Disclaimer: This is a rant post. I will post such disclaimers on subsequent rant posts so that you, the reader, can decide to skip over the post if you so deem necessary.
A while back, I took the plunge into the world of online dvd rentals and signed up for Blockbuster’s service. I signed up for their “Total Access Plan”, which offers – 3 dvd at a time, unlimited rentals per month, free in-store exchanges, and a monthly coupon good for a free in-store dvd or game rental at $17.99 per month. I had never signed up for Netflix because I could never find a reason to justify the monthly price in my budget allocation. When Blockbuster entered the market and offered these additional benefits (at the time, Netflix only offered unlimited rentals per month), it became easier to justify this expense because the potential to drop the cost per dvd to as low as $1 or $2 a month was tantalizing. Each dvd I received in mail could be viewed, and exchanged in-storefor a new dvd at no additional cost. Couple this with the one free dvd rental per month, and a clever mind (such as I would like to credit myself with) can devise a system where one could potential receive one new mailed dvd per day and exchange it for a new in-store dvd as quickly as it takes to watch the dvd and drive to the nearest Blockbuster store. If a consumer engages in this system, and is only limited by consumer-side bottlenecking (how fast they can watch and return the dvd), the consumer could ideally watch sixty-one (61) dvds in any given month (thirty mailed dvd, thirty in-store exchanges, and one free rental). Facing an $18 per month subscription fee, the consumer has effectively reduced the cost per dvd to $0.29. Compare this with $4.99 for a one time in-store dvd rental, $20+ for a cinematic experience (assuming you pay for a guest) or $1.99 for a on-demand cable movie. I personally had never rented 61 movies in a month, but even 15 movies rented per month, a cost of $1.20 per dvd, is still substantially cheaper than most other commercially available options.
Recently, Blockbuster has succeeded in stealing considerable market share from Netflix (who only provided online rentals and a paltry selection of online streaming movie) who could not compete with the free in-store exchange option that Blockbuster offers. Although Netflix is still the larger of the two in terms of total number of subscribers and market capitilization, Netflix experienced a drop in its total subscription base this quarter, a first in its history. A look at Netflix’s recent quarterly statement reads somewhat akin to “It’s all Blockbuster’s fault,”
In late 2006, Blockbuster launched its integrated store-based and online program, Total Access, whereby Blockbuster online subscribers may return DVDs delivered to them from Blockbuster Online to Blockbuster stores in exchange for an in-store rental. We have seen Blockbuster aggressively promote and price their Total Access program through in-store promotions and sign-ups as well as advertising on television and other mass-media channels and Blockbuster has indicated their intent to continue to aggressively grow their online rental business through the remainder of the year. As a result, we anticipate that growth in our subscribers and revenue will continue to be under competitive pressure for the remainder of 2007…
In the second quarter of 2007, we lowered the prices of three of our most popular subscription plans. As a result, we expect revenues to decline during the remainder of 2007. We expect revenue to slightly decline during the three months ended September 30, 2007 as compared to the three months ended June 30, 2007, due to the lowered prices of our subscription plans, coupled with the decline in average monthly revenue per paying subscriber resulting from the increased popularity of our lower cost subscription plans, partly offset by growth in our subscriber base.
With a major competition on the defensive, Blockbuster now apparently looks poised to turn on the same subscribers it recently gained. A recent pricing scheme change now introduces “Total Access Premium Plan”, a plan identical to the Total Access Plan in terms of benefits, but at a higher price; $24.99. Blockbuster also cripples the “Total Access Plan”, which retains the same price, to only allow for five in-store dvd exchanges. The previous pricing scheme had been a replica of Netflix’s prices with in-store exchanges tacked on. Blockbuster, apparently content with its position in the market, is seeking to boost its P&L statement.
This would be little cause of alarm, albeit an unwise strategic move. However Blockbuster started “throttling” its rental service, a business model that Netflix had employed which enabled it to lose many of its customers base. Throttling is the act of slowing down the amount of dvds that a subscriber can receive per month. The online rental company injects a supply side bottleneck, which effectively disrupts the pace at which a subscriber can receive new dvds. This is usually accomplished by delaying shipment of new release dvd, increasing errors in shipments, and decelerating the rate of registering and tracking dvd movements (when a dvd is reported as received, a new dvd is shipped: for Blockbuster, a dvd exchanged in-store qualified as a rental and effected the shipment of the next dvd in queue), or shipping from service centers farther away from the consumer. It is important to note that Netflix recently settled a class action lawsuit regarding throttling of its subscriber’s service. The driving argument behind the litigation was the claim Netflix “engaged in fraud, deceit, and misrepresentation; had committed a false advertising and unfair trade practices…” by throttling a service it claims to offer unlimited rental. After the settlement, Netflix amended its Term of Service (TOS) to introduce language informing subscribers that it engages in “smoothing” out its operation. A look at Blockbuster’s recent TOS tells a similar tale.
BLOCKBUSTER Online will automatically ship titles to you, up to your maximum number of outstanding BLOCKBUSTER Online Rentals, from and in the order that you have listed in your rental queue, subject to availability. However, BLOCKBUSTER Online reserves the right to determine product allocation among members in its sole discretion. In determining product allocation, we use various factors including, but not limited to, (i) the historical rental volume for each subscriber, (ii) historical number of outstanding rentals relative to the maximum number of outstanding BLOCKBUSTER Online Rentals allowed under a subscriber’s plan, and (iii) the average rental queue position of BLOCKBUSTER Online Rentals that have shipped to a subscriber in the past.
TO BE CONTINUED
