Saturday, October 2, 2010

What Blockbuster has to tell the Wine Business about the Frailty of Market Dominance

Terry post:

Blockbuster, the movie rental company, recently filed for bankruptcy protection. This is something which seemed utterly
impossible for a company once valued at over $8 billion dollars. For those of you who were napping here is a quick summary of Blockbuster's decline:

1985: First Blockbuster store opens in Dallas.

1994: Viacom acquires Blockbuster for $8.4 billion.

1997: Reed Hastings returns Apollo 13 to Blockbuster six weeks overdue, and is dismayed by the $40 late fee.

1998: Reed Hastings founds Netflix.

1999: Viacom holds Blockbuster IPO, valued at up to $4.8 billion.

2000: Blockbuster declines several offers to purchase Netflix for a mere $50 million. Instead, the company signs a 20-year deal to deliver on-demand movies with Enron Broadband Services, a subsidiary of Enron.

2001: Enron files for bankruptcy amid accounting scandal.

2003: Netflix posts first profit, earning $6.5 million on revenues of $272 million. Redbox launches a kiosk rental service.

2004: Blockbuster enters online DVD rental market. Netflix CEO Reed Hastings tells analysts in an earnings call, "In the last six months, Blockbuster has thrown everything but the kitchen sink at us." The following day, Hastings receives a package from Blockbuster. Inside: a kitchen sink.

2005: Blockbuster launches a marketing campaign touting its new "No Late Fees" policy. Subsequently, 48 states launch investigations into the program, charging Blockbuster with misrepresenting its late fee policy to customers. Blockbuster settles for $650,000.

2006: Blockbuster, now valued at $500 million, surpasses its goal of two million subscribers for its online platform. Netflix reaches 6.3 million subscribers by December.

2007: Blockbuster hires new CEO Jim Keyes, formerly of 7-Eleven. Keyes decides to roll back the company's Total Access plans. "Clearly our spending on that one channel was exceeding our returns," he said during a company earnings call. After losing a half-million subscribers in the third quarter, Blockbuster announces it will no longer report its subscriber count.

2008: Blockbuster CEO complains about Netflix in an interview: "I've been frankly confused by this fascination that everybody has with Netflix...Netflix doesn't really have or do anything that we can't or don't already do ourselves."

2009: Blockbuster rolls out Blockbuster Express, its kiosk system designed to compete with Redbox.

Looking at the summary one thing jumps out at me: distribution channels - let me explain. Blockbuster, Netflix and Redbox are all about distributing the same content via different channels. Each company sells essentially the same product (movies) via different means to the same end user. Blockbuster's wildly high valuation in the 1990's was a reflection of how dominant they were at brick and mortar distribution at that precise moment in time.

was the brick and mortar channel leader, followed by Netflix which dominates the on-line channel (or electronic distribution) and Redbox which is smaller (less costly) footprint version of Blockbuster.

So with a 1000:1 advantage over Netflix or Redbox why did Blockbuster fail to innovate?

Most wine reaches the consumer via a three-tiered distribution system: distributor, wholesaler and retailer. Each layer of the distribution system adds a pass-through cost of some sort to the product without adding perceptible value. Moving a case of wine can easily be done from the winery to the consumer without benefit of costly distributors or wholesalers.

You need only consider how Amazon web services are changing distribution for many small to mid-sized companies.

Amazon Small Business Services has become, effectively, the market maker for many smaller companies acting as retailer and distributor. "Amazon allows businesses to use Amazon’s own order fulfillment and post-order customer service infrastructure, and allows customers to receive the benefit of shipping offers when buying from third-party sellers who use Fulfillment by Amazon." So who needs a distributor and wholesaler when Amazon can do it all?

Well maybe. The Federal and State governments see the sale of alcohol products as a revenue generator and while, currently, wine products don't fit the Amazon model there is no saying that in 30 days or in 2 years that the political landscape will be more supportive of small business - even ones which sell wine.

Blockbuster failed to innovate when they had every opportunity to do so. They had size and market dominance but failed to innovate as business conditions changed leaving the door open for Netflix and Redbox to eat them alive.

Bottom line: Companies with overwhelming market share can become complacent and fail to innovate. Small businesses must innovate and take market share when market conditions change. The challenge for small wineries is to determine what market conditions benefit small, nimble business and to maneuver themselves to exploit those conditions.

~ Terry

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