The Blockbuster closed in our town last week, in the “out of business” sense. I heard a lot of folks attribute this to the popularity of Netflix.
About a year ago our post office (looks like the one in Mayberry RFD) put a sign above their “Out of town” mail slot, saying “Please put Netflix envelopes in the “Packages” drop box.” Apparently Netflix has gotten so popular that the post office has had to make an adaptation just to handle the volume, and the reflection of the shift in consumer behavior couldn’t have been written more plainly.
But the more I think about it, Netflix didn’t single-handedly kill our Blockbuster.
About six months ago our (only) supermarket got one of those “Redbox” DVD rental kiosks, and slowly it’s taken over the activity at the front of the store.
People are lined up at it all the time, and when I thought it was just a stand-alone machine, I didn’t consider it all that novel until I realized that you can reserve movies, at an individual machine, over the internet. That’s when I thought “this is really cool.” No wonder folks are jammed there, they’re going to the store anyway, and they can get their movie too, and reserve what they want. Wow.
So, I did a quick Google search on “Redbox Netflix” and this was the third citation, the headline says it all: Blockbuster CEO: Redbox, Netflix “Not On Radar Screen” as Competition. The article was from December. And this is a publicly traded company. How in the world does someone say this? What detachment from the customer (and reality) does that broadcast? It certainly provides a more grounded understanding of why our local Blockbuster went down the drain.
But while Netflix may have pushed Blockbuster to the brink, Redbox may have sent them over the edge. Not because Redbox was targeting Blockbuster: they were collateral damage. It’s Netflix who’s in the cross-hairs of Redbox. And the best part? Netflix paved the way for Redbox to hollow them out.
How? Netflix fundamentally changed consumer behavior. Until they arrived you were at the mercy of your local video store: you had to actually make a separate trip there, choose from their inventory, and had to remember what you came in there for.
Netflix created a whole new behavioral model of how you rent and experience movies and tv shows. Infinite inventory to choose from, your own queue on a website, and they mail your movie to you. How simple, how convenient. And as I wrote earlier, a change in behavior like this takes time – like a decade.
Convenience is nice, but where Netflix really grabbed hold of people was by also embracing people’s existing behavior: they don’t return movies on time. Eliminating late fees was the rallying cry that created incredible word of mouth. And started that hollowing effect for Blockbuster.
So how does this apply to Redbox? Well, they just applied Netflix’s playbook: focus on consumer behavior and where the economic leverage is. They recognized most people rent the current releases, and thanks to Netflix, they also expect to be able to use the web to choose as well as know they’ll get what they want. Critically, they also realized that having the movie mailed to you meant for many consumers just not having to make a separate trip to get it.
So Redbox embraced this existing behavior in a clever way. They just rent the top movies from a vending machine located in a supermarket. You can reserve your movie over the web. So you get what you want, with no special trip.
And the fact it’s a kiosk also means expectations are automatically set that the selection is limited. This reflects a nuanced understanding of consumer psyches, while dramatically reducing the complexity of inventory management.
And while convenience is nice, where Redbox really gets its leverage is with the economics, just like Netflix did with Blockbuster. $1 per movie. Sure there are late fees, but at this price it makes Netflix seem expensive and really tough for digitally delivered movies to pencil out from a margin perspective. Ouch.
So, against this backdrop, it’s hard to fathom the statement from the Blockbuster CEO. He’s right, Netflix and Redbox really weren’t on his radar screen. He wasn’t even in the same business, wasn’t even in the fight.
And if I were Netflix, I’d be working my bankers, hard, to figure out how to acquire Redbox.