Blockbuster Netflix Case Analysis
DEPARTMENT OF ACCOUNTANCY
MEMORANDUM
SUBJECT: Blockbuster/Netflix Case Analysis Introduction In this memorandum, I will analyze the competitive environment that Blockbuster and Netflix faced, state the key income statement and balance sheet accounts for each firm and use ratios (including DuPont model) to draw comparisons between the two firms in 2008.
Competitive Environment
Blockbuster is an American-based chain of VHS, DVD, Blu-Ray, and video game rental store that has over 5,000 stores in the U.S. The rise of online rental service providers such as Netflix greatly reduced Blockbuster’s market share. As a result, Blockbuster re-launched its online rental service to remain competitive on the market. Blockbuster faced many risks in the past decade, leading to its sharp demise. The biggest risk that Blockbuster faced was the its massive infrastructure that makes implementing changes to meet the demands of the changing technological environment difficult. Furthermore, the operating expenses to sustain business were astronomical while business was declining. Thus, management faced pressure from creditors to cut costs in order to stay afloat. Another risk that Blockbuster faced was its “no late fee” initiative that caused a costly buildup of inventory. This caused cash flows and revenues to suffer, causing stock price to hit rock bottom, further risking the firm’s reputation as a firm worth investing in. However, its success lies in its well-known brand and important relationships with movie studios that rely on it as a major distribution channel and source of revenue.
Netflix is an American corporation that offers both on-demand video streaming over the Internet, and DVD rentals through their website. It does not have any retail stores and mainly operates over the Internet, making it a low-cost business. Its strategy involves developing a sophisticated movie recommendation system that caters to the taste of
MEMORANDUM
SUBJECT: Blockbuster/Netflix Case Analysis Introduction In this memorandum, I will analyze the competitive environment that Blockbuster and Netflix faced, state the key income statement and balance sheet accounts for each firm and use ratios (including DuPont model) to draw comparisons between the two firms in 2008.
Competitive Environment
Blockbuster is an American-based chain of VHS, DVD, Blu-Ray, and video game rental store that has over 5,000 stores in the U.S. The rise of online rental service providers such as Netflix greatly reduced Blockbuster’s market share. As a result, Blockbuster re-launched its online rental service to remain competitive on the market. Blockbuster faced many risks in the past decade, leading to its sharp demise. The biggest risk that Blockbuster faced was the its massive infrastructure that makes implementing changes to meet the demands of the changing technological environment difficult. Furthermore, the operating expenses to sustain business were astronomical while business was declining. Thus, management faced pressure from creditors to cut costs in order to stay afloat. Another risk that Blockbuster faced was its “no late fee” initiative that caused a costly buildup of inventory. This caused cash flows and revenues to suffer, causing stock price to hit rock bottom, further risking the firm’s reputation as a firm worth investing in. However, its success lies in its well-known brand and important relationships with movie studios that rely on it as a major distribution channel and source of revenue.
Netflix is an American corporation that offers both on-demand video streaming over the Internet, and DVD rentals through their website. It does not have any retail stores and mainly operates over the Internet, making it a low-cost business. Its strategy involves developing a sophisticated movie recommendation system that caters to the taste of