The Digital Transformation Playbook: Rethink Your Business for the Digital Age

Netflix Versus Blockbuster
Let’s take a look at another recent case of massive disruption: how Netflix’s 
original DVD service defeated the leading retail chain for movie rentals, 
Blockbuster.
Blockbuster was an extremely entrenched and dominant player in the 
retail space, so Netflix chose to compete by offering a dramatically different 
value proposition to the customer. (See table 7.2.)
Table 7.2 
Business Model Disruption: Netflix DVD Service (Disrupter) Versus Blockbuster 
(Incumbent)
Value proposition differential
Value network differential
No late fees
Easy access (product comes to you)
Wider choice
Personalized recommendations
Subscription pricing model
E-commerce website 
Data assets and recommendation engine
Warehouse and mail distribution system
No retail costs

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The first difference was the elimination of late fees. In the retail model, 
the customer picked up a movie and paid for a fixed number of days. If they 
returned it past that time period, they were charged a late fee—aggravating 
and unavoidable. But Netflix did away with the hated late fees entirely, 
with a flat monthly fee that allowed the customer to keep three movies at 
home at a time, exchanging them as quickly or as slowly as they wanted. 
The product was also more accessible. Rather than going to a retail store, 
the customer simply picked the movies out on Netflix’s website. A few days 
later, they arrived in the mail, with a handy return envelope to send them 
back. Because Netflix was shipping from centralized warehouses, it was able 
to offer every customer 100,000 movies, a much wider product choice than 
at any of Blockbuster’s retail stores. To help the customer choose among all 
those (potentially overwhelming) options, Netflix’s website also offered a 
sophisticated recommendation tool. The cumulative effect of these differ-
ences in value proposition was that consumers who tried Netflix loved it, 
never went back, and recommended it to their friends. Blockbuster quickly 
realized it was a facing a real threat.
Why didn’t Blockbuster launch a copycat of Netflix—a mail-order ser-
vice of its own? Actually, it did. Once the threat of Netflix’s service was clear, 
the retailer tried to launch its own mail-order service. The hurdles it faced 
could have been predicted, though, by looking at the differences between 
the two companies’ value networks. One difference was the pricing model 
(subscription pricing vs. per product fees)—but that was easy enough for 
Blockbuster to simply adopt as part of its copycat effort. The next difference 
was Netflix’s website and recommendation engine. Although Blockbuster 
could build an e-commerce website, it lacked the massive data sets as well 
as the sophisticated technology assets to provide movie recommendations 
as good as Netflix’s. Another difference was Netflix’s sophisticated ware-
house and mail distribution system. With great expense, Blockbuster was 
able to build one of its own. But, critically, Netflix had spent years care-
fully iterating and optimizing every aspect of its mailing system (includ-
ing the precise shape and size of the mailing envelopes and DVD sheaths) 
to allow for maximum automation, minimum errors, the fastest possible 
turnaround, and minimal cost. It was possible for Blockbuster to replicate 
the delivery service—but not at the same price and with the same profit 
margins. Lastly, a huge difference was that Netflix lacked the overhead costs 
of running 9,000 retail stores. In the end, Blockbuster was able to offer a 
roughly comparable value proposition to customers for a while, but it could 
not do so profitably at the same customer price. After years of rapid decline, 
Blockbuster closed its final 300 stores in 2014.

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