Blockbuster’s store rental mod

Blockbuster’s store rental model is challenged by new business models for movie and game distribution.

There are a lot of ways for people to see a movie nowadays. They can go to the cinema. They can buy a DVD from specialist retailers such as HMV or large supermarkets such as Tesco or Lidl. They can order a DVD online and receive it through the post. They can download movies via the internet. They can rent via a kiosk or vending machine. Or they can do it the oldfashioned way and rent it from a video store. Blockbuster, of course, is famous for its stores: in 2010 it had 7,000 stores in 18 countries around the world. The first Blockbuster store opened in 1985 in Texas. Soon Blockbuster was the world’s largest movie rental company, and in 1994 was bought by media conglomerate Viacom for $7.6 bn (€3 bn). Ten years later, as Blockbuster’s growth stalled, Viacom spun it off as an independent company again, now valued at $7.5 bn.

Blockbuster’s business model had been an attractive one. Two decades ago, in a period of limited television channels, movie rental had given customers unheardof choice of viewing. Blockbuster used its huge buying power to obtain the latest releases from the film studios at little cost. Blockbuster would give 40 per cent of the rental income to the studios and supply them with information on usage for market research purposes. Studios typically would hold back from releasing the movie to other rental companies or to retailers for an initial period, making Blockbuster the essential outlet for the latest hits. Blockbuster was able to leverage this business model into rapid growth, using a mixture of its own stores, franchising and acquisitions. It also extended the model to the rental of video games. However, the market is now much more complex. For a start, television channels began to proliferate. In the USA, Netflix emerged in 1997, originally using a rentalby-mail model. By 2009, Netflix had mailed its twobillionth DVD. In the United Kingdom, DVD mail-rental company Lovefilm was founded in 2002, and by 2010 had 50 per cent of the national market, as well as a strong position in Scandinavia. The mail-rental model offers customers a far greater choice (Lovefilm has 70,000 titles, against the few hundred in a typical Blockbuster store) and needs only a few centralised distribution centres, as against a labour-intensive network of retail stores. Moreover, as internet capacity has improved, both Netflix and Lovefilm have also begun to stream movies straight to customers’ computers. Another rental model was pioneered by 2003 start-up Redbox, which had established a network of 22,000 DVD vending machines across the USA by the end of 2009. Blockbuster responded in several ways. In 2004, it launched its own online rental service, with customers able to return their DVDs simply through a local store. In 2009, Blockbuster launched vending machines in the USA. The company closed more than 1,800 stores. It withdrew from some national markets altogether, for example Spain, Portugal, Ecuador and Peru. But, after continued heavy losses, Blockbuster filed for bankruptcy in 2010. The next year, the company was bought for $233 m by the satellite TV company Dish Network. Store closures continued, and the whole retail management team were dismissed.

 Questions

1 Compare the pros and cons of the various business models for movie consumption.

2 What potential competitive advantages did Blockbuster have as a company as the new business models emerged in the last decade or so?

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