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Netflix, Blockbuster and VOD

Netflix vs. Video-on-Demand

10 May 2004

Netflix was one of my innovations to watch for 2003, and it had a banner year. 

             Sales rose 70% in 2003, and the stock increased in value by over 400%. I purchased some Netflix stock early in 2003 and held on to it, so I have benefited from its rapid ascent, at least on paper.

 

 

Netflix Stock Price 2003

 

Using the four factor model of product success, it’s easy to see the attractions of Netflix’ offering.  For folks who rent a lot of movies on DVDs, Netflix’ subscription service is both less expensive and more convenient than is the pay-as-you-go service offered by companies like Blockbuster. 

 

Netflix 2003

 

The service has also benefited from the rapid penetration of both DVD players and broadband internet access.  Netflix appealed to many fewer customers in 2000, when DVD player penetration was 10 percent.  DVD penetration levels in 2003 exceeded 60 percent in the United States.  The penetration of broadband has also made Netflix much easier to use for the 70 percent of US households that own computers.  Of course, those without email or access to the internet cannot use Netflix’ service.  

     Some maintain that Netflix’ moment in the sun will be brief – that the service will be replaced by “video-on-demand” (VOD) services that will force it out of business. 

 

Certainly, if VOD becomes commonplace, it’s quite possible that Netflix’ current offering – shipping DVDs through the mail -- will become obsolete.  VOD can deliver the same movie faster and at less cost so, looking at the “motivators” side of the four factor model,  it has great potential to replace Netflix’ current offering.

 

But Netflix isn’t standing still.  It’s positioning itself to be the logical provider of VOD service when it becomes widely available.  For both its existing customers and suppliers, Netflix presents the fewest barriers to a VOD purchase.  Both customers and suppliers have established routines with the company that don’t need to be changed if the delivery mechanism changes. 

 

In fact, on April 23, Reed Hastings, Netflix’ CEO, announced that the company would provide a VOD service in 2005.   Hastings maintained that the company had always intended to provide VOD services – the use of DVDs and the assistance of the U.S. Post Office was an interim step.  As reported by Reuters, Hastings noted:

 

"From the beginning we believed in the Internet delivering movies, but we believed it would be 10 years, not two years.  We were right on that because everyone who got into downloading in 1998 is bankrupt now."

 

The infrastructural requirements of VOD currently limit the appeal of the service – it takes a very long time and a lot of hard drive space to download a movie.   When the infrastructure is in place, Netflix’ VOD service should be compelling to its current subscriber base.  The new service could also help it add new subscribers as well.

           

 More Information

 

  1. My 2003 Innovations to Watch are here: http://www.biz-architect.com/innovations_to_watch_2003.htm
  2. Here’s a link to the Reuters’ story on Netflix and VOD: http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=4927664
  3. For more on the four factor framework for predicting product success, go here: http://www.biz-architect.com/do_you_have_a_winner.htm

 

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