PUSHING THE ENVELOPE
OCT. 18 | ...
Blockbuster Video officials have been getting asked about the alleged threat posed by Netflix on earnings conference calls for at least a year, while reports of the chain's own test of an in-store subscription model made it sound something like Rome's last stand against the Visigoths--a near desperate attempt to hold off the barbarian hordes represented by the U.S. Postal Service.
Now comes word that mighty Wal-Mart is launching a mail-order rental service of its own while Blockbuster has acquired its own small online mail-order service, DVDRentalCentral. That turned the tables on Netflix, whose stock fell off a cliff the day of the Wal-Mart announcement, closing down by more than 16%.
Netflix has done an impressive job of slowly building a new business. But after five years, the company has about 742,000 subscribers.
Blockbuster has 48 million customers in the U.S. alone.
Netflix reported revenue of $36.4 million in the third quarter. Blockbuster reported revenue of $1.27 billion in that same quarter.
Does anyone seriously think that Netflix poses a real threat to Blockbuster? Even if you took away all of Netflix's customers and signed them up with Blockbuster, they would barely register in the chain's account books.
Netflix's $36 million in quarterly revenue would be a rounding error if included in Blockbuster's financial results (not that anyone would permit a rounding error in reporting their financial results these days).
Netflix could double or even triple its customer base during the next few years and develop into a nice, profitable little business. The key word in that sentence is little.
Whatever number of new customers Netflix adds, Blockbuster will match simply by continuing to open new stores, regardless of whether it launches an online mail-order service of its own.
The point is, no matter how successful Netflix becomes--and I hope it's very successful--it won't make a bit of difference to Blockbuster, Hollywood Video, Movie Gallery or any other large chain.
As for Wal-Mart, although I'm sure it has studied Netflix closely, Netflix is not Wal-Mart's target in launching its online mail-order service.
More than likely, Wal-Mart sees what others in the industry see: that as DVD becomes a mainstream format, the consumer appetite for renting will grow, just as it did with VHS. And there are going to be a fairly large number of titles that will simply never be big sellers, at least not enough to justify shelf space in Wal-Mart stores.
While the low pricing of DVDs gives Wal-Mart a shot at the same release window as rental stores, some of those rental stores, particularly large chains such as Blockbuster and Hollywood, have had success in capturing some of the early sell-through business through the quick sell-off of previously viewed DVDs.
Although the loss of the rental window was initially viewed as a threat to rental stores, Blockbuster and Hollywood have used it adeptly to, in effect, invade Wal-Mart's turf.
What once would have been direct-to-sell-through titles had long provided Wal-Mart with excellent traffic builders, thanks to the chain's ability to discount and advertise them aggressively. Today, with rental stores' ability to undercut even Wal-Mart's pricing on the biggest titles within two to three weeks of street date through the sale of previously viewed DVDs, some of the mass merchant's advantage is being lost.
If Wal-Mart has anyone in its sights in launching its mail-order rental service, it isn't Netflix. It's Blockbuster.
I agree with you that this software is no big deal, but did you catch the logic behind this software?
The software tries to protect their profit margin by recommending older non-revenue sharing titles. Check out this link:
"That system, said Andrew Frank, a media analyst with the consulting firm Viant, could raise questions about the usefulness of movie recommendations based on helping the company's bottom line."
Called my local video store to verify this. They have a customer kiosk where the person can access there accounts, previous rentals and get title recommendations, along with cast and synopsis, based on their rental history.
Big friggin' software deal.
"Believe me, the customers notice and customer experience is everything in this market."
I assume you're referring to NFLX's new 800 number that allowed 8.2% of their customers to cancel their service each month....
Yes, we disagree on that exact point.
This is very, very customized order fulfillment s/w and inventory mgt software.
If you don't understand that, then you really don't understand the state of software that exists today "out of the box". The functionality is really quite abysmal which is why all the companies that make this stuff are on all-time lows and also why in the heat of the bubble, the Scients and Viants of the world (the customizing companies) were at all time highs.
The average length of time it takes to customize such software of this magnitude it 9-12 months...but in WMT's and BBI's case with their "size problem", it will take longer. I've said it can't be done, it simply will take them much longer than even they realize.
Big companies like this tend to wield a titanic-like ice pick against the making of a delicate ice sculpture while the ice-sculpture artists of the world (NFLX) use some very fine instruments to carve the sculpture just right. Believe me, the customers notice and customer experience is everything in this market.
Beyond all of that, until these guys open up multiple distribution centers, I'm really not going to worry since no matter how well they can get the back end to work in the next 12 months..unless they have quick distribution, they weak-link is the US Postal delivery time.
Believe me, this cannot be done to nationwide customers satisfactions at large scale out of 1 dist center.
Their "CineMatch" software is SPECIAL, except it is software that you might not want to replicate. The following is from Netflix's prospectus. The last bullet says it all:
"If we are unable to effectively utilize our CineMatch technology, our business may suffer.
Based on proprietary algorithms, our CineMatch technology enables us to predict and recommend titles and effectively merchandize our library to our subscribers. We believe that in order for CineMatch to function most effectively, it must access a large database of user ratings. We cannot assure you that the proprietary algorithms in our CineMatch technology will continue to function effectively to predict and recommend titles or that we will continue to be successful in enticing subscribers to rate enough titles for our database to effectively predict and recommend new or existing titles.
If CineMatch does not enable us to predict and recommend titles that our subscribers will enjoy, our personal movie recommendation service will be less useful, in which event:
* our subscriber satisfaction may decrease, subscribers may perceive our service to be of lower value and our ability to attract and retain subscribers may be affected adversely;
* our ability to effectively merchandise and utilize our library will be affected adversely; and
* our subscribers may default to choosing titles from among new releases or other titles that cost us more to provide, and our margins may be affected adversely."
and just what is the time frame or "long period of time" when sentiment and psychology and herd mentality give way to efficiency? Those factors are always there..long term or short term. some people try to "time" markets to ride waves up and down...but essentially it's a toss of the dice...gambling if you will ... in good times and bad times ... or the worst of times...when markets just sit still and don't fluctuate much for years on end.
You seem to think this software is somehow really, really special in some way and can't be replicated.
Order fullfilment software.
CRM(that's "customer relations management")software.
Couple all that with BBI's extensive customer data base and their accounting data.