in the theaters. So, the studios had a huge incentive to build stronger ties with the leading video rental company. Given the new cash flow, Redstone decided to keep Blockbuster, having sold off only 18 percent of its

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