Industry Background
Blockbuster was an American-based provider of home movie and video game rental services. It was founded by David Cook and had opened its first store in 1985 and quickly grew into a corporate giant by revolutionizing the way movies were rented. Blockbuster was the front-runner in the video rental industry operating more stores and gathering revenue that exceeded its rivals in the industry. The market power blockbuster had endorsed blockbuster to have a significant impact influencing the future of video entertainment.
Opportunities
There is an opportunity for diversification where Blockbuster can venture into movie production, run television stations, and establish video games. This will broaden its revenue stream and ensure that it does not only rely on one area, which can be rendered obsolete by technology. The existence of a highly automated distribution center measuring 850,000 square feet provides a good opportunity for the growth and expansion of the business. The company can use this big space for other business perspectives such as opening a video games store. Additionally, an outcome of a DVD tug of war could determine the future profitability and opportunity for the film business. This is just on the grounds as a lot is on the line for predicaments like Blockbuster to get their larger part of their income from rentals.
Sales of new movies, which blockbuster sold for approximately $20, contributed 14% of blockbusters 2001 gross revenues. In addition to this, Blockbuster had also introduced merchandise that would complement their core business, this extends beyond t-shirts, candy, drinks, popcorn and more. These new additions allowed their sales to grow just beyond DVD’s and provided the industry with a better opportunity to thrive .
Threats
There was a threat that Blockbuster would be rendered obsolete by technology. There were endless fears that the business and its operations would be rendered obsolete and depress its stock. The prevailing trends then made this threat real as video cassettes were quickly replaced by DVD players. This implied that all the investments that the company had made on videocassettes went to waste. In addition, competition from rivals and new entrants who were willing to leverage on the latest technological innovations to carve an edge also posed significant threats to Blockbuster’s operations. Indeed, the entry of Netflix dramatically titled the scales against Blockbuster. There was also another threat posed by the growing popularity of satellite services that had numerous movie channels. Plummeting cash flow, lack of merchandise focus, and high CEO turnover turned out to be serious threats that plagued the company as well.
Sources of Blockbuster’s Competitive Advantage
Blockbuster has a powerful buyer bargaining power that it can use to its advantage. Its huge size as a video store means that studios must rely on it to sell their movies to end-users at home. By avoiding the middleman which is a third-party distributor that most competitors need, Blockbuster was able to process more products at a lower cost than most of its competitors on its own. If Blockbuster does not buy from a studio, the studio sales will drastically reduce. In addition, Blockbuster relied on a revenue sharing formula that it had developed to negotiate contracts with studios. As a result, it managed to acquire the right number of videocassettes at a favorable price of $4 per piece and remit 40% of its revenue on the sale of the cassettes for the first six months. This was in contrast to the revenue-sharing formula used by most of its competitors who paid $8 per piece. Blockbuster had a solid base of customers who exceeded one billion annually. Indeed, this put it way ahead of its competitors, some of whom were struggling to attract customers. Moreover, Blockbuster had a presence in 26 countries other than the United States and a workforce of more than 89,000. This ensured that it robustly executed its operations and managed to meet customer expectations. In addition, the company managed to build a strong brand for itself up to a point where 20% of all movie renters in the U.S knew no other moving tenting store besides Blockbuster. Its huge presence also ensured that its branches were in proximity to movie renters, and tactfully locked out competitors. Lastly Blockbuster had also a major advantage over smaller competitors because of its 850,000-square-foot, highly automated distribution center in McKinney, Texas, where Blockbuster could repackage newly released films to make them suitable for rental.
