How Movie Rental Industry Works - Research Paper Example

Service marketing Table of Contents 1. How movie rental industry works 3 2. Key industry statistics 4 3. Market characteristics, size and product/service segmentation: 4 4. Industry conditions and current historical performance: 5 5. Major players and market share: 6 6. Five year industry forecast with forecast analysis 7 7. Marketing Strategies 8 a. 7 P’s of services marketing 8 b. 3 stage model of consumptions: 10 c. Service attributes (search, credence, experience): 12 d. Customer needs and segmentation: 12 e. Risk reduction: 13 f. Perceived value and zone of tolerance: 14 g. Pricing (fixed and variable costs): 15 h. Managing relationships and building loyalty: 15 i. Service Recovery: 16 j. Improving service quality and productivity: 17 k. Service process design: 17 8. References: 19 1. How movie rental industry works The movie rental industry has a simple supply chain. Movie studios like Warner Bros, Universal, Sony etc release DVD’s for the rental stores before releasing it for public at high prices. This is the starting point of the supply chain where DVD’s are made available for the rental stores. These stores then further lent it to the customers. Traditionally customers came to the rental stores, made their selection from the DVD’s available and paid for the DVD’s for a stipulated time period. Customers were charged late fees if they didn’t return the DVD’s on time. Revenues from late fees were roughly 18-20% of the total revenue. The new model of movie rental business is based on online transactions. Companies like Netflix offer movie rental service online. The customers are charged a monthly online subscription fee and they can choose a minimum of four movies at a time. Customers need to arrange them in an ascending order on the basis of the movies they would like to watch first. Based on the priority of the customer, the first movie is delivered and once the movie is returned back to the store, the next movie is immediately dispatched for the customer through postal services (Washington University in St. Louis, Olin Business School). The revenue sharing between the rental companies and the movie studios was initially based on buyers paying an upfront amount in the range of $65 to $70 per tape. Later in 1998 a new contract based on revenue sharing was developed where retailers paid an amount ranging $3 to $8 and shared the revenues earned from renting the movies typically in the range of 45% to 50% (Cabral-a, 2009). 2. Key industry statistics The video rental industry was formed when videocassette recorders entered the market. It was during 1980s that the industry grew rapidly. The video rental industry amounted to $8.1billion and the video sales industry amounted to $9.2billion by 1999. Consumer spending on rentals amounted to $2.4billion, most of which went to film studios. There were around 25000 to 30000 video rental stores out of which 8600 stores were operated by the top ten national rental chains. The rental revenues earned by these 10 national rental chains amounted to $3.9 billion which was approximately 47% of the total share of rental revenues. In 1999, Blockbuster was the leader in rental services in US having 4790 outlets with revenues amounting to $2.4billion which was 30% of the total industry revenues. Hollywood studio followed Blockbuster with 1615 retail stores. Initially most of the movies were sold by the movie studios to the rental stores at $60 to $65 per cassette. This price fell drastically between $10 and $15, when demand for rental movies subsidized. 3. Market characteristics, size and product/service segmentation: In 2004, the size of the movie rental market was estimated to be around $7billion to $9 billion (Serrao-a, n.d.)The per capita expenditure of an American is $160 per month (The Wesa Newsletter). Consumer spending in US on rental services and purchases in 2008 which included DVD’s and Blue ray discs amounted to $22.4 billion. Consumer spending on rentals was $7.5 billion. The relatively stable figures show that renting and buying continues to be one of the key areas of consumer spending (The Digital Entertainment Group). The table below shows the US consumer spending on home entertainment. (Source: The Digital Entertainment Group) 4. Industry conditions and current historical performance: “The Big Screen” has been the only form of watching a movie for a long time. However with the modern technologies like DVD’s and VHS has completely changed the scenario. Moreover even VHS has become obsolete and DVD’s and blue ray discs have become the most dominant form of storing movies. Rentals have emerged as the most popular form of watching a movie for various reasons. The movie rental market can be divided into Physical movie rental market: This consists of in-store, by mail and vending rental market. Digital movie rental market: This consists of digital video on demand, cable operators providing video on demand and subscription video on demand. 5. Major players and market share: In 2004, market share of Blockbuster in US was 40% in the total movie rental market. The sale from videos in 2004 for Blockbuster was approximately $16 billion. Netflix entered the market in 1998 and provided online movie rentals which helped the customers to order movies from home. Netflix’s market share rose from 2% in 2003 to 7% in 2004 (Serrao-b, n.d.). In the period between 2008 and September, 2009 the market capitalization of Blockbuster decreased by 60% which amounted to $233 million, and Netflix’s market capitalization increased by 60% to $2.45 billion. In 2009, Netflix had a customer base of 12.27 million. It added 1.1million customers in the fourth quarter of 2009. The churn rate of its customers reduced from 4.2% in 2008 to 3.9% in 2009 (Bloomberg BusinessWeek, 2010). The share value of Netflix touched the highest point in the first quarter of January, 2010 at $89.10. In the first quarter of 2010, Netflix net income amounted to $32.3 million which was $22.4 million in 2009. It expects to end the year 2010 with a customer base of 16.5 million (Zeidler, 2010). Red Box operated by opening kiosks to rent new released movies. The NPD group reported that the market share of kiosks was 19% in 2009 (Cabral-b, 2009). Netflix and Red Box has adversely affected the business of Blockbuster. Blockbuster would be facing a debt of $390 million in 2012. It closed 374 stores in US in 2009 and 545 more are expected to close this year. It is also planning to file for bankruptcy. Analysts feel that the company is on the verge of dying (Kary, 2010). 6. Five year industry forecast with forecast analysis The online rental industry faces a huge threat from online movie viewers. Internet is expected to penetrate 90% of the households in US by 2012. The number of online video viewers is expected to rise to 94% in 2012 from &&.8% in 2008. By 2012, the revenue from online video globally is expected to be around $4.5 billion. The percentage of consumers who have rented or purchased a video is expected to reach 39% by 2012. It has been found from a survey that 54% of Americans still prefer physical format like DVD and Blue ray discs while purchasing a movie. Movie watching which is considered to be a pastime for the youth is going to make its presence felt among other demographics. This would be prompted partly because of the aging population but more importantly due to word of mouth publicity, growth of new technologies like home entertainment systems which would bring the big screen experience to home, wide distribution of services and high competition. There is also an increasing trend towards buying DVDs from rental kiosks. The market of rental kiosks is expected to grow in the coming years. In addition to the low price, the kiosks also provide 24 hours access to customers which make it a preferred medium of buying DVDs Thus in spite of online video viewers, the market for physical formats through rent or purchases is expected to dominate the industry in the near futur 7. Marketing Strategies a. 7 P’s of services marketing The 7P’s of service marketing and the similarities and differences between Blockbuster, Netflix and Red Box is presented below. Product: The product for all the three companies is providing movie rental service. However there is a difference in the way they provide the service. Place: Red Box operated by setting up kiosks. The kiosks are located at local stores which makes it extremely convenient for buyers to find a movie. It can be found at local grocery stores, Wal-Mart, Kroger etc. Netflix allows the buyers to order their requirement online. The movies are mailed to the buyer by post which eliminates the hassles of selecting, renting and returning the movie to the retailer. Blockbuster on the other hand offered movie rentals through huge superstores. Blockbuster opened 9100 superstores in 25 nations in the first 20 years of its operations. Price: The rental charged by Redbox is $1per day and the buyer is allowed to keep the movie as long as he wants by paying a dollar every day (Ryan, 2010). When this amount becomes equal to the final price of the movie, the buyer is allowed to keep the movie. Netflix charges a monthly subscription of $19.95. In 2003, in order to compete with Netflix, Blockbuster charged a monhly subscription of $ 19.99$ for its online video rental services. It further lowered its price to $14.99 when Netflix was offering their services for $17.99 (Serrao-c, n.d.). Promotion: Blockbuster came up with a new concept of Movie Freedom Pass- a subscription service for online and in-store rentals. It promoted individual movies through its television advertising and shared the expenditure with movie studios. Realizing the inconvenience caused to rental service buyers, they introduced a new slogan “Go Home happy”. Blockbusters logo which was a torn ticket and “Americas family Video store” marketing campaigns gained wide popularity. Blockbuster also came out with game pass subscription and movie passes for its in-store buyers. Similarly Netflix and red Box also offers various deals and discounts to its customers as a means of promotion. Process: Netflix operates through 35 distribution points all across US. It is supported by partnering with postal service companies to reduce the delivery time of DVDs to the customers. Blockbuster operated through 30 distribution centers and 4500 stores in US and delivered the movies to the customers in a time span of a day or two. In addition to this Blockbuster spend $100 million to restructure its business out of which most of the amount was spent on improving information systems to support Blockbusters online rental service. In 2009, Red Box had a transaction rate of 80 per second which shows the effectiveness of its processes. People: People form a very critical element of service marketing. The level of satisfaction of a customer is determined by the behavior of the employees. the top management are people of high intellect for all the three companies. In case of Netflix and Red Box there is not much interaction involved with the customer. However Blockbuster has to maintain a huge pool of human resource in order to run its superstores. Physical evidence: Physical evidence in this case refers to the physical structure of the stores, the way movies are arranged and other physical aspects. Blockbusters stores offer a comfortable, clean family oriented environment for shopping. Netflix does not have any stores, hence their website is of a high quality. The physical evidence for Red Box is its kiosks which easily attract the customers because of the vibrant red color. b. 3 stage model of consumptions: A customer goes through 3 stages before buying a product/service. They are pre purchase, service encounter and post encounter. Pre-Purchase: In case of movie rentals, a buyer first goes through the list of various movies available with the service provider. A buyer is satisfied when he is easily able to find the movie of his choice. All the companies except Red Box have a huge collection of movies as mentioned above. Red Box focuses primarily on new releases. Availability of movies has been a big problem in the movie rental industry where buyers frequently complained of non availability. In 1998, Blockbuster introduced the concept of guaranteed availability of new releases and promoted it through national advertisements and even promised that no rentals would be charged if a guaranteed movie was unavailable at its store. Netflix had a collection of 100,000 DVDs and 1300 Blue-ray discs in 2009 (Cabral-c, 2009). The pre purchase decisions are also affected by how convenient it is for a customer to order the movie. Netflix offered the highest level of convenience because customers could order the movie sitting at his home. Service Encounter: This is the stage where customers actually encounter the service. The satisfaction of a customer in this stage depends on the time taken between ordering and receiving the movie. Netflix delivered movies in a day’s time compared to Blockbusters which took a day or two. In case o Red Box there is no delivery involved because customers has to visit the kiosks. As mentioned above, Red Box was processing 80 customers/ second. Post Purchase: The post purchase satisfaction in this case depends on how easily customers can return the movies to the retailers. Netflix sends envelopes with prepaid postal stamps. A customer just needs to put back the movie in the envelope and drop it at the nearest post box. In case of Red Box, customers could keep the DVD till the time it became equal to the original price of the movie and then own it. The customer had to walk down to the Blockbuster store to return the movie. However unlike in the past, none of the companies charged late fees which increased post purchase satisfaction. c. Service attributes (search, credence, experience): Search quality is something that a buyer can see before purchasing the service. Experience quality can only be understood after the buyer purchases the product. Credence refers to those quality attributes which are difficult to measure. All the three movie rental companies have well designed website from which customers can search the information regarding price, time for delivery and contractual obligations. The experience phase happens after the customer places the order and waits for the movie. The experience is enhances if the quality of the movie is good and it is delivered on time. Credence depends on the customers knowledge about the service. d. Customer needs and segmentation: There are two needs of customers of the movie rental stores. The basic need is to rent a movie of their choice and the second is convenience. The success of a company depends on the collection of movies that it has and how conveniently it is able to deliver the movies to them. All the three companies have been trying their best to improve customer satisfaction by reducing the delivery time and making movies available at their doorsteps. Red Box has its 24 hour vending machines at nearby grocery shops to improve convenience for customers. The buyers of movie rental companies comprise of almost every demographics. Professionals who don’t get much time to watch a movie in the big screen are specifically targeted by the movie rental stores. Cost conscious middle class segment is also a target for these companies. Buyers can be classified into two categories which are: Planned Renters: They are the ones who are specific about the kind of movie they want to rent and watches movies frequently. They are targeted through online services and monthly rental plans. Impulse Renters: They are the ones who rent a movie without prior planning. They are targeted through pay-per-movie in the store rental services (Wang, et al, 2005) e. Risk reduction: There are two major threats for rental movie stores. They are cable on demand and online movie streaming sources. Customers no longer want to wait for a day to receive the movie. Users of Video on Demand services provided by the cable operator along with set top boxes for the televisions can instantly access the movies and watch them in their television sets. The cable operators are planning to offer viewers the option of watching streaming videos on devises connected to the internet. In addition to this Netflix cannot offer new releases before 28 days which may lead to customer dissatisfaction. The rate at which Netflix offers its services is also very less and the viability of the business because of such low rates is being questioned. Netflix currently does not charge for streaming movies but once they have to pay higher charges, the buck would have to be passed to the customers (Greg, 2010). Internet is expected to penetrate 90% of American houses by 2012 which is a major threat for rental movie stores. Retail superstores like Wal-Mart, Best Buy and internet sites like Amazon and eBay are also a potent threat for movie rental stores. Movie rental companies need to come up with effective strategies to minimize the risks from these sources. f. Perceived value and zone of tolerance: The diagram below explains the relation between perceived value (which depends on expectation and importance of attributes) and zone of tolerance. The zone of tolerance is less for attributes which are important and vice versa. (Source: The Flagship Research Journal of International Conference of the Production and Operations Management Society) g. Pricing (fixed and variable costs): The movie rental companies had certain fixed costs and certain variable costs. In case of Netflix, the fixed costs were related to information systems, warehouse, employees and postal delivery charges. Blockbuster had additional fixed costs because it had 9100 superstores managed by thousands of employees. In case of Red Box the major chunk of the fixed costs were related to the vending machines. The variable cost associated with rental movie companies was the amount they had to pay to the movie distributors. For example, in 1999, Fox Video and Buena Vista Home Video had the following revenue sharing agreement with retailers: The retailer had to pay an upfront fee of $8.30 The retailer kept 45% of the rental revenues. After 60 days of the release, the retailer could sell the movie to the consumer and share 50% of the revenues with the distributor or he could return all the copy to the distributor keeping one for him or he could purchase the copies for $2 to $4 each. The number of movies that a retailer could keep depended on the revenue of the stores and the box office collection of the movie (Cabral –d, n.d.). h. Managing relationships and building loyalty: Netflix has a “Customer Relationship Management System”. The CRM system has an intelligent technology which helps it to gather information about the needs and preferences of the customers. This helps them in building customer satisfaction and hence customer loyalty. Netflix has topped the customer loyalty chart in 2010 with 87 points among 100 e-retailers followed by Amazon, Avon and Apple. Blockbuster too has implemented SAS software which helps in data management and provides insights regarding movie preference of customers. Ann Milley, Director of analytical strategies at SAS said that, “Blockbuster wants to be more customer oriented. They want to understand customer choices and preferences and respond to them in ways that will please the customer and increase business.” (National Retail Federation). All the three provide various deals and discounts to its online members through mail. i. Service Recovery: Netflix has tied up with a call centre named Hillsboro to eliminate the hassles of sending mail and then waiting for a reply. Now customers can easily solve their queries at any point of time. It helped Netflix in getting close to the customer. On the other hand at Blockbuster’s call centre works only during the business hours and customers are encouraged to make use of the web instead of telephonic conversations (Hafner, 2007). In the first quarter of 2010, Blockbuster added 525000 customers while Netflix lost 55000 buyers. It also offers movie freedom passes to build customer loyalty (Whitney, 2010). RedBox has a help section in their website regarding all customer queries. In addition to this it also has a toll free number for solving customer enquiries. All the three companies have a system of getting feedbacks from the customers regarding their services through their websites. j. Improving service quality and productivity: The quality of service is extremely crucial for the movie rental stores given the increased competition that it faces. They need to increase the collection of the movies so that customers are not dissatisfied because of unavailability. Secondly convenience of accessing the movies is a very important factor for these companies. Netflix has tied up with Xbox and Apple in order to reach more buyers. Red Box has its kiosks in almost 14000 locations which caters to 40 million customers. Blockbuster also started the Total Access Program which allowed buyers to exchange an online rented movie with a movie available in-store. Every company is investing heavily on improving its information systems so that they can provide better services. Productivity can be increased either by cutting costs or increasing sales. In an attempt to do reduce cost Blockbuster has shut down a large number of stores. It closed 374 stores in US in 2009 and 545 more are expected to close this year. k. Service process design: Customer waiting time is regarded as one of the most critical element of the service industry. The service process in case of rental movie stores must be designed in a way that reduces the waiting time of customers. Netflix delivers the movies to the customers in a period of one day. It has tie ups with courier companies like Fed Ex which helps it deliver the movies very fast. Similarly Blockbuster also delivers the movies in a day or two. There are distribution centres located at strategic points to reduce waiting time. 8. References: Bloomberg BusinessWeek. Stock Picks: Netflix, Boeing. Bloomberg BusinessWeek, Jan 28, 2010. Analyst Picks & Pans. Cabral, L-a. October, 2009. Revenue Sharing. The Home Video Industry. http://luiscabral.org/economics/teaching/blockbuster.pdf (Accesseed May 8, 2010). Cabral, L-b. October, 2009. Revenue Sharing. The Home Video Industry. http://luiscabral.org/economics/teaching/blockbuster.pdf (Accesseed May 8, 2010). Cabral, L-c. October, 2009. Revenue Sharing. The Home Video Industry. http://luiscabral.org/economics/teaching/blockbuster.pdf (Accesseed May 8, 2010). Cabral, L-d. October, 2009. Revenue Sharing. 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