Professional Documents
Culture Documents
2011
Blockbuster and Netflix
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1. Introduction
Blockbuster, Inc. and Netflix, Inc. are the two companies that are selected for the review
purpose and these two companies are in the same field of business.
Blockbuster, Inc. is a global leading name of provider of movies on rental and retail basis. It
offers both on-demand video streaming over the internet, and flat rate online video rental (rental-
by-mail) of DVD-Video. Further, Blockbuster, Inc. is providing game entertainment as well. The
company provides its customer’s access to media entertainment via stores, mails, vending Kiosks
or digitally to their homes and mobile devices. The company’s digital library contains more than
125,000 movies and owns 6,500 stores in the United States, its territories and seventeen other
countries as of January 3, 2010. Majority of the share of the company are owned by Viacom and
together both the companies operate stores around the world in twenty-five countries
Netflix, Inc. is a name of online media entertainment provider and more than 12 million
subscribers are enjoying the media entertainment through it.The company was founded by Reed
Hastings and Marc Randolph in the year 1997 in the state of California where its headquarters
are situated. It is the world’s largest subscription service streaming movies and TV episodes via
internet or by mail.
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Netflix is the world’s largest subscription based service streaming movies and
television episodes over the Internet and DVDs by mail with 16.9 million subscribers
at the end of September 2010. They offer a variety of attractive subscription plans
that have no due dates, no late fees, no shipping fees and no pay-per-view fees.
Approximately 2 million DVDs are shipped daily and during the last trimester of
2010 more than 66% of subscribers instantly watched more than 15 minutes of
US delivering, to its members, DVDs free of cost through first class mail, with a
Netflix currently has roughly 40 distribution centers; however, the delivery time
Customers of each service report higher or lower delivery times, depending on their
location. Because of this, it seems that the outbound logistics activities utilized by
stores directly from the studios by two methods, the first being a title-by-title basis
arrangements. Blockbuster also acquires retail movie and game inventory through
Operational actives are used to convert inputs provided by inbound logistics into
accurately and efficiently manage their purchasing, inventory, and sales records.
Blockbuster’s operational activities are neither inferior nor superior, but basically
opportunities in the market place, and thereby increase the return on their marketing
onlineDVD rental program, especially when combined with their in-store rental
positions. This is very indicative of serious internal issues and a weakness in the
value chain for Blockbuster asfar as Human Resource Management activities goes,
The general management aspect of Blockbuster is very weak, but ideally going
the possibility of accessing the online renter market, previously held by Netflix.
1. Rivalry among Existing Firms: I can say it seems not high due the fact
that renting videos and DVDs has become easier. The way the company has branded
itself in the U.S market is actually the core barrier to entry that keeps competitors
away. Logistic services are the same; the products are more or less.
a high barrier for new entries to this market. I’m confident that the right answer is
very low because there are no entry barriers and any investor can enter the market.
New entries to online rental movies would face high costs and other technology
issues.
can rent the same DVD from any supplier.One of the threats that the company has
from the external environment is the advantage of a one stop shop for the consumer.
The customer would like to see both the facilities at the same place. This shows how
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competitors are coming up with products by renting other products online as well in
order to give a different experience to the consumer to switch their existing brands.
4. Buyer Power: I will say very high due to the low price.The customer is
really powerful in this industry as he has a number of options available to try out new
services and brands. The subscriptions are sold to those who prefer online only
5. Supply power: I think it’s very low because the costs of the primary
renting service are steady compared to another industry.Netflix acquires its content
from movie studios and movie distributors. Movie studios and movie distributors
make their revenue by selling its content to the largest number possible of viewers.
Demand
In this industry customers are highly price-sensitive.The domain netflix.com attracted at least
194 million visitors annually by 2008, according to a Compete.com survey. This is about five
times the number of visitors to blockbuster.com. Blockbuster had more than 8900 stores inside
US. Regarding if the demand moves with economic cycle, I can say with confident that this
Supply
Customers have a number of options available to try out new services and brands.Netflix's
published subscriber count increased from one million in the fourth quarter of 2002 to around 5.6
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million at the end of the third quarter of 2006, to 14 million in March 2010. Netflix's growth has
Blockbuster Inc. has worked hard to keep pace with changes in the business. To keep distribution
costs down, Blockbuster divided the U.S. and its surrounding territories into 50 regions, or pool
points. The D.C. keeps a close watch on pickup schedules, so that it can expedite shipments if a
movie is in danger of missing an in-store date. All of these measures have helped Blockbuster to
stay competitive in an industry that is roiled by constant change, with an ever-growing number of
Manufacturing
We cannot talk about a manufacturing process here as the two companies provide services
(renting DVD).
Marketing
Netflix has improved their movie database and continues to add titles several times per week.
Netflix markets and promotes its service through various marketing programs, including
television, radio advertising, online promotions, package inserts, direct mail and other
promotions with third parties. The company sells its merchandise through website and mail order
providers that cannot be removed without rooting the phone and voiding its warranty.
The assets of firms in the industry are long term assets for the buildings, machines, and
inventory. Currently, this industry is in high risk due to the fact the companies are losing the
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customers. Today, Blockbuster is near bankruptcy. This is due to challenging losses, $900
million in debt, and strong competition from Netflix, Redbox, and video on-demand services.
Last five years companies in this industry are suffering from losing the revenues year after years.
Netflix, Inc. (Netflix) offers more than 10,000 DVDs and titles to its subscribers. Netflix also
operates a separate library of over 12,000 titles of movies that can be watched instantly on
Blockbuster has been the leading global provider of movie and game entertainment with stores
throughout America, Asia, Europe and Austria. It has operated in a high competitive market
offering a variety of movies, television shows, and video games for various consoles.
Netflix Inc. serves around 8 million subscribers by providing access to more than 1,000,000
DVD titles and more than 12,000 choices that can be watched directly on subscribers' TVs and
PCs. The titles include movies, television and other filmed entertainment.
Blockbuster uses the United States Postal Service to deliver their online product DVD orders to
customers. The closer a customer is to a distribution center, the faster a customer will receive an
online rental product. Approximately 90% of Blockbuster’s online customers are reachable
within one business day from distribution centers due to the utilization of roughly 90 different
mail entry points. Also, store locations are used to fulfill a portion of online orders in order to
Geographical diversification
The market coverage is limited to internet users. Netflix has operated in the large, stable $7
billion DVD-rental market and enjoys 75% share of the DVD-by-mail market. According to
internet world stats, the percentage of penetration of the internet in the North American
population in 2009 was 74.2%. This rate indicates that Netflix could reach 74.2% of the
American population, which adds market to Netflix’s list of key success factors.
Blockbuster has seen increasing the number of its retail locations as the key to its growth, either
increase its store's sales. After struggling with nearly $1 billion in debt and growing competition
from Redbox and Netflix, Blockbuster Inc. filed for Chapter 11 bankruptcy protection. The
recapitalized Blockbuster will probably move forward better able to leverage its strong strategic
position, including a well-established brand name, an exceptional library of more than 125,000
titles, and our position as the only operator that provides access across multiple delivery channels
Industry diversification
The dilemma which Netflix currently faces is to develop a strategy which will allow them to
survive in this competitive industry. Industry diversification includes a plan which allows them
to achieve sustainable growth and protect their position in the DVD rental industry.
The Blockbuster business model provides an advantage over other large home video chains and
significant advantage over single store competitors. The key elements of this business model are
to: provide a large number of copies and broad selection of movie titles; operate conveniently
located and highly visible stores; offer superior and consistent customer service; optimize pricing
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to local market conditions; nationally advertise and market Blockbuster brand name; use
extensive customer transaction database to effectively operate and market the business; and
(Amounts in millions)
2009 2009
Blockbuster Netflix
Analysis
Operating activities
The operating activities involve buying/receiving goods and providing services. Operating cash inflows
include cash receipts from the rental activity and other revenue transactions. Operating cash outflows
include payments related to accounts payable, services and supplies, interest and income taxes.
Blockbuster’s cash flow from operating activities was $29.3 million while for Netflix, it indicated $325
million. We can assume that this reflects greater operating earnings of rental service for Netflix.
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Investing activities
Investing activities include proceeds from maturities of the sales of short term-investments, purchase of
short-term investments, proceeds of sale of DVDs, purchase of property and equipments, and investments
in other assets. Cash used for investing activities totaled -$74.9 million for Blockbuster and -246 for
Netflix. The most cash outflows for Netflix were spent in purchase of short term-investment for 228
million and in acquisitions of content library for $193 million. Blockbuster cash outflows for investing
activities were mostly spent in Capital expenditures for $32.3 million and in change of restricted cash for
$58.5 million.
Financing activities
Financing activities involve obtaining resources, borrowing money from creditors and repaying the
amounts borrowed. Cash used for financing activities totaled -$85 million for Netflix while it showed
$72.4 million for Blockbuster. The most resources in financing activities for Netflix came from: the
proceeds from issuance of debt for $193 million, the proceeds from issuance of common stock for $35
million, excess tax benefits from stock-based compensation for $12 million, and borrowings on line of
credit for $19 million. Payments on line of credit for $20 million and repurchases of common stock for
$324 million were the significant cash outflows of financing activities for Netflix. Regarding Blockbuster,
the cash inflows were related to the proceeds from senior secured notes for $634 million and the proceeds
from credit agreements for $381 million. Repayments on credit agreements for $864 million are the most
NETFLIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Source: annual report 10k for 2009
BLOCKBUSTER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Source: annual report 10k for 2009
Analysis
The current ratio measures the short-term debt-paying ability. Blockbuster had a current ratio of 1.13.
This ratio was 1.82 for Netflix. We can say that Netflix had more short-term debt-paying ability than
Blockbuster.
The quick ratio measures immediate short-term liquidity. This ratio was of 0.45 for Blockbuster. Netflix
had approximately the double. So, Netflix owned more short-term liquidity than Blockbuster.
The cash ratio shows how quickly a company could liquidate its most immediate liabilities. With cash
ratio of 0.59 Netflix can quickly liquidate its most liabilities than blockbuster.
The total debt ratio measures the percentage of total assets provided by creditors. As Blockbuster had a
debt ratio of 120% and Netflix showed a debt ratio of 71%, we can assume that assets provided by
creditors for Netflix are less than those of Blockbuster.
The debt-equity ratio refers to the relationship between the total debt from creditors and the equity of
shareholders. Blockbuster displayed a poor situation (ratio of -5.90) while Netflix had a ratio of 2.42.
Profitability ratios
The profit margin on sales measures net income earned on each dollar of sales. With a profit margin on
sales of -13.74% we can say that Blockbuster provided -$13.74 of net income for $100 of sales. This
implies a poor situation. Netflix had a great profit margin on sales. This was of 6.95% which means
Netflix provided $6.95 of net income for $100 of sales.
The return on assets measures the overall profitability of assets. The overall profitability was -36.28% for
Blockbuster while it was 17.06% for Netflix. Based on these numbers, we can assume that Netflix
appeared more profitable and has more degree of success than Blockbuster.
The return on equity measures profitability of owners’ investment. Blockbuster experienced a degrading
situation with a return on equity of -177.54%. The return on equity of 58.29% for Netflix looked much
better.
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(Amounts in millions)
Blockbuster Netflix
Assets
Current assets :
Cash and equivalents 189 134
Short term investments 0 186
Receivables 79 0
Inventory 639 38
Deferred income tax 14 0
Other current assets 0 24
Prepaid expenses 139 29
Total current assets 1,060 411
Non-Current assets 478 269
Total assets 1,538 680
(Amounts in millions)
Blockbuster Netflix
Analysis
The earnings review of 2009 reflects a gross profit of 53.62% for Blockbuster while it shows 35.39% for
Netflix. The operating expenses for Blockbuster were greater than the gross profit; the result was an
operating loss of $352 million. Netflix had an operating income of $192 million. Blockbuster had a loss in
continuing operations of $517 million and a loss in discontinued operations of $41 million. No
discontinued operation was related to Netflix. Blockbuster ended up with a net loss of $558 million and
Netflix Inc.
Pro-forma Income statement
For the Year Ended December 31, 2009 ($ millions)
Blockbuster Inc.
Pro-forma Income statement
For the Year Ended December 31, 2009 ($ millions)
Blockbuster earning is assumed to be -$320 million, a loss. This is due to the very low revenue expected
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in 2010, $3,258. Netflix earning is assumed to reflect a net income of $151 million. Once again Netflix
Netflix Inc.
Pro-forma Balance sheets
For the Year Ended December 31, 2009 ($ millions)
Blockbuster Inc.
Pro-forma Balance sheets
For the Year Ended December 31, 2009 ($ millions)
For these pro-forma Balance sheets, the expected total assets for Blockbuster are $1,846 million. Netflix
For the computation of the value of the firm, the following formula is applied:
(Amounts in millions)
Blockbuster Netflix
References
Brem, Lisa and Narayanan, V.G.; That’s a Wrap: The Dynamics of the Video Rental Industry;
http://premium.hoovers.com/subscribe/co/history.xhtml?COID=10218
Lieberman, David. “Blockbuster jabs back at rivals”. USA Today – June 22, 2004. Reuters Via
Hollywood Reporter.com
Rico Chiu Sherwin Doroudi Travis Haussler Aditya Khosla Sean Mattingly March 7, 2007
http://www.stanford.edu/~aditya86/Netflix.pdf
http://www.pr-inside.com/netflix-inc-financial-and-strategic-r1077851.htm
A Strategic Analysis for theTroubled Movie Rental House (Internal Analysis) Erin M. Clark
December 4, 2007
http://www.plu.edu/~clarkem/doc/strategic-analysis.pdf
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