Analysis of the Netflix Business Model
A Business Model Disrupter Enters the Next Stage of
Video
Netflix was once held up as a major new-economy company with a unique digital business
model. By fully incorporating the internet into its operations, Netflix was able to quickly
overtake its chief rival, Blockbuster, but the company had not developed a new business
model. Instead, Netflix was able to adapt several known business models and incorporate
new digital innovations to quickly gain competitive advantage.
The Video Rental Market
Blockbuster had steadily come to dominate the video rental market, pushing mom-and-pop
rental stores out of business and diminishing the impact of smaller chains like Hollywood
Video. The company built its brand and established operational efficiencies that made it the
most successful contender with an established business model: the physical landlord.
Renting VHS customers on a daily or weekly basis is a perfect example of the landlord
business model, allowing Blockbuster to own a large number of physical assets and profiting
by charging customers for the temporary use of the asset.
This business model continued to be
successful as the market evolved beyond VHS tapes into DVDs, and might have been
successful through the transition to Blu-Ray discs had the industry not experienced disruption
from Netflix. Blockbuster seemed to be in a very good position in the marketplace, and
appeared to adapt well to changes in technology and consumer tastes, even incorporating
video game rentals into its stores. That is, until Netflix began poking holes in the traditional
video rental business model and exposing its weaknesses.
Weaknesses in the Business Model
The rise of Netflix exposed a couple of weaknesses in the traditional video rental business
model. First is customer convenience. While, at its peak, Blockbuster had stores in every
major town across the country, making the video rental process reasonably convenient, the
company could not compete with the convenience of the mailbox. The convenience factor is
a fairly common concern with thelandlord business model, for example with car rentals and
equipment rentals where the customer is responsible for picking up and dropping off at
designated locations. The sheer number of stores that Blockbuster had to maintain in order
to provide convenience added to the infrastructure costs associated with the business,
something that an upstart like Netflix would not have to contend with.