MRKT 690 Week 6 Individual Research Report: Demand Shift Strategies Example

Individual Research Report: Netflix and Blockbuster When Demand Shifted From Rental Stores to Streaming

The Demand Shift

For most of the 1990s and early 2000s, Americans watched movies at home by renting tapes and then DVDs from stores. During the 2000s demand shifted twice: first toward rental by mail, which removed the trip to the store, and then toward streaming over broadband connections, which removed the disc. Each shift weakened the value of the assets that had made store chains successful, their locations and their inventories of physical copies. Two companies with very different assets responded to the shift. One had built its business on a network of stores; the other had never owned a store and had organized itself around mailing discs to subscribers. The contrast makes this a clear test of how a firm's existing investments shape its response when demand moves away from them, and of whether a market leader's size helps or hinders it.

The Success: Netflix

Netflix began in 1997 as a DVD-by-mail rental service and in 1999 introduced a monthly subscription with no late fees, which turned movie rental from a series of transactions into a continuing relationship. In 2007, while its mail business was still growing, it began offering streaming to subscribers, at first as a small library included in their plans. The company kept investing in streaming even though it would eventually reduce demand for its own discs. Its path was not smooth. In September 2011, chief executive Reed Hastings announced that the DVD service would be split off under a new name, Qwikster, writing that streaming and DVD by mail were becoming two quite different businesses (Hastings, 2011). Customers objected to managing two accounts after a price increase earlier that summer, and Netflix abandoned the plan within weeks. Despite the misstep, Netflix kept its direction and became one of the leading streaming services in the world, and it ended its DVD rental service in 2023.

The Failure: Blockbuster

Blockbuster was the dominant rental chain, with thousands of stores. It responded to Netflix in stages: it launched an online rental service in 2004 and announced the end of late fees in 2005, both moves that reduced income from a model that had depended partly on fees. In 2006 it introduced a program that let online subscribers return mailed discs in its stores for new rentals, which won subscribers but proved expensive, and after a change in leadership in 2007 the company scaled back its online push and refocused on the stores. Its strategy therefore remained centered on stores, which carried leases and staff costs that mail and streaming rivals did not have, and on a customer experience, browsing shelves, that fewer customers wanted. As customers moved to mail rental, kiosks and streaming, its store revenues fell, and in September 2010 the company filed for bankruptcy protection, citing competition from digital and lower-cost rivals (de la Merced, 2010).

Analysis

Research on radical innovation explains much of the difference. Chandy and Tellis (1998), surveying firms in three high-tech industries, found that a firm's willingness to cannibalize its own investments was a more powerful driver of radical product innovation than firm size. Netflix showed that willingness repeatedly. It moved into streaming while discs still produced most of its revenue, and even the failed Qwikster plan reflected a belief that the disc business should not hold back streaming. Blockbuster's investments, its stores and their staff, were large and specific to the old model, and every step toward online rental reduced their value, which made the company hesitant to move fully.

Managers' beliefs mattered as well. Tripsas and Gavetti (2000), in a study of Polaroid's response to digital imaging, found that Polaroid built real digital camera know-how, yet its leaders kept assuming profits would come the way they always had, from selling film after the camera, and that assumption stopped the know-how from turning into a winning business. Blockbuster's problem was less a lack of options than a belief that the store was the business, which made every alternative look like a threat instead of a future. Netflix's leaders, whose company had never owned stores, saw the disc as a temporary vehicle and the subscription relationship as the real business. That belief let them treat streaming as the next form of the same service, while Blockbuster's leaders tended to treat online rental as an add-on to protect store traffic.

Lessons for Demand Shifts

Three lessons follow. First, a company facing a demand shift should define its business by the customer need it meets, home entertainment on demand, rather than by its current delivery method. Second, it should be prepared to cannibalize its own products before a competitor does, accepting a smaller share of a declining business to win a share of the growing one. Third, it should expect missteps and correct them quickly, as Netflix did with Qwikster. A shift rewards the firm that moves early and adjusts, not the one that waits for certainty, because certainty arrives only after the market has already moved.

References

Chandy, R. K., & Tellis, G. J. (1998). Organizing for radical product innovation: The overlooked role of willingness to cannibalize. Journal of Marketing Research, 35(4), 474-487. https://doi.org/10.1177/002224379803500406

de la Merced, M. J. (2010, September 23). Blockbuster, hobbled by digital rivals, files for bankruptcy. The New York Times.

Hastings, R. (2011, September 18). An explanation and some reflections. Netflix.

Tripsas, M., & Gavetti, G. (2000). Capabilities, cognition, and inertia: Evidence from digital imaging. Strategic Management Journal, 21(10-11), 1147-1161. https://doi.org/10.1002/1097-0266(200010/11)21:10/11<1147::AID-SMJ128>3.0.CO;2-R