危 wēi danger
Video stores emerged in the 1980s and enjoyed explosive growth over the next decade. None is better known than Blockbuster, which opened its first store in 1985 in Texas and subsequently grew to 9,000 stores in 25 countries worldwide. Blockbuster was highly innovative, driving its rapid growth through franchising (at its peak opening one store every seventeen hours). It also improved on the traditional model of buying new video releases for a large flat fee by negotiating revenue sharing arrangements with the film owners, enabling it to access new releases at low fixed cost. Blockbuster’s dominance led to its sale to Viacom for a price of $8.4 billion
机 jī opportunity
Surely Blockbuster’s scale, negotiating power, brand recognition and prime real estate made entry into the film rental market a guaranteed failure. Not if Blockbuster’s ‘strengths’ could be turned into weaknesses – which is exactly what Netflix’s model did when it entered the market in 1997. Netflix turned Blockbuster’s expensive retail channels into its Achilles heal by distributing via the internet. Netflix also leveraged the strengths of the internet to improve the consumer experience – offering tailored recommendations, greater movie choice (at lower cost because of centralized stocking) and greater flexibility. Netlflix even smooths demand by inviting its customers to create a list of films they want to watch and Netflix chooses the order in which they receive them. Netflix owns more than 55 million discs and, on average, ships 1.9 million DVDs to customers each day. In stark contrast Blockbuster Inc has spiralling losses and is more more than $1m in debt – forcing it to announce that its European arm was being put up for sale last month.
How About…
- When looking at disruptive business opportunities start with the incumbents’ P&Ls – where do they spend the most money?
- When disrupting these high cost aspects of the incumbents’ business models exploring how the new approach can improve the customer experience above and beyond cost?
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