BLOCKBUSTER, NETFLIX, AND REDBOX COMPETE FOR MOVIE RENTALS29 Charging $17.99 a month for an unlimited number of movie rentals (three at one time), Netflix revolutionized the movie rental business with a one-day mailing service for DVDs and acquired 12 million subscribers and $1.5 billion in revenue. However, Blockbuster, the video rental giant from the $5.5 billion bricks-and-mortar movie rental business, decided to enter the mail-in delivery and online-DVD rental businesses. Blockbuster drove prices down to $14.99, attracting 2 million subscribers. Netflix responded with a cut-rate service of one movie at a time for $9.99 per month, which drove the net profit right out of the business. Use Porter's Five Forces model to answer the following questions:
Questions
1. Does easy access to distribution channels at grocery stores for Redbox's 22,000 vending machines indicate high or low entry threat in the movie rental business? Why? Why might McDonald's be an even better distribution channel than grocery stores?
2. What economies of scale were available to serve as a barrier to entry in Blockbuster's bricks-and-mortar movie rental business? Did NetFlix face a cost advantage or disadvantage?
3. Who are Blockbuster's suppliers? Are they in a position to appropriate much of the value in the value chain? Why or why not?
4. What factors determine the intensity of rivalry in any industry? Is the intensity of rivalry in the movie rental industry high or low? Why?
5. Porter's Five Forces model is sometimes extended to Six Forces of Competition to include the threat to profitability imposed by disruptive technology. What disruptive technology has threatened the bricks-and-mortar and mail-in movie rental business?