CASE STUDY—The Demise of Blockbuster
Teaching Objectives
The objective of this case is to discuss how different business models and supply chain structures impact
the financials of the firms in the DVD rental business. In particular, the goal is to convey that the
characteristics of the movie (recent/big hit or old/eclectic) affect whether it is best rented from a
centralized or decentralized model. By comparing the financials of Blockbuster, Netflix and Redbox, we
identify the strengths and weaknesses of each model. The centralized Netflix model displays strategic fit
for a wide variety of somewhat older movies whose demand is hard to predict. The decentralized
Redbox model displays strategic fit for a few new releases whose demand is large and predictable. The
growth of both companies left Blockbuster squeezed in the middle because its model did not have the
same level of strategic fit.
Case Questions and Discussions
1. In what ways did Blockbuster achieve better strategic fit than local stores?
Blockbuster started with the business model of having large physical storefronts in high-traffic
neighborhood locations. By building stores that were larger than existing mom-and-pop rental stores,
2. How much implied uncertainty do Netflix and Redbox face? What levers do they use to deal with
this uncertainty?
3. How did Netflix and Redbox achieve better strategic fit than Blockbuster?
Netflix and Redbox achieved better strategic fit than Blockbuster by targeting different segments of
movie rentals. Whereas Blockbuster attempted to provide its customers both new releases as well as
older movies, Netflix and Redbox divided the market among themselves. Netflix primarily targeted a
wide variety of older movies while Redbox primarily targeted a much smaller variety of new releases.
Exhibit 1: Company Comparisons (%)
Metric
Blockbuster
Netflix
Coinstar
SG&A (% of Revenue)
49.50
24.16
13.60
COGS (% of Revenue)
46.30
49.20
69.60
Inventories (% of Revenue)
15.73
2.21
9.12
Inventories (% of COGS)
33.98
4.50
13.10
PP&E (% of Revenue)
58.47
15.92
66.57
PP&E with Depreciation (% of Revenue)
6.13
7.90
35.08
Liabilities (% of Revenue)
45.64
28.80
71.05
Exhibit 2: Blockbuster
Both Netflix and Redbox operated with lower costs because they were not burdened with the heavy
fees of leasing thousands of retail locations as Blockbuster was. The table below shows that the general
Fiscal Year Ended
Total Revenues
Operating Expenses
General and Administrative
Advertising
Depreciation/Amortization
Impairment of Goodwill
General and Administrative Expenses as a Percentage of Revenue
Source: Blockbuster 2009 Annual Report.
1
Blockbuster 2009 Annual Report.
2
Netflix 2009 Annual Report.