New Business Models

After years of declining revenue and the rise of several innovative competitors, Blockbuster, which had been the long-time market leader in the movie rental industry, had collapsed. James F. Keyes, Blockbuster’s CEO since 2007, had seen the writing on the wall for several years. Rapid technological change had provided inroads for competitors with distinct cost advantages and unique value propositions unmatched by Blockbuster. Upon joining the company, Keyes moved quickly to improve the in-store experience for customers, leveraging Blockbuster’s historic core competency. But new business models launched by competitors Netflix, Redbox,, and others left the box store looking like a high-cost modern artifact. Blockbuster’s bottom line was left bleeding in the face of plummeting revenues, and Blockbuster filed for Chapter 7 bankruptcy protection in 2011. Coming out of bankruptcy, Blockbuster tried to mimic or beat competitive offerings by Redbox, Netflix, and Amazon by growing its kiosk rental business, allowing mail-order DVD rentals to be returned by mail or at the store, and introducing Direct Access, or in-store access to mail inventory.1 But it was too little, too late. Dish Network finally stepped in to purchase Blockbuster’s assets for $320 million in 2012, but it appeared that Blockbuster had lost its death match with smaller, more nimble competitors, armed not with slings and stones, but with kiosks and broadband.

History of the Home Video Entertainment Industry

When the first motion pictures were released in the early 1900s, there was only one way to view them—at a theater. It wasn’t until television became popular in the 1940s and 1950s that people could watch some movies at home, although viewing was subject to the schedules of the television networks.
In 1975, Sony introduced its Betamax video cassette recorder (VCR) to the American public. This was closely followed by Panasonic (formerly known as Matsushita) launching a Video Home System (VHS) VCR, which was then licensed to many companies, including Philips, GE, and RCA. These products could record and play movies, but they were expensive, selling for roughly $1,000 in 1977.2 In December 1977, the first video rental store, Video Cassette Rentals, opened its doors, offering both VHS and Betamax videos. Customers joined as “members” for a fee of $50 per year (or $100 for a permanent membership), and then paid $10 to rent each video.

Soon afterward, video rental stores began cropping up all over the United States, and more and more studios began to enter the home video market.3
The adoption of the VCR by the American public was slow at first. In 1980, only 1.1 percent of US households had a VCR. By 1985, that number had grown to 20.9 percent of US households.4 By the end of the decade, VCR penetration was at 68.6 percent,5 and the price of an average VCR had dropped below $400. As the number of VCRs increased, so did the number of video rental outlets. George Atkinson launched a chain of stores called Video Station, which quickly grew to become the market leader, with a total of 500 stores by 1984. But Video Station was soon challenged by Blockbuster, a video rental chain that opened its first stores in 1985. In 1987, Blockbuster acquired the chain Movies to Go, bringing its total number of stores to 67. During the next two years, Blockbuster grew rapidly through franchising. By 1989, Blockbuster was the largest video rental outlet in the country, with more than 1,000 stores, and it had begun to expand into overseas markets.6 Hollywood Video opened its doors in 1988, following a growth strategy similar to Blockbuster’s. It quickly became the second-largest video rental franchise in the United States.
Box rental stores continued to proliferate through the early 1990s, with no apparent technological or competitive threats in sight. Then, in late 1995, a consortium of electronics manufacturers developed the digital versatile disk (DVD). The technology was introduced to the United States in 1997, and by mid-1998, Netflix had launched the world’s first online DVD rental service. Later that year, Amazon opened the first online video store, offering 60,000 titles for purchase, including 2,000 DVDs.7 During this time period, the technological landscape continued to evolve, and in 2002, MGM became the first major studio to allow online pay-per-view consumption.8 Redbox launched the same year, with its kiosks providing head-to-head competition with Blockbuster’s 5,566 domestic box-stores.9 In 2003, the year Netflix surpassed 1 million subscribers, annual DVD rental revenue surpassed annual VHS rental revenue for the first time.10
In 2004, CinemaNow was the first company to introduce a service that allowed customers to purchase and download digital movies for unlimited viewing. By 2005, Apple had launched online digital video services, a move followed by Microsoft and Amazon the next year.11 Viewing quality technology took a leap forward in 2006 with the introductions of high-definition (HD) DVD and Blu-ray. In the same year, PlayStation3 became the first gaming console to feature an HD DVD player. Online providers followed suit, increasing video quality as bandwidth became more widely available.12
The next several years brought a rapid contraction of the physical DVD and VHS rental markets as cost-efficient competitors (most notably Netflix DVD and Redbox) grew, and online content providers lured viewers away from physical rental. Between 2006 and 2013, the physical DVD rental market dropped from $10.7 billion to $4.5 billion.13 During the same years, total physical DVD-rental industry employment plunged from 141,000 to 55,000.14 The growth of online content providers threatened to further shrink the physical rental market.
The battle for the growing online market continued to unfold in 2013. Facing continued growth of Netflix’s online streaming business, Redbox and Verizon partnered to launch their own streaming service called Redbox Instant. In similar fashion, NBC and Fox joined forces to launch Hulu, offering free, ad-supported viewing, and later launching a premium subscription service to rival Netflix’s streaming service. In 2013, both Netflix and Hulu began offering original content, a move highlighting the important and sometimes tenuous relationship between content providers and distributors.
Throughout the history of the home entertainment industry, content producers had held significant supplier power. Producers, who owned the content rights to their movies, held the power to negotiate hard contract terms with distributors. Additionally, content producers, like consumers, showed little loyalty to specific distributors, switching channels and partners to maximize profits as the technological landscape shifted. For example, in 2007, NBC and Fox, who were key content providers with their Hulu partnership, showed a willingness to sidestep outside distributors altogether in favor of direct, cost-effective online distribution.
Netflix’s decision to produce and distribute its own originally produced shows—such as political drama House of Cards, comedy-drama Orange Is the New Black, and historical drama

The Crown—was a move to weaken the power of content producers and differentiate its offering from competitors. The initial results from these shows—in terms of positive feedback from consumers and advertisers—have been positive. The battle between content producers and distributors continues to significantly shape the competitive industry dynamics.

Major Players
During the history of the home video industry, several players have entered with innovative business models that have changed the competitive landscape. Leaders have been Blockbuster, Netflix, Redbox, Apple, Microsoft, Amazon, and Hulu. A look at each provides insight into the industry’s rapidly changing dynamics and the strategies and business models deployed by its strongest players.

The first Blockbuster store opened in Dallas, Texas, in 1985. The store was successful, which prompted Blockbuster to open several more stores in the area and eventually a local ware- house to provide and manage inventory. Taking a lesson from his previous experience in data- base management, Blockbuster’s founder, David Cook, designed the warehouse to efficiently stock a selection of titles customized to each store according to its local demographic. This innovation brought a convenient, customized choice of VHS titles to customers in the exciting new arena of home entertainment.15
The company decided it could grow more quickly if it pursued a franchise model like the one used by McDonald’s and many other fast food giants. With a franchise model, individuals in different cities and regions paid an upfront franchise fee (anywhere from $200,000–$400,000),16 which gave them the right to own and operate a Blockbuster store at a specific location. In addition to receiving the fee, Blockbuster received an ongoing percentage of revenues gen- erated from each store. Although the franchise model meant that Blockbuster had to share profits with the franchisees, it allowed Blockbuster to grow at a much faster rate than would have been possible if Blockbuster had tried to finance and build all of its stores.
After a period of strong financial performance, Blockbuster was acquired by John Melk and Wayne Huizenga, a successful entrepreneur who had founded Waste Management and AutoNation. Huizenga became CEO and grew the business aggressively, both organically and through the acquisition of key competitors, including a 250-store buyout of mid-Atlantic rival Erol’s.17 Pushing into international markets, Blockbuster purchased the 875-store Ritz video chain of England in 1989. In 1991, Blockbuster entered the Japan and Australia mar- kets through a mix of partnerships and acquisitions.18 By the early 1990s, Blockbuster had come to dominate the home video rental market in the United States, with more than 3,500 stores around the country.19 (See store growth in Exhibit 1). Each store carried more than 1,000 different movie options. Blockbuster needed to make this large investment in stores and inventory in order for customers to be able to conveniently find a store—and a desirable movie to rent.
Blockbuster’s growth often came at the expense of traditional mom-and-pop video stores that found it hard to compete on selection and price. Customers often preferred the consis- tency of experienced, well-trained employees, as well as the variety of locations offered by Blockbuster compared to smaller stores and franchises. Blockbuster quickly discovered that it didn’t make money from the videos sitting on the shelves. It needed to get customers to rent the DVDs and return them as quickly as possible so Blockbuster could rent them to another customer. To encourage customers to return DVDs quickly, it charged late fees. These fees were unpopular with customers, but Blockbuster couldn’t make money if it didn’t get the DVDs back quickly. This pain point would later pave the way for industry disruption through Netflix’s subscription-based model.

EXHIBIT 1 Number of Blockbuster Stores over Time
Blockbuster Stores
Year Company-Owned Franchised Stores Total
1990 928 654 1,582
1996 4,472 845 5,317
2000 6,254 1,423 7,677
2005 7,158 1,884 9,042
2010 4,322 1,022 5,344
2011 n/a n/a 1,500
2012 n/a n/a 575
Source: Public filings; K. Peterson, “More Blockbuster Stores Closing,” Financial information for video rentals is not available for Amazon, Apple, Hulu, or Microsoft.

Blockbuster continued to win market share and was acquired for $8.4 billion by Viacom in 1994. It was only two years later, however, that the company’s market value plummeted to an estimated $4.6 billion because investors were losing confidence and sales were beginning to slip.20 Blockbuster split from Viacom in 2004 and launched Blockbuster Online to compete directly with Netflix’s subscription business. Carl Icahn joined the board in 2005 and began a tenuous relationship with then-CEO John Antioco, who left the firm in 2007.21 Blockbuster’s market value had fallen to approximately $850 million by late 2005.22 After Antioco’s exit, new CEO James Keyes launched initiatives to return the focus to the in-store retail experience. The efforts proved insufficient to turn around the company, which lost $3.8 billion between 2003 and 2010. PricewaterhouseCoopers issued a statement in 2010 expressing doubt that Blockbuster could continue as a growing concern. Blockbuster filed for Chapter 11 bankruptcy that September, citing competition from Netflix and Redbox as the cause of plummeting reve- nues and its inability to service its $900 million worth of debt.23
Despite its struggles, Blockbuster remained the market leader in the movie rental industry, serving 47 million customers daily in 18 countries. In 2010, however, it lost $20 million fol- lowing a $310 million loss the year before.24 Lacking the resources to continue restructuring, Blockbuster moved toward Chapter 7 bankruptcy and liquidation in 2011. James Keyes’s bold efforts to increase revenues, improve the customer experience, cut costs, and imitate competitive offerings proved to be too little, too late. Soon after, Dish Network acquired Blockbuster for $320 million. In early 2012, Dish announced that 90 percent of the remaining stores would stay open and continue to rent DVDs and games, while adding sales of wireless products that could be used to stream Blockbuster movies. Dish had initially announced plans to reshape Blockbuster into a head-to-head competitor with Netflix, but it retracted those plans in late 2012.25 At the time of the 2011 bankruptcy filing, Blockbuster was operating a total of 5,220 company stores worldwide,26 a number that fell drastically through the bankruptcy and Dish acquisition process. In November 2013, Dish announced it would close the remainder of its Blockbuster stores and shut down the Blockbuster By Mail service, but the streaming service Blockbuster On Demand would remain intact, and Blockbuster franchises and licensed stores in the United States and internationally would stay open.27

Reed Hastings launched a company aimed at fulfilling his dream of building the world’s best Internet movie service. The company was incited in part by a $40 late fee charged to Hastings for the video rental of Apollo 13. Inspired by his vision and fueled by his frustration, Hastings created Netflix and the company’s innovative subscription-based rental model that has revolu- tionized the way many people consume home entertainment.28

Netflix’s model was simple: Customers paid a monthly subscription fee for unlimited mail-order DVDs plus unlimited online streaming. Initially, Netflix offered eight subscription plans ranging in price from $8.99 per month to $47.99 per month that allowed customers to rent one to eight DVDs at a time. With a subscription, customers could enjoy unlimited rentals without due dates, late fees, shipping fees, or per-title rental fees. DVDs could be conveniently selected, received, and returned without ever having to walk farther than the mailbox.29
Netflix’s business model was revolutionary. Whereas box-shop competitors such as Blockbuster moved titles from warehouses to store to customer, Netflix shipped directly from the warehouse to the customer. This model eliminated the need for brick and mortar stores, simplifying the value chain, and it allowed Netflix to cut costs and pass the savings on to cus- tomers. In 2010, Netflix’s general and administrative costs represented only 3 percent of total revenue, compared to 52 percent for Blockbuster, a cost primarily related to store labor and leases. (See Exhibit 2 for a full income statement).30 Netflix’s low fixed asset requirement allowed capital to be spent elsewhere, such as on expanding content, which furthered its advantage over the box-shop business model.
From the customer’s perspective, the downside of renting movies over the Internet was that you had to plan ahead—no impulse movie watching. You couldn’t just pop over to the Blockbuster store and grab a movie to watch. But the upside was the ability to access 90,000 movies shipped from 50 warehouses around the country—warehouses strategically placed to ensure most customers got their orders within two days. This business model gave customers many more movie options to choose from. Offering customers a large selection of DVDs was fundamental to Netflix’s strategy. Titles included new and old Hollywood releases, classics, independent films, documentaries, and TV shows. Netflix invested heavily to maintain a diverse

EXHIBIT 2 Financial Information for Selected Years for Blockbuster ($ millions)
Fiscal Year 2010 2005 2000 1993
Income Statement Items
Revenues $2,125.9 $5,721.3 $4,960.1 $2,227.0
Cost of sales $884.8 $2,564.0 $2,036.0 $430.0
G&A expenses $1,116.8 $2,724.1 $2,174.0 $178.0
Advertising $50.5 $252.7 $215.3 $50.8
Depreciation & amortization $76.1 $226.6 $459.1 $396.1
Operating profit $(2.3) $(388.0) $75.7 $423.0
Interest expense $94.3 $98.7 $116.5 $33.8
Income taxes $7.4 $63.3 $45.4 $146.2
Net income $(268.0) $(588.1) $(75.9) $243.6
Balance Sheet Items
Cash and cash equivalents $146.5 $276.2 $194.2 $95.3
Merchandise inventories $242.4 $310.3 $242.2 $350.8
Rental library, net $269.1 $475.5 $646.7 $470.2
Property & equipment, net $165.5 $723.5 $1,079.4 $522.7
Total assets $1,183.5 $3,179.6 $8,548.9 $3,521.0
Current liabilities $562.3 $1,317.9 $1,123.2 $643.2
Total liabilities $1,735.5 $2,548.0 $2,540.5 $1,297.6
Total equity $(552.0) $631.6 $6,008.4 $2,123.4

Source: Blockbuster SEC filings. In 2011, Blockbuster filed for bankruptcy protection and was subsequently purchased by Dish Network.

selection and to gain early access to new releases, partnering with content providers through direct purchases, revenue-sharing plans, and licensing agreements.
Because Netflix customers paid a monthly fee, the company’s business model made profits in a manner opposite to Blockbuster’s. Netflix made more money when customers didn’t watch the DVDs they ordered. As long as the DVDs sat unwatched at customer’s homes, Netflix didn’t have to pay return postage or mail out the next DVD. Because Netflix didn’t have to build stores, hire sales clerks, or buy a huge inventory of DVDs to put in each store, it had more than a 30 percent cost advantage over Blockbuster. It was able to share some of this cost advantage with customers in the form of lower prices, and keep some of this advantage in the form of higher profits. With a solid value proposition and low costs, Netflix grew quickly, breaking 100,000 subscribers in 1999, renting its one-billionth title in 2007, and climbing to more than 35 million subscribers by 2012 (see Exhibit 3).31
To support the growth, Netflix built more than 50 high-efficiency distribution centers and 50 additional shipping points, placing 97 percent of the company’s customers within a one-day shipping reach. From 2008 to 2012, Netflix experienced a compound annual growth rate (CAGR) in revenues and gross profit of 21.5 percent and 16.7 percent, respectively (see Exhibit 4). Fol- lowing its IPO in May 2002, the company’s market value was approximately $300 million.32 That value rose to $1.5 billion by the end of 2005 and $9.3 billion by the end of 2010. Following a drop to $5.1 billion in December 2012, which was attributed to a loss of customers when Netflix split its streaming service from its DVD mail service, the market value recovered in January 2013 back to $9.3 billion.33
As Netflix grew, it signed larger traditional licensing agreements and began offering new types of content. In 2010, Netflix announced a $1 billion partnership with Paramount Pictures, MGM, and Lions Gate Entertainment to continue content delivery to its expanding customer base.34 And Netflix began creating its own content (House of Cards, Orange Is the New Black, 13 Reasons Why) in 2013 in a bid to compete with cable and network television. By mid-2013, several Netflix series had received Emmy nominations for original, online-only, and Web television.I By 2017 Netflix offered 27 original programs, more than any other competitor, to drive customers to its streaming service.35

Redbox launched in 2002 as a venture initially funded by McDonald’s. McDonald’s was an early investor because it saw the potential of video rental kiosks, as well as McDonald’s stores as a key distribution channel. Redbox’s innovative strategy centered on a distribution network of low-cost, self-service vending kiosks. The kiosks allow customers, with a swipe of their credit card, access to a limited selection of the hottest new releases for $1.20 per night ($1.00 per night for the company’s first eight years). A customer can return the title the next day or keep it,

EXHIBIT 3 Growth in Netflix Subscribers
Netflix Subscribers
Year Total subscribers (000’s)
2000 292
2005 4,179
2010 20,010
2011 26,253
2012 35,489
Source: Netflix public filings.

IB. Stelter, “Netflix Does Well in 2013 Primetime Emmy Nominations,” July 18, 2013. 2013/07/18/watching-for-the-2013-primetime-emmy-nominations/?_r=0

EXHIBIT 4 Netflix Financials ($ millions)
Fiscal Year 2013 2012 2011 2010 2005 2001
Income Statement Items
Revenues $4,374.6 $3,609.3 $3,204.6 $2,162.6 $682.2 $74.2
Cost of revenues $3,083.3 $2,625.9 $2,039.9 $1,357.4 $465.8 $49.9
Operating expenses
Technology and development $378.8 $329.0 $259.0 $163.3 $35.4 $17.7
Marketing $3,083.3 $2,625.9 $2,039.9 $293.8 $144.6 $21.0
General and administrative $180.3 $139.0 $148.3 $70.6 $35.5 $4.7
Gain on disposal of DVDs $(6.1) $(2.0)
Operating income $228.3 $50.0 $376.1 $283.6 $3.0 $(37.2)
Interest expense $29.1 $20.0 $20.0 $19.6 $407.0 $1,852.0
Income tax $58.7 $13.3 $133.4 $106.8 $(33.7)
Net income $112.4 $17.2 $226.1 $160.9 $42.0 $(38.6)
Balance Sheet Items
Cash and cash equivalents $605.0 $290.3 $508.1 $194.5 $212.3 $16.1
Current content library, net $1,706.4 $1,368.2 $919.7 $181.0
Content library, net $2,091.1 $1,506.0 $1,046.9 $181.0 $57.0 $3.6
Property and equipment, net $133.6 $131.7 $136.4 $128.6 $40.2 $8.2
Total assets $5,412.6 $3,967.9 $3,069.2 $982.1 $364.7 $41.6
Current liabilities $2,154.2 $1,675.9 $1,225.1 $388.6 $137.6 $26.2
Total liabilities $4,079.0 $3,223.2 $2,426.4 $691.9 $138.4 $30.3
Total equity $1,333.6 $744.7 $642.8 $290.2 $226.3 $(90.5)
Source: Netflix SEC filings and Annual Reports.

with daily rental charges accruing until the customer owns the DVD outright after 25 days. The kiosks are placed in high-traffic locations to encourage impulse rentals and to make planned rentals as convenient as possible. Retailers are incentivized to place kiosks by receiving a share of revenue, which is typically based on the retailer’s appeal (e.g., Walmart receives a larger share than a mom-and-pop store).
The customer rental experience was kept simple and convenient. The selection process is simplified by the limited choice of titles (70–200 at most locations), all of which are prominently displayed on each kiosk. Redbox’s nonsubscription model allows customers to rent without the hassle of paperwork or membership fees. DVDs can be returned to any kiosk, adding a final touch of convenience to the rental process.
Redbox grew quickly from 2003 to 2005, adding more than 1,100 kiosks throughout the United States.36 In 2005, Coinstar paid $32 million to acquire 47 percent of the company, and four years later, it purchased the remaining equity from McDonald’s for approximately
$170 million.37 Redbox’s low-cost kiosks model allowed rapid expansion, and by 2012, the company had 43,700 kiosks (see Exhibit 5). The average cost of a Redbox kiosk was only $15,000 with an additional $6,720 for DVD costs to initially fill the kiosk.38 With Redbox fully onboard, Coinstar’s market value rose from an estimated $800 million in late 2009 to a peak of $2.1 billion in mid-2012 (see Exhibit 6).39
By 2012, 68 percent of the US population lived within a 5-minute drive of a Redbox kiosk,40 and the company controlled 47.8 percent of the physical rental market.41 Redbox’s footprint continued to grow throughout the United States and Canada, with almost 44,000 kiosks in

EXHIBIT 5 Growth in Number of Redbox Kiosks
Year Total kiosks
2002 12
2005 1,200
2010 30,200
2011 35,400
2012* 43,700
*Excludes kiosks and the impact of kiosks acquired as part of the NCR Asset Acquisition.
Source: Public filings (included in Coinstar Inc. filings), www

EXHIBIT 6 Redbox Financials ($ Millions)
Fiscal Year 2013 2012 2011 2010 2009 2008
Income Statement Items
Revenue $1,974.5 $1,908.8 $1,561.6 $1,159.7 $773.4 $388.5
Direct operating expenses $1,383.6 $1,340.9 $1,134.2 $859.8 $585.2
Marketing $23.0 $20.5 $22.0 $14.2 $8.2
G&A $166.1 $159.9 $120.4 $94.9 $78.5
Operating income $239.0 $238.7 $169.5 $190.9 $101.6 $50.2
Balance Sheet Items
Total assets $1,896.7 $1,561.7 $1,450.8 $561.2 $468.9 $378.1
Source: Outerwall SEC filings.

operation in 2012 and more planned. This vast network of kiosks was enabled by a network of regional operations supervisors who were responsible for the maintenance and operation, including stocking, of all kiosks in their assigned geographic regions.42
Redbox partnered with Verizon in 2013 to launch a video-streaming service called Redbox Instant, which was similar to the one offered by Netflix. For $8 per month, customers enjoy unlimited streaming of more than 4,600 titles and up to four disk rentals from kiosks. The ser- vice is offered through Android and iOS mobile apps and on Xbox and PlayStation 4 gaming platforms.43 Redbox Instant, however, lasted for less than two years and was shut down in Octo- ber 2014. As streaming continued to be a substitute for physical DVD rentals from its Redbox kiosks, Redbox launched its second attempt at streaming, with Redbox Digital, in early 2017. However, it remained unclear how Redbox Digital would successfully compete with Netflix and other streaming competitors.

Apple, Amazon, and Microsoft: Internet Video on Demand
Beginning in the mid-2000s, Apple, Amazon, and Microsoft began to leverage their online capabilities and customer bases to win a share of the video on demand (VOD) market. VOD allows customers to rent titles for a single viewing or unlimited viewings within a specified time period (often 24 hours). Pay-TV operators, such as Comcast and Direct TV, traditionally controlled this market, but their stronghold began to erode with the rise of Internet video on demand (iVOD) beginning in 2005. Despite rapid growth of the iVOD segment, Pay-TV operators maintained a 72 percent share of the VOD market in 2012. The balance of the market was split between electronic sell-through (EST), or the digital download and ownership of titles, which comprised 16 percent of the market, and traditional iVOD, with a 12 percent share.44
The EST market had been dominated by Apple, which held a 65 percent share in 2012, with Microsoft controlling a growing 10 percent of the market, and other players including Sony, Amazon, and Walmart. Meanwhile, the iVOD market had been more fragmented, with Apple commanding a 45 percent market share in 2012, followed by Amazon at 18 percent, and other players, including Walmart (through Vudu) and Microsoft (through Xbox video).45 Apple began offering videos through the iTunes music store in 2005, with a narrow selection of TV shows and music videos. One year later, Apple added more than 500 TV shows and began offering movies for download, with prices ranging from $9.99 to $19.99. Apple launched its iVOD service in 2008, allowing customers to rent through iTunes for as little as $0.99 per title. Microsoft launched an iVOD service through its Xbox platform in 2006, offering rentals for $2 to $6. Original content was provided through partnership with several studios, including CBS, MTV, and Paramount Pictures.
Amazon followed suit in 2006 with its own iVOD service called Unbox, which was later rebranded as Amazon Video on Demand and then Amazon Instant Video. Amazon pursued a broad selection of movies and, by 2008, offered 5,000 titles as compared to Apple’s selection of 800. In 2011, Amazon began including 5,000 streaming movies and TV shows as a part of its Amazon Prime Membership.46 The offering had grown to 40,000 titles by 2013. Amazon’s VOD services allowed customers to pay and view movies individually or to gain unlimited access to a library of content through an annual membership to Amazon Prime, a bundled service package costing $79 each year, which also included free 2-day shipping on purchases and access to thousands of Kindle eBooks. However, Amazon Prime members were still required to pay a separate rental fee for newer popular titles. In this way, Amazon straddled the subscription- based approach of Netflix, while at the same time offering the more flexible membership-free approach of competitors such as Apple.47 Following Netflix’s lead, Amazon jumped into original programming and by early 2017 had a dozen original programs, including Mozart in the Jungle, Sneaky Pete, and Transparent.
EST and iVOD offered distinct value propositions and cost advantages that further dis- rupted the home entertainment industry. EST allowed consumers to purchase videos for unlimited views from the comfort of home, conveniently storing the titles to hard drive or in the cloud. iVOD combined the streaming benefits of Netflix with the financial simplicity of Redbox, allowing home streaming of a range of titles with no subscription required. Both services elim- inated the need for physical DVDs and physical distribution channels.

In a move to connect content providers directly to online consumers, NBC Universal and Fox launched a joint venture in 2007 to offer aggregated, ad-supported streaming online content.48 The deal was backed by Providence Equity Partners, which took a 10 percent stake for $100 million, valuing the company at $1 billion. 49 After a period of development, beta testing, and branding, Hulu launched in the US market in March 2008. NBC used its existing channels to advertise the service, including a spot in its Super Bowl broadcast in February 2009. That spring, Disney joined the venture, committing a significant amount of content and taking a 27 percent equity stake.50
Hulu reached profitability in 2010 and continued rapid growth, with 900 million monthly streams in January, which was triple the figure from a year before. By 2010, Hulu offered content from more than 200 providers, each earning from 50 percent to 70 percent of content- generated ad revenues.51 Hulu’s total revenues reached $420 million in 2011 (see Exhibit 7), fueled in part by a rapidly growing paid subscription service—Hulu Plus. Hulu Plus offers cus- tomers access to a broad range of premium, though still ad-supported, content for $7.99 per month. Additionally, Hulu Plus customers gain early access to content and are often able to view content within a day of its original broadcast, compared to a week or more for free cus- tomers. By the end of 2011, the service boasted more than 1.5 million subscribers with a rapid growth trajectory.52

EXHIBIT 7 Hulu Financials ($ Millions)
Fiscal Year 2013 2012 2011 2010 2009
Revenues $1,000.0 $695.0 $420.0 $263.0 $108.0
Source: Privco,

Mirroring moves from Netflix, Hulu announced that it had ordered its first original series in early 2012. The move both created competitive differentiation and began to decrease Hulu’s reliance on outside content from TV and movie studios, the business’ main cost driver. In 2012, Hulu disclosed it would spend more than $500 million to develop original content by 2017, Hulu had at least nine original series, including The Mindy Project, Casuals, and The Wrong Mans. However, its original series had not received the critical acclaim of Netflix’s original series.53 In 2013, Disney, Fox, and Comcast (the acquirer of NBC) explored options to sell Hulu but opted to keep the company, citing optimism in the developing business model. The networks committed
$750 million of new capital to broaden content offerings and update the platform, positioning the company to compete directly with Netflix for a share of the online streaming market.54

Although James Keyes’s efforts to avert Blockbuster’s demise appeared valiant, they proved no match for the onslaught of technology, value, and convenience offered by its new competitors in home entertainment—competitors with cost structures and competencies specifically devel- oped to support their respective business models. Blockbuster’s attempt to match its competi- tor’s offerings through its Blockbuster Express kiosk business, its mail-order DVD program, and its digital service, Blockbuster On Demand, was too little, too late. The gale of “creative destruc- tion” described by famed economist Joseph Schumpeter, had resulted in new strategies and business models blowing away Blockbuster. Now the new competitors were left to duke it out to see which companies could ride the new wave of innovation and which companies would sink under the wave.
For both Netflix and Redbox, the future of the DVD rental market within the home enter- tainment industry was becoming unclear as more and more content distributors focused on providing downloaded and streaming content. For Redbox, how long would consumers con- tinue to be willing to physically go out and rent a movie or video game from a kiosk? Would the flexibility of Redbox Digital bundling of digital streaming and complementary credits to rent at physical kiosks provide the right value proposition to consumers?
In addition to deciphering the method of delivery, the acquisition and development of content would be another issue facing entertainment distributors. By producing their own content, distributors such as Netflix, Amazon, and Hulu had begun to shift power away from traditional content producers. This upstream expansion into content development had already yielded positive results for each of these companies. Yet, could this threat to producers cause them to more aggressively move downstream into distribution? Could the rise of smaller independent content producers aid distributors in the power struggle against established tra- ditional producers?
Technological advances and innovative business models showed little sign of slowing down in the home entertainment industry. How would the current generation of power players address the competitive forces and disruptive innovations they would undoubtedly face? How would the ever-increasing broadband Internet capabilities, a rapidly growing Internet user base, and technologies yet to be discovered affect these players’ strategic directions? Perhaps most importantly, who could adapt to the dynamic environment, and who would be left to join the many companies that had washed up on the shores of the industry for decades?

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