June 5, 2004: Headlines: COS - Swaziland: Business: Silicon Valley: Computers: Internet: Statesman Journal: At Netflix headquarters in Los Gatos, Calif., CEO Reed Hastings (Swaziland RPCV) writes on a white board and explains why Netflix can send Blockbuster into a death spiral

Peace Corps Online: Directory: Swaziland: Peace Corps Swaziland: The Peace Corps in Swaziland: June 5, 2004: Headlines: COS - Swaziland: Business: Silicon Valley: Computers: Internet: Statesman Journal: At Netflix headquarters in Los Gatos, Calif., CEO Reed Hastings (Swaziland RPCV) writes on a white board and explains why Netflix can send Blockbuster into a death spiral

By Admin1 (admin) (pool-141-157-22-73.balt.east.verizon.net - 141.157.22.73) on Tuesday, July 20, 2004 - 7:22 pm: Edit Post

At Netflix headquarters in Los Gatos, Calif., CEO Reed Hastings (Swaziland RPCV) writes on a white board and explains why Netflix can send Blockbuster into a death spiral

At Netflix headquarters in Los Gatos, Calif., CEO Reed Hastings (Swaziland RPCV) writes on a white board and explains why Netflix can send Blockbuster into a death spiral

At Netflix headquarters in Los Gatos, Calif., CEO Reed Hastings (Swaziland RPCV) writes on a white board and explains why Netflix can send Blockbuster into a death spiral

Internet a battleground for movie rentals

Services such as Netflix are leaving Blockbuster behind

KEVIN MANEY
Gannett News Service
July 5, 2004

LOS GATOS, Calif. — At Netflix headquarters in Los Gatos, Calif., CEO Reed Hastings writes on a white board and explains why Netflix can send Blockbuster into a death spiral.

“We have a shot at undermining its business model,” he says, sounding about as wickedly gleeful as Frank Gorshin’s Riddler describing the undoing of Batman. And if current trends continue, Hastings might be right.

Which makes for an interesting lesson for all kinds of companies. For more than a decade, Blockbuster has been aware that technology might someday threaten its model of renting movies out of physical stores.

In that sense, it did a lot of the right things. Wayne Huizenga, who built Blockbuster, even talked about it in a 1993 interview.

Yet for all of Blockbuster’s vigilance, this entire time it has been worried about the wrong technology. It’s as if an early-1900s railroad engineer, certain that air transportation would doom trains, learned to fly zeppelins.

Blockbuster focused its concerns on movies on demand — the long-standing idea that consumers will be able to watch movies by downloading them through cable TV lines or the Internet.

“It’s not going to happen as soon as a lot of people say it’s going to,” Huizenga said in ’93, and he was right.

In the meantime, Blockbuster never saw that the Internet, combined with the change from videotapes to DVDs, would give birth to something like Netflix. Now Netflix is growing at 80 percent per year, and Blockbuster said in April that its 2004 earnings will fall 10 percent.

The two companies’ stock charts — Blockbuster is owned by Viacom but trades as a separate stock — look like opposite images. During the past two years, Netflix shares have tripled, and Blockbuster’s have been cut in half.

Here’s how bad it’s gotten for the nation’s largest video outlet: On CNBC a of couple weeks ago, Viacom Chairman Sumner Redstone said he “should have said goodbye” to Blockbuster a few years ago — before the Netflix threat became apparent.

Interestingly, Netflix exists thanks to the one thing about Blockbuster that many people hate: late fees. You rent a movie, you forget to take it back on time, and Blockbuster adds fines until the video is returned. Late fees generate a big chunk of Blockbuster’s revenue while giving its customers all the warm and fuzzy feelings of a parking ticket.

In the mid-1990s, as the Web started catching fire, Hastings dropped off some movies he had rented and got hit with a late fee. He was on his way to the health club and started to think about the business model for workouts: You pay a flat fee per month for unlimited workouts. Why not do the same for movie rentals?

“Then I thought, ‘If you’re going to do that, why compete with Blockbuster stores?’” Hastings says. “This was 1997, so I thought, ’Why not do it online?’”

This worked only because of DVDs, which caught on about then. Bulky tapes would’ve been too costly to mail. But DVDs could slip into an envelope.

In 1999, Hastings launched Netflix with a radical new model: Order movies on the Netflix site, and they arrive by mail. You keep them as long as you want, and when you send a movie back, Netflix sends you the next one you ordered. For that, you pay about a $20 monthly fee.

Netflix has 2 million subscribers. Hastings is aiming for 20 million — about the number of people who subscribe to HBO. Netflix will grow, analysts say, not by creating new movie renters, but by stealing them from Blockbuster and other video stores.

Though Netflix is still a relative speck in the movie-rental industry, here’s a testament to its power: In the past year, Wal-Mart, MSN and others have launched me-too services. In May, Blockbuster cried uncle and launched a subscription service.

At this point, Netflix has the brand recognition and the momentum in Web-based, subscription movie rentals. If there’s a threat to Netflix, it’s probably not me-too competitors. It’s probably ... movies on demand.

Yep, the threat Blockbuster worried about long ago might — maybe, possibly — be close to taking off. Movielink, a joint venture of major movie studios, is selling downloadable movies. RealNetworks just introduced an Internet movie offering. TiVo is heading in that direction. It seems obvious that AOL will get around to selling online movies.

So will Netflix. The company recently announced that it will start offering movies online in 2005.




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Story Source: Statesman Journal

This story has been posted in the following forums: : Headlines; COS - Swaziland; Business; Silicon Valley; Computers; Internet

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