More on Netflix: strategy and competitive advantage

Update 2: Blockbuster has just announced that they will drop their prices starting Nov 1 to meet Netflix’s lower price.

Mike over at does his usual bang up job of providing comprehensive coverage of NFLX news with his post titled: Hacking NetFlix : Major Netflix Announcements!

I added the following post to his comments (with some additions here), which is worth sharing.

Mike, appreciate the link and attribution; quite kind.

Unfortunately, it’s a story I wish I didn’t have to write about (I’m sure you share that sentiment).

I didn’t listen in on the analyst call, so your added comment of “Hastings said that Blockbuster was never considered as a threat” is news to me.

And quite frankly, it’s shocking.

Reed’s a very bright guy, with a strong team behind him… so perhaps I’m missing something. But I’ve been beating the “Netflix has no competitive advantage” drum for a couple of months now, and for him not to acknowledge that Blockbuster, with a more established brand, better capitalization, larger customer base, and most importantly, an impulse rental satisfying physical store (i.e., channel) presence… shows either arrogance or ignorance. (And believe me, I have no motive to ascribe such words to Reed, just calling it as I see it.)

Don’t trust my end game analysis? Check out Herb Greenberg’s article. To paraphrase, Blockbuster believes it will end 2004 (after 4.5 total mths for their online service) with more subscribers than NFLX has accumulated during its first 3.5 years. While actual subscriber numbers are important and telling, it is Blockbuster’s accelerating subscriber growth curve that Netflix should find most alarming.

Reed/Netflix should be on the phone tomorrow with MSFT and Apple to see if either is interested in an acquisition, partnership or OEM offering to compliment their online music stores. Tivo is not the answer.

Update: I originally wrote that Blockbuster expected to have more subscribers than NFLX by the end of 2004, rather than more than NFLX had after 3.5 years of business. Quite a difference, as the majority of NFLX’s subscriber growth (in real terms) has occurred in the last 1.5-2 yrs. My takeaway remains unchanged however; NFLX doesn’t have a clear sustainable competitive advantage, and, they ought to (at least internally) recognize Blockbuster as a real threat.

Posted in Uncategorized