This summer, Blockbuster was full of glee. Titled “Blockbuster Rescues Furious Netflix Customers,” a press release in July promised to give Netflix customers an oasis after their upstart competitor blundered with its failed Qwikster service. The company launched a promotion to lure customers aware from Netflix and back to the once ubiquitous national movie rental chain, which had made a somewhat successful transition from brick-and-mortar to online and mail distribution off the heels of Netflix’s explosively popular service.
The promotion was ambitious, offering Netflix customers a 30-day free trial of Blockbuster’s Total Access plan, which which Blockbuster touted as a flexible approach to movie rentals that combines receiving movies by mail and through retail stores, although the company has closed hundreds of stories in the past couple of years.
Partly because of its dwindling retail presence, the company’s lure to Netflix customers was largely unsuccessful, and the company kept closing retail stores throughout 2011. A number of other missteps led to Blockbuster’s failure to capitalize on Netflix’s big gaffe of 2011, creating a lose-lose scenario for the movie rental industry this year.
A Failure to Remodel
Aside from convenience, one of the most attractive parts of Netflix’s business model was the low cost subscription service. This flat-fee pricing model is appealing for its transparency and straight-forwardness. Additionally, the lack of late fees removed the naughty-schoolboy feeling that customers had grown accustomed to when bringing back their rental to Blockbuster a day after the deadline. Many customers felt that Netflix was fairer, which accounted for the company’s enormous success in its early days. By word of mouth, news of Netflix’s convenient and hassle-free business model spread throughout the country.
In 2011, Netflix lost that sense of fair play with its customers, giving Blockbuster the chance to take it back by remodelling its pricing structure, terms of service, or delivery methods. The firm failed to capitalize on these opportunities, partly because its parent company was already in the process of downsizing Blockbuster’s operations.
In April, Dish Network purchased Blockbuster for $320 million in a bankruptcy auction. Instead of aggressively investing in the brand, the network continued to close stores throughout the U.S. and Canada, while its rules about renting new releases intimidate and alienate many customers. The rule is simple but poorly defined–rent too many new releases and a customer’s account will be throttled, meaning that new releases will be mailed more slowly than before. This business model made many customers feel like a liability to the company.
Additionally, there was the frustration that not all Blockbuster stores allowed exchanges of mailed discs, and discs obtained from in-store exchanges could not be returned to another store. To many, the retail tie-in was an added layer of frustration.
This is on top of the fact that customers have grown used to instant gratification thanks to streaming video solutions such as Netflix’s popular offering. Returning to a largely mail-order system with the so-called “convenience” of driving to retail locations to exchange or return rentals was no longer acceptable in 2011. In short, Dish Networks was relying on Blockbuster’s old business model long after that model had remained attractive to customers.
At the same time, Dish Network’s broadcast experience meant that it was in a perfect position to push its Blockbuster On Demand service. Yet this streaming service was a sluggish entry that was simply too late to the party.
Is it Too Late for Blockbuster’s PR War?
Blockbuster has attempted to revitalize itself by “borrowing” the kiosk-based retail model that Redbox began a few years ago under its Blockbuster Express brand. Blockbuster also offers video game rentals–which Netflix does not–and its price for two DVD rentals per month is actually lower than Netflix’s. And with its kiosk services and retail locations, it has a greater physical presence in American neighborhoods than any of its competitors.
Despite the company’s sizable assets, it faces an uphill battle in reclaiming its top spot in the movie rental industry even after Netflix’s embarrassing gaffe caused a still-open rift between it and its customers. There are three major lessons for business owners from all of this:
1. Complacency destroys success. Blockbuster did not see the mail-delivery and streaming services on the horizon even when they should have been obvious after the DVD made movies lightweight and broadband made streaming virtually instantaneous. Blockbuster’s earlier complacency ended in a humiliating bankruptcy and the closing of over a thousand stores. 2011 was a chance to reverse that complacency with renewed vigor, but instead Blockbuster launched a PR campaign pronouncing how wonderful it already was instead of convincing customers that it could be better.
2. When your competitor trips, step up. Instead of reversing its downsizing of its Blockbuster operations when Netflix tripped, Dish continued to close Blockbuster stores. It rolled out the On-demand Service and kiosks too slowly, and failed to streamline Blockbuster’s return policy and pricing model. Had it lowered prices or introduced new services just as Netflix rose prices and made its products inconvenient, Blockbuster could have delivered a knock-out to its stumbling competitor. Instead, Blockbuster continued on its previous track.
3. Your customers are partners, not liabilities. The golden rule of business is that customers choose businesses because of the price, quality, and convenience of their products. The foundation of any successful and sustainable business is the choice of its customers. No matter how big a company becomes, it should respect its customers for making the choice to do business with it. Here Blockbuster failed in a big way. In the minds of customers, Netflix had transformed late fees from a necessary evil to a nasty punishment to bad customers, which meant they were no longer acceptable. Blockbuster failed to recognize this in time, and thus failed to steal customers’ affection for Netflix.