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WHAT DO YOU DO?

Good question, Ace. I love speculating:

a) Raise prices. A 2$ premium on 3M subs is 72M$ more in pre-tax annual profit.

Could you raise prices $2 across the board? I don't think so, at least not on the lowest-tier plans. But if we assume those make up less than 7-10% of the three million subscriptions, perhaps that's not worth worrying about. At any rate, in the absence of similar price hikes at Netflix, I'm certain that once you raise prices by $2, you no longer have three million subscriptions; even with the Total Access feature, "prices going up" or "no longer cheapest 3-out plan" would, I think, mean quite a few defections, at least this early in the game (more on that later).

b) Limit the in-store exchanges in some manner.

An arrow to the heart of Total Access? Well, maybe. This would arguably involve the least amount of management effort and finesse, which is why I think it's the option most likely to come out of the Blockbuster boardroom, but I think it would create a lot of resentment. I think you could lob some of the highest-frequency users back into Netflix's court this way, which of course is a definite plus. But more importantly, Blockbuster needs to be consistent in their strategy. This bait-and-switch tactic would only remind people why they hate Blockbuster.

c) Limit the mail exchanges in some manner.

I'm assuming you mean something along the lines of changing the "3-out, all you can eat" plan to "3-out, maximum of X discs per month." I'm sure this would send anyone who wasn't married to Total Access right to Netflix but since these are your high-frequency users, you don't mind so much.

d) Get rid of the free coupon.

For some reason, I was under the impression that the coupons had already been phased out. In fact, it seems this might be happening: The current deal, beyond the Total Access freebies, limits new subscribers to one coupon per month, but those who signed up when the deal was two coupons per month still get that (for now). The coupons are still good for a game or a movie. Returning the on-line DVDs in the store, though, will only get you a DVD rental--no games. One a month for new customers? Set against the Total Access program, this doesn't seem like much. Total Access is getting a lot of heat, so maybe these go away, or are further reduced or restricted. Naturally, Blockbuster is focused on filling the corporate coffers, but you have to be sure you keep driving traffic to the stores; otherwise you run this risk of too many stores closing, undermining Total Access.

e) Stop advertising entirely

I don't know that you can afford to do this, since you create a vacuum that Netflix can easily fill even if they reduce advertising themselves.

f) Raise prices on your normal store business.

Here I assume you mean DVD rentals and sales, and perhaps impulse items as well. I haven't been to a Blockbuster in ages, so I don't really know what the prices are like for the candy and soda, but perusing the ihateblockbuster site gives me the feeling they're not moving a whole lot of it. As for raising prices on DVD rentals, that leads me to....

g) Other?

While the Golden Parachute is always an option for Antioco, assuming he stays put I think he's got to focus on executing on these two fronts:

1. The On-line Experience:

Titles: Blockbuster should never, ever have to advertise fewer titles than Netflix. In the releases, Netflix always seems to have 5-10,000 more titles. Why? Netflix can't possibly have that many exclusive deals. For Blockbuster to have to publish a lower number is inexcusable. To my understanding, Blockbuster is not renting games through the mail--can't find anything about it on their homepage. True? If not, that's nonsensical: They've made the decision to invest in the games, those should be available via mail, too. It's the one way they can beat Netflix on-line.

Price: As I hinted above, I don't think Blockbuster can afford to be pricier than Netflix right now. If they can firmly establish Total Access in their customers' minds and if (the bigger "if") Total Access is sustainable, then I am sure there will come a time when they can raise prices. For now, they have to bite the bullet and follow Netflix's lead--the price they pay for being so highly leveraged.

Recommendations: Will their recommendation software ever be as good as Netflix's? Maybe not, but I don't think that matters as much chiefly because that difference is harder to quantify. It's easy to look at two advertisements and say, "Well, Netflix offers more titles, I like 'more,' I'll go with them," but I think unless their movie recommendations are patently bad, any noticeable difference is easily dismissed.

Interface: I have not experienced Blockbuster Online. From what I gather, the difference between it and Netflix's isn't great enough to be a genuine negative, but I'm open to having this assumption corrected. Either way, as with recommendations, this is generally harder to quantify, and, as with recommendations, isn't as important if you're competitive on price.

2. The In-Store Experience:

Titles: People should be pretty sure of what's on the shelves before they even walk in the door. Focus on the most popular DVDs, not just the new releases, perhaps broken out by category (children's, TV, horror, romance, etc.), and make it known that if you want obscure or catalogue items, you go on-line, but if you want instant gratification for the most popular fare, you can come to the stores. Shame on any Blockbuster that makes Smokey and the Bandit II and Muppet Yoga available in the store (unless, of course, those particular titles do well in that location), but if Sex and the City and The Andy Griffith Show are popular with renters, leave 'em up there. Any titles that sit too long without being rented--say three to four weeks?--should get phased out (with the exception of seasonal fare, like the Peanuts specials and It's a Wonderful Life, which should always be available during the appropriate season). This should allow for a smaller footprint; sublease the space, and play hardball when negotiating locations that are too big when the leases end (sooner if at all possible).

I know there are people who like to browse and be surprised by possibilities they hadn't considered; not only should a certain allowance be made for providing shelf-space for off-beat, low-frequency/highly critically acclaimed films, that aspect should be trumpeted as well.

Price: If someone knows they're going to walk out of a store with something they (should) like, I think you can afford to be a little more aggressive with pricing, especially if they're still walking into the stores with coupons and mailers. Caveat: You have to back this up with good customer service (below).

Recommendations: Put a few kiosks in the stores so customers can swipe their store membership card and see two lists: 1) all titles from their queue that are currently available in the store and 2) all personal recommendations that are currently available in the store. This would probably be an administrative nightmare, but I think it would be a huge plus for the in-store experience and drive store traffic.

Interface: Focus on customer service! I worked retail for several years--I know it can be tough to get good help, but good store managers attract good people. If the in-store experience is unpleasant, a good selection at good prices isn't going to help. Get people who love movies behind the counter, and be sure that every transaction goes something like this:

"I loved Fight Club! Have you seen Oldboy? You can get that here, plus we have Trainspotting, which you might like, too."

As I said, I haven't been to a Blockbuster store in quite a while, so maybe such exchanges are commonplace, but--again, based on perusing ihateblockbuster.com--I doubt it. People love expressing their opinions on movies; Blockbuster should emphasize that in their stores. At any rate, the current strategy--sub-par store experience and a poor selection at middlin' (?) prices--obviously needs some adjusting.

On-line, you make the improvements where you can, but you can't beat Netflix on their home turf, so don't even try--unless you add games to your rent-by-mail plan. Otherwise, just copy them as much as patent law allows, and focus on your home turf: The In-Store Experience.

As for downloading, I think Blockbuster needs to be prepared to sit on the sidelines for a while. Netflix has the cash flow to make tentative forays into on-line rental and make a few mistakes; Blockbuster does not have this luxury. On-line rentals may be in its future, but I don't think their debt levels allow them to experiment right now. I think we can accept that being first doesn't always mean being best or being the long-term leader.

As I noted in my CAPS "Underperform" rating for BBI (by which I am currently being capital-C Crushed, but on which I am not even close to giving up), the mix of an on-line presence and bricks-and-mortar stores could be a powerful combination for a savvy company. I just think Blockbuster is getting hit with a double-whammy--non-innovative leadership and an entrenched customer-unfriendly perspective.

Mike
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