Tuesday, November 16, 2010

Always Pushing Beyond the Envelope
NYT, 8/8/2010

This is a great article about two companies, Blockbuster and Netflix. Both pioneered delivery of movie DVD’s to consumers: Blockbuster via mass selling of DVD’s in ubiquitous stores while Netflix via U.S. Mail. The big difference between the two is that Blockbuster never really planned beyond their original business design while Netflix panned for “creative destruction” of their initially innovative business design breakthrough. One just delisted from the S&P 500 while the other is soaring. Guess which is which.
"For Blockbuster, the advent of DVDs in the mail was a disruptive technology. The chain relied initially on bulky videotapes and late fees to generate a fat revenue stream, and its scale was huge; smaller, independent stores gradually left the market. Netflix opened a new battlefront, mailing thin DVDs and letting customers keep a disc as long as they wanted.

Blockbuster saw the change coming. It even took action, setting up its own mail service. But seeds of destruction had been sown, and Blockbuster is now financially troubled. Netflix, meanwhile, is already embracing technology shifts that will make those red envelopes a quaint memory
Creative destruction has such a cataclysmic sound. But the term, coined by the Austrian economist Joseph Schumpeter to show how capitalism destroys companies as more innovative ones succeed, describes a process that is more like a slow-motion train wreck.

Established companies’ historical inability to change is what makes Netflix’s maneuvers so fascinating. It foresaw its possible demise at the moment of its own creation.

Netflix was formed in 1997 with the idea of sending movie DVDs, then a new technology, through the mail. But Reed Hastings, the founder and chief executive, and early employees, recognized that delivery of movies over the Internet would replace the mail carrier soon. They named the company Netflix, not Mailflix or DVDs by Mail. ….

……It is happening again, this time to Netflix. It was only last year, more than a decade after its founding, that streaming movies started to take off. But it was Netflix pushing people to do it, even though it meant that the company might rent fewer discs by mail.

Since January 2007, it had been offering a small selection of movies for streaming from the Netflix.com site to a customer’s personal computer. Then it began streaming to TV-connected devices so that the movies could be displayed on a larger screen, the way customers have always watched movies at home.

…. Netflix, meanwhile, keeps cutting deals with movie studios to get more films and television shows online. Now a movie aficionado paying $8.99 a month, for example, gets one DVD in the mail at a time — but can also watch movies online to his heart’s content. At one movie a day, the cost of the habit drops to less than 30 cents a film. Mail-only subscriptions are still available…..

..There is no way that a store with racks of movies can sell its wares for as little. Blockbuster’s same-store sales have declined steadily, even when including sales from its mail service and kiosks. It is closing hundreds of stores. Delisted from the New York Stock Exchange in July, the company’s stock is trading for around 17 cents on the pink sheets, down from $30 in May 2002, which is about when Netflix stock began publicly trading at $7.53."

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