In 2005, struggling retail video rental giant Blockbuster ramped up its own DVD rent-by-mail business, setting its sights on mail-order DVD rental firm NetFlix. Blockbuster aimed to undercut the upstart firm’s pricing, and conventional wisdom held that Blockbuster should be easily able to muscle its way further into the market, quickly building volume with huge retail and advertising budgets and its long-established brand.
The results? During 2005, NetFlix has managed to add 1.5 million new subscribers, building its total subscriber base to over 4 million. Blockbuster? In 16 months, it’s managed to sign up just over 1 million users. And the companies have done a bit of a financial switcharoo: Blockbuster is now worth about $685 million but with a debt load over $1 billion, while NetFlix has no debt, $182 million in cash assets, and a market value of $1.5 billion.
While NetFlix received a boost mid-year from Wal-Mart’s withdrawal from the online DVD rental business, not everything is rosy. The company was forced to settle lawsuits regarding misleading advertisements and offers, and has had to back off from both a UK launch (where Amazon.com already operates a similar service) and a downloadable movie rental business (due to lack of cooperation from movie studios).
Nonetheless, brick-and-mortar video rental businesses saw a revenue decline over 11 percent for the third quarter of 2005 alone, accellerating the big chains’ plans to close retail locations, and putting heavy pressures on small rental businesses. And NetFlix is looking forward to more profitable quarters and expanding its business to new heights. Blockbuster? Licking its wounds.
