Remember when Blockbuster and Hollywood Video began to look more like a ghost town than profitable businesses? The speed at which these businesses went from dominating the market to closing their doors was almost alarming. While some believe it had more to do with"inertia", I would contest game changing technology—in this case—multiple new technologies; elasticity of demand; and change in consumer tastes were all major contributors to Blockbuster and Hollywood Video's inability to compete.
Netflix picked up considerable market share by offering DVD’s via mail, and providing movies that can be streamed on their website. Redbox built upon existing technology (vending machines) and applied them to the movie rental market. Why was this combination so potent to the traditional main street movie store? Beyond the introduction of new technology, these new companies had much less overhead to contend with, and in Netflix's case, a compressed distribution chain and favorable economies of scale were also at work. Maybe most influential was the price. These business models proved to be efficient, and allowed them to offer movies at a much lower price; waiting in line for 20 minutes on Friday night (despite the cool posters and popcorn) was no longer appealing when we could pay a quarter the price with almost zero wait time.
Netflix may have forgotten how it captured as much of a market share as it has: price and flexibility for the consumer. Netflix recently increased their price from $9.99 (for online streaming and DVD by mail) to $7.99 for each. Obviously, management believes their demand to not be overly price elastic (meaning they know it is not inelastic), and will therefor not experience too many lost subscriptions. However, if they are wrong, they may have jumped into a conundrum. The most profitable arm of Netflix is the streaming side of the house, yet they cannot grow the streaming division without additional quality content. Thus far, their streaming service has provided inferior movies and release dates, but compensated by offering documentaries, and TV shows that are not usually offered in a Redbox. Initially they even made things worse by making it more complicated for customers to order movies by dividing the streaming and mail order sites into two different businesses. Of course this was short lived and Netfilx has done an about-face by announcing they will keep both services on one site. Still, are re-runs and old movies enticing enough to compensate for higher prices and lack of flexibility? Can re-runs and dated movies grow subscriptions? If they do not grow their subscription base, content providers become less willing to provide the additional content needed to grow. According to Jason Gilbert of the Huffington Post, Starz, a content provider for over a 1000 online Netflix movies, will not renew their contract for 2012 so Netfilix will have to fill its content with less re-run friendly networks such as the CW.
If the elasticity of quantity demanded is greater than management believed: Netflix subscriptions will continue to fall and they may have just given the increasing number of substitutes available a chance at substantial market share. Management would do well to remember what made them successful in the first place.