Blockbuster vs. Netflix

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TO:Professor
FROM:
DATE:September 13, 2011
SUBJECT:Analysis of Blockbuster and Netflix

INTRODUCTION
Blockbuster and Netflix both operate within the same competitive market, but take a vastly different approach in terms of operations. In this memo, I will analyze the competitive environment the two firms operate in, the vertical income and balance sheets of each firm, and the important ratios that give insight into the financial health of both companies. BLOCKBUSTER

Blockbuster Inc. provides in-home rental and retail movie and game entertainment. Blockbuster operates through thousands of in-store retail locations as well as digital distribution over the internet to meet customers’ needs. Not only does Blockbuster have store locations throughout the United States, but globally as well in 17 different countries. However, the majority of revenue comes from store locations in the United States. The retail home video industry is very competitive, and Blockbuster has numerous competitors threatening its market share. Competition comes from traditional video store retailers such as Movie Gallery, online retailers such as Netflix, and mass merchant retailers. One risk factor Blockbuster faces is the change in studio pricing policies. The change in pricing policy has led to an increase in competition, which has impacted consumer rental and purchasing behavior. Other risk factors include new technologies and alternative methods of content delivery. A success factor Blockbuster enjoys is the competitive advantage home video retailers have in the early timing of its distribution window. Except for theatrical releases, home video retailers are the first to receive copies of videos. NETFLIX

Netflix is the world’s leading internet subscription service providing T.V. shows and movies to its customers. In addition to streaming movies and T.V. shows on their computers, customers can also have DVD’s delivered to their homes. Netflix operates by obtaining content from various studios through revenue sharing agreements and markets its service through online and television ads. Netflix also utilizes third-party computing providers to efficiently stream T.V. shows and movies. Almost all of Netflix’s revenues are generated in the United States and all of the firm’s long-lived assets are held in the U.S. Major competitors of Netflix include direct broadcast satellite providers (DirectTV), rental outlets (Blockbuster and Redbox), and entertainment video retailers. One risk factor Netflix faces is the attraction and retention of subscribers. If the firm’s customer base begins to shrink, profits will likely suffer adverse effects. Furthermore, the company is at risk if it is no longer able to compete effectively. New technologies, new entrants to the market, and new viewing habits could threaten the success of Netflix. A success factor for Netflix is the attraction of new customers, which means additional subscriptions and revenue. Another success factor is the improvement of the firm’s technology, which allows Netflix to keep and attract customers. INCOME STATEMENT

One key metric on Blockbuster’s income statement is gross profit. From 2006-2008, Blockbuster’s gross profit declined slightly, although this figure rebounded in 2009. It is critical to Blockbuster’s financial health to reduce the cost of sales in order to boost gross profit and the bottom line. The increase in cost of sales is largely due to an increase in the cost of rental revenues. As I stated above, one risk factor for Blockbuster is the change in studio pricing. This risk has clearly presented itself in Blockbuster’s income statement. In addition, another significant element on the income statement is the impairment of goodwill. From 2006-2009, Blockbuster has experienced a 9 percent impairment of goodwill. This has led to a significant increase in operating expenses. As a result, net income is adversely impacted in these years. A critical metric on Netflix’s...
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