Marketing 300 Group #1

Kate Grimaldi Helen Nguyen Michael Rightmyer Elle Robinson

Blockbusters Bankruptcy Blues Its the morning of September 23, 2010, and many Americans are getting ready to leave their homes to grab a coffee and newspaper while on their way to work. As they approach the newsstand, they stare in utter disbelief. Some were confused, while others were disheartened. What could possibly cause such a stir to what was usually an ordinary morning routine? From reading the headlines, these unsuspecting Americans were shocked to learn that the iconic home entertainment store, Blockbuster, was filing for Chapter 11 bankruptcy. From the Wall Street Journal to USA Today, this headline hit home for many of those who enjoyed walking through the aisles of the store perusing the numerous options for movie rentals. Even those who had not been to a blockbuster in months or even years were surprised to see this neighborhood store suffering from rising debt. Meanwhile, executives were working behind the scenes, trying to cut their losses and figure out which stores to close and which ones to keep open. Blockbuster CEO Jim Keyes sat at his desk after the announcement asking himself, Our main competitor is dominating the market with a tenth as many workers! Where did we go wrong and how are we going to move forward and gain greater market share in the industry? Mr. Keyes and other executives realized they had a lot of soul-searching to do in order to make Blockbuster competitive in the current market. They scheduled a meeting to determine how they were going to increase their market share in the video industry, specifically online and if they should compete with the online video retail giant, Netflix. Road to Movie Night In November 1981, video rentals began to take a firm foothold in the U.S. due to the Video Software Dealers Association (VSDA), a trade association for retailers of videos whose goal was to promote the right of video stores to rent movies. In 1985, 11 million VCRs were sold in the U.S., resulting in 30% of U.S. TV households owning one. In 1988, revenues for video rentals surpassed box office (movie theater) revenue. At this time, $5.15 billion was spent on video rentals by U.S. consumers, in comparison to $4.46 billion spent at the box office. In March 1997, the DVD is introduced in the U.S., becoming a huge hit with consumers and causing an emergence of DVD sales. In 2003, consumers spent more money on DVD rentals than VHS rentals for the first time with $4.38 billion spent on DVD rentals and $3.82 billion on VHS rentals.1 Bringing Entertainment Home On October 26, 1985, the first Blockbuster store was opened in Dallas, Texas by its founder, David Cook under his company, Cooks Data Services. In June 1986, Cooks Data Services changed its name to Blockbuster Entertainment, which grew as a result of Cooks experience with managing databases and eventually became a household name. Blockbuster became successful initially due to its ability to recognize and target its segment in a given neighborhood. The company had the ability to customize a store to its neighborhood and stock its stores with
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movies that catered to demographic profiles. In December 1988, Blockbuster became the top video retailer in the U.S., earning $200 million in revenue. Blockbusters original business plan allowed for many customers to be within a close proximity of rental stores. By 2006, 70 percent of all Americans lived within a 10 minute drive of a Blockbuster, allowing the franchise to be very successful for a period of time. However, Americans soon found more convenient methods of bringing entertainment home to them. While Blockbuster stores where within a 10 minute drive of approximately 200 million Americans, DVD rentals peaked in 2005 and have been declining ever since.2 Modern Times Netflix claims Title of Market Leader Dominating the Video Entertainment industry for a number of years, and until more recently, was Blockbuster. Fast growing competitor, Netflix, entered the industry in 1997 emphasizing convenience of video rentals in a new way. Rather than populating communities with numerous brick and mortar establishments they solely offered their customers mail delivered DVDs in which they ordered online. As a result consumers definition for convenience shifted. Originally, convenience meant having a Blockbuster establishment within a few miles from your home. Consumers definition for convenience then became not even having to leave your house, but rather having the movies delivered directly to your door. Netflixs early advancement in convenience quickly adapted yet again in 1999, when they expanded to digital distribution. Lagging behind, Blockbuster did not expand into the realm of digital distribution until 2004. Thus, Netflix had a significant lead on Blockbuster in regards to digital subscriptions, as they held approximately 67% of the online market. The entertainment industry had been undergoing digital convergence, a process where information technologies, telecommunication, consumer electronics, and entertainment converge into one conglomerate. This process allowed for consumers to download movies from the internet onto their computers, eliminating the need to drive to a Blockbuster store to rent a movie. Recognizing this, Netflix continued to develop means for consumers to receive videos, such as online viewing subscriptions as well as streaming through other devices such as Xbox in order to view video from their site on your home TV. Blockbuster now also offers a wide array of digital viewing options, in addition to keeping brick and mortar establishments.3 Despite Blockbusters attempt to compete with Netflix, they filed for bankruptcy in 2010. While, on the other hand, that same year Netflix generated a net profit of $161 million. Why is there such a vast difference? CEO of Netflix, Reed Hastings, made clear that his company was "evolving rapidly," and his goal from here on out is to
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http://www.entmerch.org/press-room/industry-history.html John Falcone (2011, September) Netflix vs. Blockbuster: Whats the best service for streaming and DVDs? CNET News.

move "too fast," if anything.4 Netflix push towards evolving with technology, culture, and consumers of our world today is what enables Netflix to maintain their title: Market Leader. Target Audience: Blockbusters Bulls-eye The video entertainment industry would not exist without the devout audience of movie watchers present in the United States. In 2011 box office admissions were estimated at 1.28 billion.5 Due to this sizeable amount of potential customers, the target audience for the video entertainment industry is video watchers who value quick access to the latest movie releases. These customers are unique to the video entertainment industry because they demand a very diverse product: access to all genres of movies especially the newest releases. When asked about the behavior of a target audience Steve Jobs, a successful innovator, commented, if we keep putting great products in front of customers, they will continue to open their wallets. That is exactly what Blockbuster attempted to do. It placed the desired product, new movie releases, in front of its customers in the most convenient medium. Blockbuster drew video watchers into their store by branding the movie viewing experience: Make it a Blockbuster Night! In its most recent business model, Blockbuster offers both an online and instore experience. Therefore, Blockbusters target audience is video watchers who value quick access to the latest movie releases in all mediums. This target audience wants the ability to watch any movie in the most convenient way for them. Blockbuster targets this audience specifically because of its multi-option video rental services that satisfy the target audiences movie watching needs. Friday Night Lights - Where to go at the end of the day It is now late evening on Friday, September 24th 2010. One day has passed since Blockbuster publicly filed for Chapter 11 bankruptcy. As Americans return from a long day of work, and exhausted from the week, they decide to make it a movie night. Do they make it a Blockbuster night? Most Americans will prefer to choose Netflix for their video viewing pleasures. Although Blockbuster has now developed a similar digital distribution program enabling consumers to rent movies without leaving their home, Netflix was the first company in the video entertainment industry to apply strategies incorporating digital convergence. Thus, Blockbuster must quit playing follow the leader and start racing to the front. Blockbuster needs to break free from the pack in order to reclaim their title as Market Leader.

Darren Murph. (2011, September). Reed Hastings Netflix spinoff isnt about DVD success, its about hedging the stream. Aol Tech. 5 Brian Fuson. (2012, January).Year End Box Office Wrap 2011: Attendance Down, Top Ten Grossers and Studio Market Shares. Thompson on Hollywood.

Exhibit 1: Netflix vs. Blockbuster Revenue6

Exhibit 2: Sales Growth and Volume Blockbuster vs. Netflix7

http://go-digital.net/blog/2011/02/netflix-vs-blockbuster-perfect-example-of-an-industryreplaced-by-a-more-efficient-version-of-itself/ 7 http://tech.fortune.cnn.com/category/magazine-content/

Exhibit 3: Netflix Exponential Growth Through Digital Distribution8

Exhibit 4: Blockbusters Initial Attempt at Steal-Sharing Online Subscribers from Netflix9

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Exhibit 5: Movie Rental Business Market Share for 200910

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