Wither Netflix, Blockbuster Redux?

In 1998 Reed Hastings founded Netflix, the lar...

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Considerable online and print real estate has been dedicated to the recent announcements by Netflix and Blockbuster. However, it seems that neither company has paid much attention to the critical B word – bundling.

First, a recap.

Till recently, Netflix was the darling of Wall Street. It was also a much analyzed case study in class rooms. Netflix was toasted as an example of how to disrupt an industry with a new technology enabled offering. The success of Netflix was in many ways responsible for the bankruptcy of Blockbuster, which was a behemoth of the traditional movie rental market. Netflix offered a eat-as-much-as-you-can streaming option along with a 1, 2 or 3 DVD-in-the-mail option. Bundled together.

Then, Netflix did two things – first, it increased prices by 60%. Second, it announced a split of its bundle. It announced that streaming and DVD-in-mail services will be separated into two different companies, with different websites.

Outraged users have been leaving in droves. The Netflix stock is down by more than 50%.  However, this might just be the beginning. The real value destroying act is not the price increase, but it is the impending unbundling.

Blockbuster on the other hand, after being acquired by Dish Network, has announced a combined streaming, mail and on-demand service. It promises a 100,000 strong library and unlimited DVD / BR exchanges through its  numerous retail locations.  While the offering sounds strong at first look, the fine print shows that only Dish subscribers can avail of it.

Why did we get here?

Netflix clearly understands that digital streaming services are going to disrupt the industry, much like its DVD-in-the-mail plan did in the nineties and early noughties.  It also realizes that it has to increase the size of its streaming library, and hence pay top dollar to the content owners. These seem to be the most plausible reasons behind its recent actions. While this is a great strategy in the medium term, a medium term strategy is only good if you are able to survive the short-term.

What’s the bungling / bundling issue?

This Wikipedia article on bundling suggests

Bundling is most successful when:

Consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product.

Netflix users appreciated the joint performance of the bundled product as it fulfilled two needs simultaneously:

  • I need to watch something, at this time.
  • I need to watch this thing, at some time.

With the unbundling of this product, Netflix users have been greatly inconvenienced. They have to pay 60% more, and have to spend much more time maintaining two separate queues of movies on two different websites. Consequently, they seem to be looking to shop elsewhere for their needs. For example, to meet their ‘I need to watch this thing, at some time’ need, they may go to iTunes or RedBox. Similarly, to meet their ‘I need to watch something, at this time’ need, they may turn to Blockbuster. Or so seems the thinking at Dish headquarters.

However, the bundle offered by Dish is a $30 quad-play. It contains the DVD, streaming and on-demand plus Dish cable. Hence it is more likely to appeal to customers who are primarily searching for a cable provider. Furthermore, reports suggest that Blockbuster’s streaming library is less than 5,000 titles – as compared to a paltry 20,000 for Netflix. Hence it is not a one for one replacement.

Clearly, both companies are bungling the bundling.

Thus there is now a large unmet for a bundle that offers unlimited streaming and DVD, at an affordable price, in a convenient manner. Netflix’s abandoning of this market has hurt it already and will certainly continue to hurt it in the short-term. If it is lucky and no serious competition arises during this period, then it may be able to flourish in the medium and long-term.