Is Netflix About To Imitate Blockbuster After Two Decades?, Marketing & Advertising News, ET BrandEquity
There was a time when the $6 billion company, the lion’s share of Blockbuster’s revenue came from late fees the company charged customers for not returning DVDs on time. It wasn’t nice to fine customers, but John Antioco, then CEO of Blockbuster, couldn’t conceive of an alternative business model that could ensure the revenue stream. Blockbuster made money by renting out DVDs to customers in its nine thousand stores around the world, so naturally if they weren’t returned in time the company wasn’t able to rent them out. to the next group of customers and therefore, in order to compensate for this loss of opportunity the existing customers had to pay the penalty.
Netflix’s subscription model aptly circumvented this challenge and allowed customers to keep the DVD as long as they paid the subscription fee. However, the company initially struggled with the cost of mailing DVDs and suffered losses. Netflix posted a loss of $57 million in 2000 alone. The dismay led Reed Hastings, the founder, to unsuccessfully attempt to offer the company at an average price of $50 million to Antioco that same year.
However, this event turned out to be a blessing in disguise for Reed. Agility and the drive to stay relevant has pivoted Netflix more than once and evolved into an entertainment giant with millions of customers in over one hundred and ninety countries.
In 2010, Blockbuster declared bankruptcy and as of 2019 only one Blockbuster store existed. The reason for this debacle was not only Blockbuster’s inability to adapt streaming from DVD rentals, but also likely a dystopian image that formed due to its punitive policies towards customers. It also has an interesting connection to a behavioral theory proposed by Margaret Clark, Judson Mills and Alan Fiske. The trio claimed that we humans live in two different worlds simultaneously – one where social norms prevail and the other where market norms rule.
According to social norms, people make friendly requests to each other without any expectation of immediate return, whereas in the world governed by market norms, reciprocity or give and take determines the success of any relationship and therefore things are more transactional. By market standards, trading is sharp and there is no warmth, care, and compassion. Blockbuster chose to follow market norms and thus failed to create space in the hearts of customers. It was pure business and there was no forgiveness for defaulters.
So when people found a better alternative (Netflix), they moved on without any guilt of breach of loyalty. With innovation and customer focus at its core, Netflix could win customers. From shipping DVDs to streaming content to creating original content, the company could easily sell through some major industry shifts. Large-scale expansion led to efficiency and a better understanding of viewers’ tastes and preferences which, in turn, fueled further growth.
However, undeniably, the foundation of Netflix’s success has been the massive adoption and democratization of the World Wide Web, popularly known as the Internet. As it has become apparent that there is a global shift in the way people watch and consume video content, more and more players have ventured into the creative and distributing content online. Some of the legacy production and media houses like Disney and Sony joined the race, as they were already big names in this space, with decades of accumulated expertise that they could leverage to become leaders.
Also, the e-commerce giant, Amazon, with its prime subscription, which was originally launched to induce customers to enter into a long-term contract on its e-commerce platform by offering free shipping, has identified content as an excellent opportunity to further strengthen the relationship with customers and convert them into patrons. In fact, there is a positive correlation between people watching content on Amazon Prime and buying goods from its e-commerce business.
So, with the increasing intensity of competition in the Over-the-top content delivery space, players have started to compete on content quality, variety, and relevance. Additionally, in order to capture the colossal, yet price-sensitive market that existed in emerging economies, OTT platforms began to compete on price. Compared to Netflix, Amazon had a clear advantage, as it was already present in these markets with its e-commerce business and also, its annual subscription rate was lower than Netflix. Therefore, in an exponentially growing market like India, Netflix had to reduce its subscription rate to become more competitive.
These emerging markets also posed a different challenge. Although millions of people watch content on OTT, the actual paying subscribers are only a fraction of it. The practice of password sharing is common.
It certainly wasn’t a desirable scenario for Netflix. Illicit observers were stealing the potential revenue stream. So, in order to solve this problem, Netflix has taken the decision to charge an additional amount to customers who share their passwords with friends and acquaintances. This offer is launched first in Chile, Costa Rica and Peru and then, probably in India.
Now, by doing this, Netflix is likely going from social standard to market standard, almost similar to what Blockbuster was doing two decades ago. The most important question at this point would be, is this the right time? the right place/market? And the right move?
I await all your opinions in this context.
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