In honor of Netflix’s big beat today in the very unfortunate age of COVID-19, I decided to revisit my four-part Bazaarblog series while I was CEO of Bazaarvoice (from our inception in 2005 to our IPO in 2012). The name of the last part? “Netflix vs. Blockbuster: Round Four (Lights Out?)”
First, just to provide a foundation here, Bazaarvoice was named after Chapter 4 of “The Cluetrain Manifesto” (available for free online), “Markets Are Conversations”. I still think it is the best chapter of any book on marketing that I’ve ever read. Bazaarvoice, literally translated, means “the voice of the marketplace”. I told the story about how Brant Barton, my Bazaarvoice co-founder, and I picked the name in Chapter 7 of my book “The Entrepreneur’s Essentials” (also available for free online). Do yourself a favor and read “Markets Are Conversations” if you never have - it was amazingly prescient.
Second, when Brant and I founded Bazaarvoice there were only three retailers in the US with customer reviews. Bazaarvoice grew to thousands of retailers and brands (i.e., suppliers to retailers, such as P&G) around the world and in 40 international languages. We became a global company and it was truly an entrepreneurial dream come true for Brant, our team, and me. For the past four years, I’ve been creating a new dream alongside Bryon Jacob, Jon Loyens, and Matt Laessig (and a truly incredible team of 60 now) by building data.world and our growth has only accelerated in this age of COVID-19. But I digress. The point is that we were initially searching for the answers at Bazaarvoice - what was going to really make social work in an eCommerce environment. We were determined to pioneer the new category of social commerce (and speaking of creating categories, “Play Bigger” is an amazing book).
Outside of “The Cluetrain Manifesto”, the book “The Ultimate Question” held clues. One of the big learnings: bad profits drove bad word of mouth. And Blockbuster was the ultimate manifestation of bad profits with their late fees. Netflix’s initial marketing campaign? “The end of late fees.”
Outside of Netflix’s big beat today, why bring this up now? Because whomever is living on bad profits in this environment, when 22m Americans have already lost their jobs, is going to really regret it. New businesses will be built during this time and will become the next behemoths as the market eventually recovers. And if you are an entrepreneur in search of a business idea, search for businesses that are in huge markets that are dependent on bad profits. Your initial marketing campaign could simply be, “The end of [insert bad profit source here]”, and you may indeed become the next Netflix and whomever your target is may become the next Blockbuster. Ah, I wish it were that easy - it is going to take terrific execution and financial backers too.
Ok, so here is the entire four-part series. I edited these a bit to make them slightly shorter without losing the key lessons. Remember as you read this that it is a time capsule. Back in 2006, the only way to rent from Netflix was by mail, where you received a DVD in the mail and you could only have a certain amount of them checked out at the time (I believe we had a subscription that allowed us to have three out at a time.) And, very interesting, this series extended into the Great Recession as I wrote Round Four and here we are again in the unfortunate age of COVID-19.
Bad Profits and the Incredible Power of Word of Mouth (published on Feb. 19, 2006)
Blockbuster is traded on the NYSE under the ticker symbol BBI and is a 21-year old company with 8,500 stores located in 29 countries. Netflix is traded on NASDAQ under the ticker symbol NFLX and is an 8-year old company with one website and 37 shipping centers in the U.S. As of Friday, Feb. 17, Netflix was worth $1.36 billion and Blockbuster was worth $0.73 billion, or roughly half of the value of Netflix. Huh?! Well, just as Google is worth $109 billion while General Motors is worth $12 billion, there is an explanation for this apparent craziness. And it has to do with word of mouth and what Fred Reichheld calls "bad profits."
Fred Reichheld, the founder of Bain & Company's Loyalty Practice and the author of "The Ultimate Question: Driving Good Profits and True Growth", describes bad profits as a company's Achilles' heel. There are many examples of bad profits and you and I have experienced them. Your hotel phone bill being bigger than your room bill. A $35 returned check fee from your bank. Your cellular phone company giving their best prices to new customers and not to you. Airlines charging you a $100 change fee when there is plenty of availability on the flight. Rental car companies charging you 300% more for gasoline than the nearest gas station. And, of course, Blockbuster charging you excessive late fees.
I was a Blockbuster customer for many years. You could even say that I was a loyal Blockbuster customer. But I always hated Blockbuster's excessive late fees. I remember driving to the local Blockbuster only one hour late and getting that sinking feeling in the pit of my stomach. Avoiding that feeling served as a deterrent to me renting movies sometimes. I would tell my wife, "Let's not rent a movie this weekend because I have a busy week coming up and we will probably forget to return it on time." Remember that? I'm sure you have been there.
Bad profits have the direct effect of decreasing customer loyalty. And the Blockbuster name became synonymous with late fees. The power of word of mouth cemented their reputation. But Blockbuster's competitors had similar bad-profit policies, so you learned to live with it. Then in 1998 along came a tiny company in Los Gatos, California named Netflix. Their marketing platform was "abolish the late fees". It worked, big time. Word of mouth spread like wildfire. Blockbuster let them thrive because they earned way too much in bad profits (earning hundreds of millions of dollars per year in late fees) to eat their cash-cow.
How can a company be so oblivious to a small start-up? Well, there are two reasons for that. The first is explained articulately in the book "The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail" by Clayton Christensen. This is one of my favorite business books of all time and perhaps the single most important book for entrepreneurs to read. The second reason is that Blockbuster didn't listen to their customers. They didn't listen to the power of word of mouth. And, as a result, they lost almost 90% of their market value in a little over three years, dropping from around $7 billion in value as of Q2-2002 (only one quarter prior to Netflix going public) to their current value of $0.73 billion.
Blockbuster introduced their "End of Late Fees" program on January 1, 2005. But it was too late and, sadly enough, it was a corporate policy that was not binding on their franchised stores in the U.S. (so only half of the franchisees opted to participate and still half don't to this day). And, outside of the U.S., Blockbuster late fees are still the norm. But none of this really matters. Because the bad-profits damage had been done. The Blockbuster reputation had been solidified. And the corporation continues its death spiral, much to the benefit of the rapidly growing Netflix.
At Bazaarvoice, we are teaching our clients how to listen to word of mouth and harness its power. We often get asked about negative reviews. We view negative reviews as an opportunity for action. Since launching with us, PETCO has done a fantastic job of listening to negative reviews, using them as a call to action by feeding them to their Customer Support department. Imagine how different the outcome may have been for Blockbuster if they had actually listened to their negative word of mouth.
As I travel throughout the U.S. to visit many prospective clients, I hear the new corporate mantra is often "customer centricity". I would argue that negative reviews help companies learn how to be customer centric even more so than positive ones do. In Reichheld's book, he goes on to explain that "the ultimate question" to measure customer loyalty is, "Would you recommend us to a friend?" Reichheld explains that this question probes both dimensions of customer loyalty - the head and the heart. The head thinks best features, best service, and best price. The heart beats they know me, they value me, they listen to me, and they share my values. I think this is brilliant, and our slant on this question today is, "Would you buy this product again?"
Netflix vs. Blockbuster: Round Two (published on Dec. 6, 2006)
Because of the power of negative word-of-mouth, and the ability for Netflix to leverage the "bad profits" that Blockbuster had been collecting from its customers for late fees, round one of Netflix vs. Blockbuster was a total knockout.
Round two is getting a little more interesting, as Blockbuster finally starts to leverage their stores to create a potentially more positive word-of-mouth offering. In today's Wall Street Journal, Blockbuster announced that they are letting subscribers of Netflix rent movies for free through Dec. 21 by simply walking into one of their stores and redeeming the tear-off address flap from the signature red Netflix envelope for the free rental. This is a promotion for Blockbuster's new "Total Access" feature, which lets customers return DVDs rented through its online service, which competes directly with Netflix, in their stores. Blockbuster announced Total Access in the November 1 edition of the Wall Street Journal with the following quote from their CEO: "Customers shouldn't have to choose between renting online versus in-store, and they should never have to be without a movie," said Blockbuster Chairman and Chief Executive John Antioco in a statement. This is a smart strategy as it enables Blockbuster to leverage something Netflix doesn't have - 8,500 stores located across 29 countries. It will ultimately lead to some positive word-of-mouth for Blockbuster, and a new competitive differentiator against Netflix. I, for one, plan to try this out over the holidays as the only downside to my Netflix subscription is sometimes I don't plan far enough ahead to have the movie I want when I want it.
However, it is hard to imagine that this will lead to a long-term competitive advantage for Blockbuster. The next wave that will hit is movie downloading, which will solve the only real challenge Netflix has (the wait time). And Netflix is planning to lead in that wave. Check out Reed Hastings' recent interview on 60 Minutes. And don't get me started on how great of a job Netflix does in creating high switching costs (or "community stickiness") with all of its great ratings and social networking features. Even though I will try Blockbuster again as a result of this promotion, it is unlikely I will dump Netflix.
What is the lesson learned here? Leverage your multichannel assets, like Blockbuster is finally doing, to earn "good profits", especially in the face of a competitor acting on your source of bad profits. This will help offset the negative word-of-mouth that your bad profits have generated with positive word-of-mouth. Also, reducing your sources of bad profits now will help prevent disruptive upstarts in the future. This is much harder to do than it sounds, and the book “The Innovator's Dilemma” does the best job of any I have read in explaining why.
Also, I just saw that Reed Hastings won the "Innovator of the Year Award" from the NRF (National Retail Federation), the parent of Shop.org.
Netflix vs. Blockbuster: Round Three (published on Jan. 17, 2007)
According to TechCrunch, Blockbuster has been very successful with their “Total Access” offering, which I wrote about in my Round Two post on Netflix vs. Blockbuster. Apparently they attacked Netflix where it hurts (the immediacy of movie delivery), and it has resulted in Blockbuster growing their online membership by 700,000 over the last two and a half months to a total of 2.2 million subscribers. Netflix has 6 million subscribers, by comparison.
Since the time I started writing about this in February of last year, Blockbuster is worth close to the same amount as Netflix ($1.25 billion versus $1.56 billion, respectively). Blockbuster’s stock rose from a low of around $3.8/share in late October to today’s $6.57/share. I’m not sure if Blockbuster reads this blog or not, but they did something right! They have added $527 million of market value in the last four months while Netflix has basically plateaued in value over the same time period.
I also wrote about how Netflix would eventually launch digital streaming of movies, which would change the game yet again. That would take away the only serious deficiency Netflix has versus Blockbuster - again, the immediacy of movie delivery. What I didn’t imagine is that it would happen so quickly. The Associated Press had a great story on Netflix’s new “Watch Now” feature yesterday. One thousand movies and TV shows are available to 250,000 subscribers (for free) and they will be rolling this out to an additional 250,000 each week through June. And Netflix is spending big money on this: $40 million to cover the licensing and overhead costs, which will cost them greatly at their current operating profit of $17 million per quarter (compared to Blockbuster’s $1.9 million).
There is a lot of speculation by individual investors about the two giants battling it out, and a great deal of trading volume. I have to wonder if Netflix made this move not just because of Blockbuster but based on Apple’s recent announcement of the Apple TV.V Apple has been a huge catalyst for digital music downloads due to the viral success of the iPod. If Apple TV is executed well, it will become a similar catalyst for digital movie downloads, and Netflix will be well positioned versus Blockbuster. Netflix’s recent move is a difficult one for Blockbuster for copy, but Apple’s iTunes may be the real competitor.
There are many word-of-mouth lessons to be learned in watching these two battle it out: Netflix capitalized on the negative word-of-mouth that Blockbuster had generated due to its bad profits - the late fees that we all grew to hate. Netflix’s campaign launch was “the end of late fees” (and that was all they really needed to say due to the bad profits doing most of the talking for them). Netflix pioneered many social networking and community features along the way, including ratings and reviews and great collaborative filtering (i.e., a recommendation engine). It takes Blockbuster no less than four and a half years (during which Netflix’s value grew eight-fold) to battle back due to the inertia caused by them being a franchise and not wanting to kill their most lucrative profit source (late fees). Blockbuster’s campaign slogan for “Total Access” is “never be without a movie”. It takes Netflix only four months to launch “Watch Now” and aggressively start rolling it out to (presumably) its best customers first to stop them from leaving to go to Blockbuster (or, alternatively, movie download sites like Amazon, Unbox, CinemaNow, Movielink, or iTunes (once Apple TV is launched).
I look forward to seeing how the rest of this movie plays out. And speaking of video, we are proud to launch online video upload for customer reviews. Many of our clients will be launching video-enabled reviews over the coming months.
Netflix vs. Blockbuster: Round Four (Lights Out?) (published on Mar. 8, 2009, during the Great Recession)
It has been over two years since I last posted on the word-of-mouth lessons learned from bad profits and the battle of Netflix vs. Blockbuster. I wrote a series of three posts on the subject, on Feb. 18, 2006, Dec. 6, 2006, and Jan. 17, 2007. Yahoo! Finance tells a dramatic story since then. Blockbuster's total market cap, as of the close of trading on Friday, is $73.25 million. Netflix, by comparison, is worth $2.24 billion. Netflix is worth more than 30 times what Blockbuster is worth! And to think that just two years ago, Blockbuster was worth the same as Netflix, based on Blockbuster's launch of “Total Access”
The lessons of bad profits apply more today than ever. The psychological cost of buyer's remorse is the highest it has ever been, with U.S. unemployment now at 8.1% (and California's unemployment rate at 10.1%). Unfortunately, our entire global economy has been significantly challenged by bad profits, mostly stemming from financial firms' overly engineered and incredibly complex derivative trading products based on mortgage-backed securities to Madoff's actions that will fundamentally change regulation of the entire hedge fund industry. We will persevere, as we always have, but the costs of bad profits will hopefully be remembered like never before, especially as we live in this age of global connectedness and word of mouth transparency.
Thibault Penin via Unsplash