NetFlix: Transforming the DVD Rental Business

Do any of these scenarios sound familiar: You’re cleaning your child’s room and you discover a 3-week old rental DVD with two weeks worth of late fees. You return an unwatched movie because you didn’t have the time to view it and you want to avoid paying the high late fees. You end up watching movies at inconvenient times so you can get the video back to store on time. You can’t find the movie you want at the store because it is a new release or a hard to find independent film.

The big DVD-rental chains -- Blockbuster, Hollywood Video – and local rental stores are not very forgiving when it comes to late returns and often have a limited selection of movies. So what alternatives do you have if you are chronic late DVD rental returnee or find you need more time to watch the films you rent?

Enter online DVD-rental Web service Netflix.com. With the help of the Internet and the U.S. Postal Service (USPS), Netflix is offering an alternate “brick and click” channel to rent DVDs. For a flat monthly fee, you get as many DVDs as you want and keep them for as long as you want. When you return one or all of them, the next selection on your movie priority list is mailed out. Standard return dates and late fees are history.

This case study analyzes the different facets of the business model of this emerging “Amazon-like” business and highlights the competitive dynamics that are shaking up the stoic movie rental business.

Case Highlights:

• The DVD infrastructure has been put in place very quickly. For the last few years, the DVD player has become the fastest selling consumer electronics device in history. The superior quality of DVDs, the economics, and the adoption by movie studios as a distribution medium is causing a tectonic shift in home video business from VHS tapes and VCRs.
• Capitalizing on this trend is Netflix, a high-growth company with a novel business model: subscription service for unlimited mail order DVD rentals with no late fees. Netflix is changing the movie rentals business by eliminating late or extended viewing fees and allowing consumers to watch movies on their schedule. The company’s subscriber base has doubled year after year since launch in 1998.
• Netflix’s novel inventory, forward fulfillment, and reverse logistics model positions the company to benefit from the exponential growth of the DVD market. Netflix does not fulfill orders itself; instead, it has a risk-sharing logistics partnership with the USPS to ship DVDs to and from customers.
• While Netflix is an early market leader in the emerging online DVD rentals market, it faces some difficult challenges. The three main challenges include: 1) optimizing its pricing and subscription model, 2) taking on Blockbuster and, 3) avoiding the “less-than-optimal fulfillment economics” that plagued Internet home delivery retailers such as Webvan and Kozmo.
• An intense competitive battle between Netflix and Blockbuster is beginning to take shape. Who will win? What should Netflix do to out-maneuver, out-last and out-think Blockbuster? Conversely, can Blockbuster adopt a fast-follower strategy to slow or halt Netflix’s subscriber growth rate?

Read the full case study...