Netflix, Wal-Mart and Blockbuster

Submitted by Dave Harkins on Wed, 06/11/2003 - 6:29pm.

Wal-Mart announced yesterday that they're now rolling out their online DVD rental program (read the story), which is nearly identical to that of Netflix (www.netflix.com). Rumors are that Blockbuster (www.blockbuster.com) is close behind with an offering of its own.

If you're not familiar with Netflix's business model, it works like this: You pay a monthly fee of around $20, choose as many DVDs online as you want (providing you only have 3 out at a time), keep them as long as you like, and never pay a late fee. The U.S. Postal service provides the distribution to and from Netflix.

Wal-Mart's program is nearly identical, but only allows two DVDs out at a time for a monthly fee of $15.54. You can choose to keep three out for $18.76 or four for $21.94.

I just don't get it. I don’t think Wal-Mart is going to be in the business for long, and I think Blockbuster will be foolish to follow.

While Netflix is apparently successful with customers, I don't understand the value it provides. The business model is built on two ideas: 1) most people return DVDs late and rack up real money with late fees, and 2) the movie you want is often never in stock at the local video store.

I think most people return movies on time. Who has time to rent a movie, but not return it? What about the time spent on the web choosing the movies you want to rent? Talk about a waste of time—picking movies to rent, and then finding that they're not available to you until for weeks to come. As for choice, try getting a new release quickly from the online stores. Think about it, 1mm members at Netflix (from all over the country), 15,000 titles (to be sure, more than the local store), but how many copies of each? For most films, you'll have better luck locally if you want to watch the movie in the next few weeks.

To be fair, I should tell you that I tried Netflix when it first started and found that I often couldn't get new releases that I wanted and often ordered movies that I thought I would like (and usually didn't watch) just to gain the value from my investment. After a couple of months, I decided I liked going to my local Blockbuster and picking the movies off the shelf. If I didn't find what I was looking for I just might choose something else or maybe not even rent. However, most of the time, I didn't go looking to rent a specific movie; renting movies is an impulse decision for me.

And that's really it isn't it? The online DVD rental business forces you to plan what you want in advance. I think most people are like myself and want to drop by the local video store, pick something out and take it home---today. Not plan several days or weeks in advance and wait for it to arrive. What about that 1mm subscribers that Netflix has, you ask? They are early adopters, in my opinion. People who like cool, cutting edge things and want to try them (and lazy people who don't want to leave their homes to rent or return a movie).

Let's talk about the economics of this. If you rent from a local video store, you'll pay around $4.50 per DVD. Rent once a week and you're at $18.00 (assuming you remember to return it on time.) While I couldn't find any recent research (but I'm sure some exists), I'll bet that the average person only rents about four times a month anyway. So you're already saving $1.95 a month (again, you've got to return your movies on time) over Netflix. In fact, Netflix says it looses money if a customer rents more than five times per month.

So what's my point with all this ranting? Simply put, I don't believe this business model is sustainable as it currently operates. I believe the market potential for the service is near saturation, and there's no true way to differentiate the service offered. Wal-Mart is forcing Netflix to compete now on price, making this a commodity offering. The service will have to evolve to the next level to build a larger customer base and still provide profits for their respective companies. Let's watch and see what happens. I give the current model 18 months or less.