How Netflix Beat Blockbuster: Role of Technology and Pricing Strategy

This report analyzes how Netflix beat Blockbuster by leveraging technology and implementing a genius pricing strategy. It explores the role of technological diffusion and innovation in the growth of online streaming services. The report also discusses the challenges faced by Netflix and its future prospects.

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Executive summary
The retiring of the Blockbuster brand had been mostly attributed to the growth of online video
streaming services that led to the fall in the revenue of the company. Findings reveal that in the
growth and success of Netflix the role of Technology and rather the technological diffusion has
been immense. Netflix is considered to be one of the top most innovative companies since the
last decade by Forbes magazine. Netflix is probably one of the best example showing how the
change and rather in the growth of the scope of Technology has changed the manner in which we
watch television. The analysis of the factors that made Netflix beat blockbuster video involves
the study of the growth of online operation over the preference for retail outlets. Another reason
why Netflix was able to put blockbuster videos out of business had been the genius pricing
strategy of the company.

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Table of Contents
I. Introduction..................................................................................................................................4
II. Context........................................................................................................................................4
Historical overview of Blockbuster.............................................................................................4
Historical overview of Netflix.....................................................................................................5
III. Theory........................................................................................................................................5
PESTEL Analysis:.......................................................................................................................5
Porter Five Force analysis of Netflix...........................................................................................8
Porter Five Force analysis of Blockbuster...................................................................................9
Transactional strategy................................................................................................................10
IV. Analysis: How did “Netflix beat Blockbuster Video”?...........................................................11
Role of technological diffusion, innovation; first movers and followers......................................11
Changing technology.................................................................................................................12
Operating online vs retail outlets...............................................................................................12
Pricing strategies of Netflix.......................................................................................................13
V. Discussion.................................................................................................................................15
Assessment of Netflix dominating the provider of the online video streaming........................15
Stumbling of Netflix after Qwikster failure...............................................................................16
Rebuilding of Netflix with original content...............................................................................17

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Future of Netflix........................................................................................................................17
VI Conclusion................................................................................................................................18
VII List of references.....................................................................................................................19

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I. Introduction
The aim of the report is to analyse the growth of online operations with reference to the
emergence of Netflix in the online video streaming business. The report shall begin with the
overview of blockbuster and Netflix to state their comparison followed by the illustration of the
strategic positioning and action of Netflix. The role of Technology and the shift to online
operations and innovation shall be discussed in terms of Netflix. The pricing strategies as well as
the challenges faced by the company shall also be analysed and the future of the company shall
be discussed.
II. Context
Historical overview of Blockbuster
Blockbuster also referred to as Blockbuster video or Blockbuster entertainment is a provider of
Rental services for video game and home movie distributed through the video rental stores,
cinema theatre and DVD by mail. The company had witnessed immense growth in the 1990s and
it was about a decade ago when it had strength of 9000 stores in United States employing over
84000 people in the stores (Sawhney 2017). In 1990 it was the undisputed leader in video rental
industry. However, Netflix went public the revenue of blockbuster came crashing down and in
2010 the company filed for bankruptcy. In 2013, there were about 300, company owned stores
for video rental in United States that were soon shut down. The extreme competition from
automated kiosks of Redbox, the mail order service of Netflix and the growth in the demand of
'Video on demand' services had led to the eventual device of the company (Aziz et al. 2018).

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Historical overview of Netflix
The history of Netflix is very interesting as Netflix was founded by two software engineers in
1997 with the intention of using internet for renting movies on the DVD that was then a new
video streaming format. It is also believed that the idea of Netflix to one of the founders, Reed
Hastings, came when he was charged by blockbuster $1 40 as late fees for returning a DVD. In
1999 monthly subscription model was adopted by Netflix with unlimited rental for a single rate
monthly. In 2007 Netflix moved into video streaming as the subscriptions were increasing by
great bounds and in 2010 there were over 20 million subscribers for Netflix. In 2013 Netflix
announced its move into the original programming with its web series called the 'House of Cards
(Fernández-Manzano, Neira & Clares-Gavilán 2016). With the idea of dividing it streaming
business and DVD business, Qwikster was created by Netflix for the purpose of DVD
distribution. In which of protest from the consumers the idea of Qwikster was soon dropped. The
success of its first web series led to the eventual growth in the original programming in Netflix
that is the USP of the company at present (Gedye 2018).
III. Theory
PESTEL Analysis:
Factors of PESTEL Impact on Netflix Impact on Blockbuster
Political
USA, as the second biggest vote
based system on the planet, has the
President as the leader of the nation.
USA appreciates noteworthy
political soundness just as
reasonable and straightforward
This fast infrastructural and
mechanical back-up by the
Government has helped
business improvement of
Netflix in the USA just as
advancement of required
foundation for achieving
Similarly this has assisted
Blockbuster in
development of its home
video rental business along
with operating with net
income US$ 468 million
during 2010-2011, after

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administrative framework. The USA
acts as advocator and promoter of
democracy all over the world and
therefore, has political influence in
international level. This higher level
of political stability and worldwide
connectivity has assisted the county
in rapid infrastructural and
technological development, which
has been a great strength for the
businesses, trades and manufacturers
in USA (Leyva et al. 2018). The
efforts by USA Government for
helping business and industries have
made the county a great destination
for FDIs. According to Turkyilmaz
et al. (2019), USA is the first choice
by most of the multinational
organizations in terms of business
investment.
the worldwide excitement
world.
which almost 300
Blockbuster stores were
closed nationwide.
Economic
USA has the largest economy in
world in terms of nominal GDP that
is US$ 20,494,100 million during
2018 (Turkyilmaz et al. 2019).
Disregarding antagonistic effects of
monetary subsidence in 2009-2012
periods, fast fall in joblessness amid
2015 improved its economy in quick
ways since 2017 (Leyva et al. 2018).
In this manner, the quickest financial
This rapid financial
prosperity has increased
demand for the online
films, television
programmes and streaming
media application (till
2019, Netflix had almost
62 million paid
subscriptions in USA).
Before the incident of
closing 300 Blockbuster
stores, the company was
operating in USA smoothly
with sufficient economic
perspectives.

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development of USA has prompted
high spending by shoppers on wide
scope of items and administrations,
which is the greatest in addition to
point for practically all the enormous
and globally renowned associations
in USA.
Social
USA has the third biggest populace
in world with 327.16 million out of
2018. Having the general public with
colossal decent variety from
alternate points of view there are
noteworthy varieties in customer
request and decisions.
Significant socio-economic
mobility has been one of
the main factors affecting
business development of
Netflix in USA. Therefore,
socio-demographic factors
are largely affecting the
business of Netflix.
However, growing aging
population in USA has
created scarcity of labour
for the organizations.
Technological
USA is the global leader in science
and technology and has been at the
forefront of applying technology in
wide variety of fields. The US
Government is a supporter of
technological change and application
of innovative technologies (Leyva et
al. 2018).
This has been high
advantage for technology
based companies like
Netflix, which has been
market leader in the
business of Blu-ray rental
and online streaming media
and films.
This company has also
benefitted through the
rising advancement of the
technology in the country.
However, faced certain
initial difficulties
Legal
USA faces visit intense climate
conditions just as climatic
catastrophe and harms, which, by
and large, prompts budgetary harms
of business tasks, explicitly in the
travel industry segment.
Moreover, the business
organizations have to face
strict environmental
policies developed by the
Government for restricting
business impacts on
environment (Turkyilmaz
The company has faced
major difficulties in terms
of legal operations

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et al. 2019). Netflix faces
similar policies and
restrictions for regulating
their businesses.
Environmental
USA has strict legal system under
the constitution based democratic
Government. The business
organizations face strict legal and
legislative rules in the USA.
This company has followed
the strict guidance of the
environmental policies and
restrictions
Major changes in the
operations have been
reconsidered due to
reducing the harmful
impact on the environment
Porter Five Force analysis of Netflix
Five Forces Details of the Forces
Power of Buyers: The buyers are highly demanding and want to buy the best offer at
lower prices. Thus, bargaining powers of customers is high for seeking
discounts and offers.
Power of Suppliers In USA, there are specific powerful suppliers in the entertainment
sector which use their negotiation power for extracting higher prices
from firms (Pittman & Sheehan 2015). The suppliers can lower overall
profitability of the streaming media producers like Netflix. Thus,
bargaining power of suppliers is high.
Threat of Substitutes Threat of substitute is high in the online streaming and entertainment
industry in USA. Different organizations offer different value
propositions and offers
Threat of new
entrants
New entrants in the CATV system are bringing innovation and thereby
putting pressure on Netflix (Adhikari et al. 2015). The new entrants are
also offering reduced cost and pricing strategy with new value

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propositions. Thus, threat of new entrants is high.
Competitive Rivalry In the CATV industry, competitive rivalry among the competitors is
high. Thus, Netflix acts amidst highly competitive operational market
and tremendous rival positions in the USA market.
Porter Five Force analysis of Blockbuster
Five Forces Details of the Forces
Power of Buyers: During 2010-2011, in the media and entertainment industry in USA,
customers had high level of bargaining power. Low switching cost
allowed customers to cancel their subscriptions and seeking new
provider.
Power of Suppliers High degree of influence of pricing was entertained by the suppliers as
few suppliers produced media and entertainment based innovative
contents (Guggenheim 2016). Thus, power of the Blockbuster suppliers
was high.
Threat of Substitutes Blockbuster always faced high threat of substitutes in the entertainment
industry while operating in USA. There were lots of substitutes offering
alternative service of home video rental in lower price (Moreno-
Izquierdo, Ramón-Rodríguez & Perles-Ribes 2016). Thus, threat of
substitute was high.
Threat of new
entrants
Threat of new entrants was always high for Blockbuster. The new
entrants offered alternative price -and technology, which was great
threat for Blockbuster.
Competitive Rivalry During 2008-2010, the competitive rivalry in the home video rental was
high in USA. This is observed that before close of 300 centres of

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Blockbuster in 2011, the company operated under tough market
conditions and rivalry.
Transactional strategy
This is one of the international strategies and has been a complex strategy for maximisation of
local responsiveness as well as global coordination in business operations in the organizations.
The main aim of the transaction strategy has been to maximise exchange of learning and
knowledge between different dispersed units. According to Pittman & Sheehan (2015), this
specific strategy refers to the efficient operations that have been adapted to local conditions.
However, this is hard to achieve the transactional strategy but General Electric has been able in
achieving the transactional strategy.
IV. Analysis: How did “Netflix beat Blockbuster Video”?
Role of technological diffusion, innovation; first movers and followers
Technological diffusion can be defined as the manner in which innovation such as three new
products and new processes spread across different industries. The real advantage of Netflix has
been that it is a tech company at first. It is through technological diffusion that Netflix has
perfected the idea of online streaming of videos rather than just a simple mail order rental shop
of DVD (Dana Jr 2017). Irrespective of how many movies and shows that the company has
released through the online streaming process, it has always ensure that the 118 million
subscribers at that time are able to watch the series or movies without any hassle. Netflix has also

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re encoded the entire catalogue in order to offer the best picture even after using smallest
bandwidth (Chopra & Veeraiyan 2017). This has been possible with the use of the updated AI
technology that the company developed in the name of Dynamic Optimizer. The company has
stated that it used to deliver content with enjoyable quality of 750 kbps. It is through
technological diffusion from encoding framework it decreased to 270 KBPS stating that if a user
has editor plan of 4GB it would be able to watch Netflix for 26 hours that was increased by 10
hours of viewership from before.
The idea of Netflix itself had been and innovative idea that attempted to cash on online video
streaming with specialisation in on-demand video streaming as against DVD rental service. The
company had the idea of 'choose-your-own-adventure' and presented the vision of interactive
television. Another innovation by the company had been the briefing of original content and
investment in original series as well as acquiring rights for popular shows that customers view on
television (Chopra & Veeraiyan 2017). The innovation lies in not appealing to a broad audience
but to address a niche target market making them dependent on Netflix for all their digital
content viewership.
From the analysis of the business model and innovation idea of Netflix it has been realised that
Netflix is a first mover in the industry of online video streaming through subscriptions. It has
been the first company that allow customers to rent movies online and also the first company to
launch its on original content such as shows on television but on digital media platform.
Changing technology
Netflix and its success story teaches a lot about technology adoption. The idea of streaming any
video or content online had existed before Netflix was established. The excessive demand for

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online video streaming and online movie rental shows the change in technology with the growth
of on demand media industry and using Technology for releasing original content (Flanagan
2018). The success of the company lies in using the data of the uses for serving them the content
that they would prefer, leading to Netflix being a major disruption in television. The success of
Netflix also shows that technology can be used for better customer satisfaction and more success
in place of physical video rental shops.
Operating online vs retail outlets
Blockbuster video had been involved in a business model where it had physical stores that rent
DVDs to the customers for a certain fee that they need to return after the specified time. The
rental stores in the 1996 had been a relevant business and blockbuster video was the most
dominant name in the movie rental business at that time with over 50% stake in the DVD
subscription service (Aversa, Haefliger & Reza 2017). Netflix had attempted to do something
that blockbuster video had not even conceived of doing in their business model and that was
operating online solely. Netflix bolted way beyond the video rental store after it capitalised on
the fast internet delivery for streaming of the videos. The strategic re-positioning of the company
to offer online streaming of videos and movies to the customers was also significant of the shift
of the attitude of the customers towards online operations as against retail outlet purchases (Yan
2017).
Online operations in the form of online streaming of videos and movies were also convenient for
the customers rather than visiting retail outlets. The online streaming business also looked to be
more cost-effective and promising with the availability of different kinds of content in one
platform rather than buying different DVDs for different content such as movies or games.

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Pricing strategies of Netflix
Initially the company and bundled out streaming plans from traditional by mail DVD business by
increasing the prices of combined offerings between $10 monthly to $16 monthly. However, at
present operations as of 2017, significant changes in the pricing strategy had been made by the
company with three kinds of plans for the customers: basic ($7.99); standard ($10.99) and
premium ($13.99).
Figure 1: Netflix plans
(Source: Poyar & Poyar 2019)
The customer had the flexibility of choosing the plan depending upon the services that they
wanted to avail from Netflix and the number of shows that they could view in each plan. The

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result has been extremely effective for Netflix as its streaming subscribers increased by 2 million
(Pfeifer, Conroy & Pfeifer 2017). The success of Netflix has been with the flexibility in the
pricing strategies and to keep the prices to reflect the experience of the customers on relative
basis. Another key strength of the pricing strategy is that it increased the prices along with the
launch of new original contents on the website stating that higher prices was associated with
more customer value (Aversa, Haefliger & Reza 2017). With a little rise in the pricing range the
company was offering different content range and all and as the customers were paying 10%
more on an average there was insufficient increase in the profits (fig below):
Figure 2: Profits of Netflix
(Source: Poyar & Poyar 2019)

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V. Discussion
Assessment of Netflix dominating the provider of the online video streaming
At present Netflix accounts about half of the video content streams online and about more 44
million viewers have subscribed for the video-on-demand service of Netflix in 2017-2018. It has
also been found that video streaming is accounting for 57.69% of the online data traffic globally
and Netflix contributes to 14.97% of total volume of downstream traffic globally (fig below).
The figure suggests that the scope of online video streaming is increasing as per Sandvine, an
internet research firm in the United States. It is further believed that Netflix would dominate the
video streaming industry although it would face tough competition from Amazon video
streaming services.
Figure 3: Sandvine report

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(Source: Marketing 2019)
Stumbling of Netflix after Qwikster failure
One of the stumbling blocks for the uninterrupted growth of Netflix had been found in the form
of the failure of Qwikster. In 2011 it was announced by Netflix that in place of paying $10 DVD
rentals and unlimited streaming of on-demand video, customers demanding both the services
would have to subscribe for two packages differently at $15.98. Resultantly at the behest of the
protest from the customers who were not least from the division of the services started and
subscribing to Netflix and in 2011 Netflix lost 800,000 subscribers (figure below):
Figure 4: Impact of Qwikster debacle
(Source: Rodriguez. 2019)
Rebuilding of Netflix with original content
Next Netflix had learn from its blunder after the Qwikster debacle and understood that it has to
be smart about hiking prices. The plan of the division of online video renting and DVD rental
was revoked and the next time Netflix had increased the rates, the rates were modest and were

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introduced along with some more original constant and more popular shows to be streamed
online that it increased the subscription rate (Smits 2017).
Future of Netflix
Netflix is facing competition from others streaming services such as Apple's streaming services
and rise of Disney. However the investors of the company are not worried about the future as
Netflix is now be considered to be the future of entertainment (Kovacs & Jansen 2015). The
creative content on the platform along with the efficient video streaming services has position the
company to be the best provider for video streaming online 1000 original content releases in
2018 and its International streaming to be increased by 70% estimated at $1.78B in 2018 Netflix
had witnessed 125 million subscribers worldwide and is expected to grow to 140 million on 2020
(Park 2017).
VI Conclusion
To conclude it can be stated that the analysis of the growth of Netflix and the failure of
blockbuster videos can be considered to be linked to the emergence of online video streaming
business introduced by Netflix. The future of Netflix is also being considered with great
prospects. One of the key limitations of the report had been inability to analyse other factors
related to the failure of blockbuster videos rather than associated it with the growth of Netflix.

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8_7
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