Videos for Use with the Netflix Case. Two pertinent videos are available to accompany your use
of the Netflix case:
A 6:32-minute video of a Bloomberg News interview with Netflix CEO Reed Hastings on
February 18, 2009. This interview covers the movie rental industry, the future of the movie
industry, and costs inherent in renting movies. It can be accessed at
1. How strong are the competitive forces in the movie rental marketplace? Do a five-
forces analysis to support your answer.
Below is a representative five-forces model of competition in the movie rental industry:
Rivalry among companies competing in movie rentals—a strong to fierce competitive
force that is likely to intensify in the years ahead
In assessing this competitive force, you should be directed to refer to and utilize the presentations
in Table 3.2, Figure 3.4, and the discussion on pp. 55-59 of Chapter 3.
You should conclude that rivalry among Netflix, Blockbuster, Redbox, and other movie rental
competitors (especially video-on-demand providers that stream movie rentals directly to the
renter’s TV or PC) seems destined to grow more intense. All competitors are scrambling to attract
the patronage of individuals/households that rent movies—the battle for sales revenues and market
shares is very contested and seems destined to become more fierce. Rivalry is centered on such
• Price of movie rentals (rented either individually or via a subscription plan); variety of
subscription plans to choose from.
• Convenience in renting movies (including returning rented DVDs).
• Breadth of selection (size and diversity of movie rental library).
• Availability of the DVD (are all the copies out on rental or are some available either in the
store/kiosk or in distribution inventory ready to be shipped?). Customers tend to be annoyed
when the DVD they want to rent is not immediately available.
Of course, DVD availability is not a factor when the rented movie is being streamed over the
Internet by video-on-demand providers.
• Ease of browsing through all the selections to determine which movies to rent.
• Policies and fees (if any) regarding how long the renter can keep the DVD (or view the movie
if it is downloaded or rented online).
• Advertising and promotion—Much of the advertising is being done online in the case of both
Blockbuster and Netflix; however, Blockbuster utilizes in-store promotions on a regular basis.
But the DVD rental business is not one that is a heavy user of TV, radio, and newspaper
advertising on a regular basis.
• Image and reputation.
Most movie rental competitors pursue some version of a differentiation strategy to try to set
themselves apart on the basis of one or more competitive factors.
Several factors were working to intensify rivalry among movie rental industry participants:
• All rivals are actively and busily launching fresh promotional initiatives (the free trials and
unlimited streaming at Netflix, for example) and engaging in new marketing tactics and
market maneuvers (Redbox’s rush to deploy more of its distinctive red kiosks and
Blockbuster’s initiatives to reinvent itself) to spur their movie rental revenues and build a
loyal customer base. The large number of fresh strategic initiatives on the part of various
movie rental rivals heightens rivalry.
• Low switching costs on the part of buyers—it is pretty easy for people wanting to rent a
DVD to (a) go to one store location or another to rent a DVD or (b) switch their subscription
from Netflix to Blockbuster or some other subscription service or (c) order the movie through
their cable provider or some other video-on-demand provider.
• Some rivals have utilized rock-bottom subscription rates (and free trials) and low rental fees
as a means of attracting new customers—a factor which intensifies rivalry. Redbox only
charges $1 per day for a movie DVD obtained from its kiosks. It is unclear to what extent
subscription prices might fall to the extent movies are streamed directly over the Internet
rather than being sent-and-returned by mail. Streaming delivery is undoubtedly less costly
than DVD distribution by mail.
• Rivalry increases when one or more rivals are dissatisfied with their market position and
launch moves to bolster their standing at the expense of rivals. A case can be made that
Netflix, Blockbuster, Redbox, the cable TV companies, streaming video providers, and
Internet sites offering downloadable movie rentals are likely to make further moves to bolster
their unit volumes and market positions. All movie rental competitors seem to be actively
attempting to grow their business.
• Rivalry is likely to increase significantly as “wave of the future” video-on-demand
(streaming movies over the Internet) becomes the most common means of delivering rented
movies to individuals/households—the capability of individuals/households to watch
streamed movies without a hassle is starting to explode. Class members should (quite
correctly) see video-on-demand as a new technology-driven way of delivering movie-
viewing services to consumers—growing use of the movie-streaming channel will greatly
increase the competitive pressures on companies like Blockbuster and Redbox with brick-
and-mortar and kiosk movie rental locations. Over time, there is reason to expect that movie
rental competitors with VOD capability will take substantial sales and market share away
from most other types of movie rental providers.
• Rivalry increases as the product offerings of rivals become more standardized. We see the
differentiation between Netflix’s online product offering and the online offering of
Blockbuster as growing smaller, not larger. And, in the future, the main differentiating factor
among VOD providers will be the size and content of their respective movie libraries.
However, the image/reputation differentiation between Netflix and Blockbuster is growing
stronger, despite Blockbuster’s presence in the online movie rental business—Netflix’s
number of subscribers dwarfs that of Blockbuster’s subscriber base. And there will be
continuing differentiation among movie rental providers based on the means of delivery
(streaming versus providing a physical DVD).
On the other hand, there is at least one factor acting to make rivalry somewhat weaker—
somewhat rapid growth of the market for movie rentals, especially in the VOD/streaming
segment. Most of us are likely to take the position that the demand for VOD/streaming movie
rentals will grow briskly in the years ahead. There are already clear signs that Netflix subscribers
are shifting in greater numbers to streamed delivery as opposed to mail delivery. Rapidly growing
preferences of individuals/households toward watching streamed movies acts to weaken rivalry in
the VOD/streaming channel—but in this case, the market growth is probably not fast enough to
override all the factors acting to intensify rivalry.
We think it is hard to be definitive about just where the overall market demand for movie rentals is
in the life-cycle. The VOD/streaming rental segment is almost certainly in the rapid growth stage.
However, demand for DVD rentals at retail stores is stagnant at best and at places like
Blockbuster/Movie Gallery has been eroding rapidly—as evidenced by Blockbuster’s dismal
prospects and the recent demise of Movie Gallery. Video-on-demand has big growth potential as
of 2010 and beyond. The growth potential of renting movies from vending machines is unclear,
but would not seem to qualify as a “wave of the future” distribution channel relative to the Internet
and VOD segments. Redbox’s growth is tied to the appeal of its conveniently-located kiosks, its
$1 per day rental fee, and the decline in business at Blockbuster and Movie Gallery (some of
which can be attributed to Redbox stealing customers away from Blockbuster, Movie Gallery, and
other local movie rental stores. Thus, the overall growth prospects of the combined movie rental
segments is a mixed bag.
Threat of entry—a weak to moderate to strong competitive force, depending on the segment or
means of distribution.
In assessing this competitive force, you should be directed to refer to and utilize the presentation
in Figure 3.5.
In 2010, the windows for entering the brick-and-mortar segment of the movie DVD rental
business and the mail-delivery subscription segment are pretty much closed. It will become
increasingly difficult for new entrants using business models like Netflix or Blockbuster or
Redbox to overcome entry barriers and capture enough business to compete profitably. And trying
to go head-to-head against Netflix (and to a much lesser extent Blockbuster) in the online
subscription segment seems unattractive as well (the entry barriers are high). We ought to
recognize that the barriers to entry into online subscription segment of the movie rental business
are moderately high for enterprises wanting to cover a large geographic area and compete on a
• The costs of developing a Web site.
• Developing order fulfillment capability to equal the short delivery times offered by Netflix
• The added investment in DVD inventories.
• Expenditures for advertising and promotion needed to draw visitors to the web site and
convert them into paying subscribers. (From case Exhibit 3, students can see that Netflix is
spending over $200 million annually on marketing.)
In the brick-and-mortar movie rental segment, there may be very limited entry opportunities for
small niche players in local markets to get into renting movie DVDs to customers living near their
store locations. It is relatively easy for a local retailer to open a DVD rental outlet and compete on
a very small scale for business within a 2-5 mile radius; but such entry poses little direct threat to
Blockbuster and Redbox (or even Netflix) as of 2010.
Clearly, the biggest entry threat into the movie rental marketplace in 2010 and beyond are
enterprises that enter the video-on-demand or streaming movie rental segment. But we think
the remaining time to enter is growing short. The most likely entry candidates into the video-on-
demand or Internet-streaming segment are those few companies that have the resources and name
recognition to compete successfully against Netflix and other present video-on-demand providers
(for instance, cable TV providers and the phone companies offering TV and other entertainment
services). The near-term entry threat from this type of competitor is relatively high (since
there are signs that VOD/Internet streaming is on the verge of exploding (many TVs and DVD
players are either Internet-ready or have built-in Internet access capability) and Google is
launching Google TV.
New entry by resource-rich companies with good name-recognition (like Google TV—which
enables household to combine their regular TV experience with the capability to access videos
anywhere on the Internet) will almost certainly trigger fierce competitive pressures as all
VOD/streaming competitors tout the merits of a movie-watching service that allow viewers to rent
movies “on-demand” and watch the rented movie directly on their big-screen TVs within minutes
of placing the order. In short, technology is advancing in a manner that makes video-on-demand
more and more feasible and more and more attractive to Netflix, other movie rental Internet sites,
cable and broadband providers, and perhaps others (including the movie studios themselves). A
variety of movie rental providers are gearing up to offer video-on-demand. The owners of
Hulu—NBC Universal; ABC’s parent Walt Disney; and Fox Entertainment’s parent, News
Corp—had announced plans to begin offering a premium service for $10 per month that would
provide a bigger library of TV shows to watch. Amazon.com might prove to be a factor in the
As more and more households sign on for broadband service and as download speeds advance,
then delivering all kinds of entertainment products via high speed Internet means will almost
certainly catch on with individuals/households. People with iPads and PCs may also become
regular users of VOD..
Hence, the entry threat into the movie rental industry should be viewed as moderate to strong, but
with time running out to enter (since it will become increasing difficult for a new entrant to
overcome the leads of the incumbent and soon-to-enter VOD providers (which now includes
Netflix—indeed, Netflix seems to be driving the transition to streaming). First-mover
advantages and late-mover disadvantages are in play here.
Competition from substitutes—a moderately strong competitive force depending on the extent to
which consumers prefer to rent movies versus seeing them at the movie theaters or buying movie
DVDs for their own personal library.
In assessing this competitive force, you should be directed to refer to and utilize the presentation
in Figure 3.6.
There are currently three principal substitutes for renting movies: (1) buying movie DVDs and/or
the DVDs of new and old TV shows for one’s own personal library, (2) watching a movie on any
of various TV channels (such as Bravo, Turner Classic Movies, HBO, Cinemax, Starz, and other
premium movie channels typically available from cable, satellite, and telecommunications
providers), and (3) seeing the desired movie at movie theaters. Buying movie DVDs has recently
become less expensive (but still not as cheap as renting a movie from any of several sources),
since the strategy of some movie makers is now to price new releases of movie DVDs low enough
to cause more and more people to buy a movie DVD rather than rent it. To a lesser extent, another
substitute is watching movies on all the various TV channels. However, the selection of movie
DVDs at retailers like Wal-Mart or Best Buy or Target is nowhere near as broad as the selection
available for rental from Netflix, Blockbuster, and other rental providers—which, for movie
enthusiasts, limits the appeal of substitutes for movie rentals.
In addition, there are hordes of entertainment substitutes for watching movies altogether—but
these other entertainment forms may not be good substitutes for people who prefer to watch
movies in their home at their own convenience and are frequent or dedicated movie watchers.
All things considered, we should conclude that substitutes for renting movies are a relatively
strong competitive force, given that
• Acceptable substitutes are readily available and competitively priced (in some cases).
• Buyer costs to switch to substitutes are relatively low.
• Many consumers are familiar with and comfortable with using substitutes (buying their own
movie DVDs, going to movie theaters, and watching movies on TV).
• There are many, many entertainment substitutes for watching movies altogether.
The bargaining power and leverage of suppliers—a moderately strong competitive force,
depending on the type of supplier.
In assessing this competitive force, you should be directed to refer to and utilize presentation in
We should recognize that movie studios have considerable bargaining power and leverage over
Netflix, Blockbuster, and other movie rental enterprises because of their power to heavily
influence the price and other terms and conditions under which their movie DVDs will be
supplied to movie rental providers. Movie studios are already in a powerful position to dictate the
dates when their movie DVDs will be released to all the different movie rental providers.
The movie studios will, in all likelihood, become even more powerful and able to command
higher prices in making their movies available for streaming. Netflix and other VOD/streaming
providers can expect to pay higher fees in gaining the agreement of movie studios to stream their
titles. Why? Because VOD providers will compete on the basis of having a large library of titles
available for streaming. Since the movie studios own these libraries, they will be able to secure
bigger fees in making their titles available to particular VOD providers.
Other suppliers to movie rental participants, however, are relatively weak and have little or no
bargaining power. Web site services, servers, mail services for shipping and returning DVDs, and
the services required for operating retail stores can all be obtained from a variety of sources at the
going market price.
The bargaining power and leverage of people renting DVDs—a weak competitive force
In assessing this competitive force, students should be directed to refer to and utilize the
presentation in Figure 3.8.
• Individuals have virtually no power to bargain for a lower price on movies they rent from
Netflix, Blockbuster, or other movie rental providers. They can choose to rent or not at the
going rates or to subscribe or not to one rental plan or another, but no one individual is in a
position to negotiate the terms and conditions under which he or she will rent a movie DVD
from Netflix or Blockbuster or Redbox or a cable TV company or any other video-on-demand
Conclusions concerning the overall strength of competitive forces: Competitive
pressures in the movie rental industry are pretty strong and are likely to grow stronger in upcoming
years as video-on-demand and Internet streaming become the dominant means of distributing rented
movies. Currently, we see rivalry as far and away the strongest of the five competitive forces, followed
by competition from substitutes and the bargaining power of movie studios. We see the bargaining
power of the movie studios as growing stronger as the transition to streaming accelerates.
But while collective competitive pressures are fairly strong and likely to intensify, they are now not so
strong as to prevent many movie rental companies—especially Netflix—from being profitable. Up to
this point, the movie rental companies (with the exception of Blockbuster and Movie Gallery) have
able to cope with rivalry, the bargaining power of the movie studios, and the competitive pressures
from substitutes. It would not, however, come as a shock if the bargaining power of the movie studios
begins to squeeze the profitability of VOD/Internet streaming providers as they demand bigger fees in
return for granting streaming access to the libraries of movie titles.
The dismal financial performance of Blockbuster and Movie Gallery confirm that competitive
conditions for earning attractive profits are pretty tough. Netflix, on the other hand, is doing very, very
well from the standpoints of revenue growth and financial performance. (This is true of Redbox, as
well, which is the subject of the next case)
2. What forces are driving change in the movie rental industry? Are these driving
forces likely to have a favorable or unfavorable impact on competitive intensity
and future industry profitability?
You may want to direct students to pages 72-76 and Table 3.3 in Chapter 3 in singling out the driving
forces that are at work in the movie rental industry.
We should identify many of the following as driving forces:
Technological changes related to the Internet.
• Many TVs and DVRs were now Internet ready or had built-in Internet connectivity (which is
reflective not only of technological change but also of product innovation).
• The technology of streaming rented movies directly to big-screen high-definition TVs is
improving very quickly, thus enabling streaming and VOD to become the “wave of the
future” in delivering rented movies to viewers. Netflix is providing subscribers with unlimited
movies selections via streaming as part of its regular subscription price and the percentage of
Netflix subscribers watching streamed movies is rising briskly. For some years now, cable
and satellite TV companies had been promoting their VOD services and making more movie
titles available to their customers—their customers could use their TV remotes to place orders
and instantly watch a movie from a list of several hundred selections that changed
periodically. This technology-driven growing interest in watching VOD and streamed
movies is probably the biggest and most important driving force in the movie rental
business as of 2010.
• The number of households with high-speed broadband Internet service was growing—which
broadened the market for both VOD delivery (and Internet streaming) of movies.
• The 2009 requirement that all TV stations in the United States use digital technology and
equipment to broadcast all their programs had resulted in (a) growing consumer interest in
purchasing big-screen TVs with high-definition capability and (b) far more programs
(including movies on various movie channels) being transmitted in high-definition format.
Changes in how the product is used. There is a fast-emerging switch from renting DVDs to watch
movies to watching Internet-streamed or movies from VOD providers. This switch away from
renting a physical DVD is having and will continue to have a profound effect on the entire movie
Changes in costs
• Prices for wide-screen, high definition TVs have been dropping rapidly and picture quality
was exceptionally good, if not stunning, on increasing numbers of models—all of which has
spurred sales. Big-screen TVs enhanced the experience of watching movies at home.
• Moreover, streaming movies to subscribers is far cheaper than mail delivery/return or
operating rental locations (stores or kiosks) where customers can obtain/return rented DVDs.
Product innovation (partly driven by technological changes)
• Many new TVs were Internet ready or had built-in Internet connection capability, which
facilitated watching Internet streamed movies. In addition, increasing numbers of devices
were appearing in electronics stores that enabled older TVs to be connected to the Internet and
receive streamed movies from online providers with no hassle. Households with Internet
capable TVs were expected to become big users of streamed movies and to search out
providers of on-demand movies.
Renting a streamed movie could be done either by using the services of Netflix, Blockbuster
Online, Amazon Video-on-Demand, Apple’s iTunes, and other streaming video providers or
by using a TV remote to click to an on-demand provider of filmed entertainment (such the on-
demand service of a cable or satellite TV provider).
• Rapid increases in the number of household having digital video recorders (DVRs) which
made it simple to record a TV program or movie and then replay it at a convenient time.
Falling prices for DVRs with Blu-ray technology were spurring sales of DVRs—which could
translate into growth in movie rentals for home viewing. In 2010 more than 85% of U.S.
households had some kind of DVD player or player-recorder. Increasing numbers of
households had Blu-ray DVD players or player-recorders; such devices enhanced the caliber
of the in-home movie-watching experience when viewing a Blu-ray-enabled movie DVD.
Growing numbers of movie DVDs were available with Blu-ray technology (usually at a
higher rental fee).
• The growing number of devices (in addition to TVs and DVRs) with Internet streaming
capability (video game consoles, iPads, iPhones, PCs, and so on)
• The push by Netflix and others to watch streamed movies rather than rent physical DVDs;
Netflix’s unlimited streaming feature is having a significant market impact.
• The recent appearance of movie rental kiosks—Redbox and Blockbuster Express
Availability and use of file-sharing programs that facilitated pirating of downloadable movies—
however, streamed movies were much harder to pirate (which resulted in movie studios more
amenable to granting movie rental providers the rights to stream a bigger portion of a movie
studios content library). Movie studios were very leery of pirating because of the resulting erosion
of sales of movie DVDs.
Conclusions: The combined impact of these driving forces in the marketplace should be analyzed
by answering three questions:
What is the likely effect of the driving forces on demand for movie rentals? We should
conclude that the driving forces will likely result in growing overall demand for movie rentals (via
either the Netflix subscription-based business model (with unlimited streaming) or via video-on-
demand/streaming technology and devices).
Are the driving forces acting to strengthen or weaken competition in the movie rental
business? The weight of evidence indicates that the driving forces will all act to intensify
competition among the various movie rental providers. All the new entrants offering
streaming/video-on-demand will be trying to wrest rental revenues and market share away from
traditional movie rental providers. The movie rental kiosks will prove to be strong competition for
Blockbuster and other local brick-and-mortar providers rental DVDs. There will be vigorous
competition across all the different distribution channels—brick-and-mortar rental stores, movie
rental kiosks, mail delivery/return of rented DVDs, Internet streaming, and VOD/pay-per-view.
Will the driving forces lead to higher profitability among the movie rental companies? We
think the best answer here is probably yes in the case of competitors with the ability to supply
movie rentals on demand via streaming/VOD technology. However, brick-and-mortar movie
rental providers are highly vulnerable to the driving forces.
The DVD rental marketplace is likely to be fast-changing for some years to come, as all the driving
forces come into play and the battle among new and existing rivals shakes out.
3. What does your strategic group map of this industry look like? Is Netflix well-
positioned? Why or why not?
Strategic group maps are beneficial for determining relative company placement in the industry. A
good strategic group map should utilize two strategic variables that differentiate the various
competitors in the movie rental marketplace.
We can choose among any of several strategic variables to divide the DVD rental industry into
strategic groups and illustrate the different market positions they occupy. We have chosen to employ
breadth of product line (in terms of number/variety of movies offered) and the type of distribution
channel or approach to getting the movie rental to customers for viewing. Other possibilities for axes
might include scope of geographic coverage and image/reputation/brand name recognition—there is
not always one single best strategic group map.
A representative strategic group map is shown in Figure 1 (it matches what class members will be
using in the Connect-based exercise for this case).
Once we have come up with a map, then we think we should press them for their evaluation of what
we learn from the map. Any of the following questions can be posed to help draw out their views:
Which company is better positioned—Netflix or Blockbuster? (We favor Netflix because of its lead
in migrating to VOD technology and devices for delivering rented movies to subscribers.)
Which other industry members are well positioned? (Our answer is that companies with the
capabilities to be successful in the VOD channel are best positioned.)
Which industry members are weakly positioned? (Traditional brick-and-mortar movie rental stores)
Which industry members are likely to benefit from the impacts of industry driving forces? (Movie
rental providers that have strong Internet streaming/VOD delivery capabilities)
Which industry members are likely to be injured by the impacts of industry driving forces?
(Traditional brick-and-mortar movie rental stores and movie rental kiosks)
On the whole we like Netflix’s position on the map, especially since it can move vertically over time
and is rapidly enhancing its ability to migrate to an Internet streaming delivery system. However,
Blockbuster is improving its streaming/VOD capabilities, but it trails Netflix in this regard. If
Blockbuster got into VOD, it would be a potent competitor in the sense of being able to access the
casual DVD movie rental customer (via its large network of retail stores and VOD) and the heavier
movie-watching segment (via online ordering/mail delivery, Internet streaming, …