Charging $17.99 a month for an unlimited number of movie rentals (three at one t

Question

Charging $17.99 a month for an unlimited number of movie rentals (three at one time), Netflix revolutionized the movie rental business with a one-day mailing service for DVDs and acquired 12 million subscribers and $1.5 billion in revenue. However, Blockbuster, the video rental giant from the earlier $5.5 billion bricks-and-mortar movie rental business, decided to enter the mail-in delivery and online-DVD rental businesses. Blockbuster (now a division of Dish Network) drove prices down to $14.99, attracting 2 million subscribers. Netflix responded with a cut-rate service of one movie at a time for $9.99 per month, which drove the net profit right out of the business.

Movie studios like Viacom and Time Warner also entered the market with direct-to-the-customer video on demand delivered over the web. Following two months of theatre-only releases, the studios asked $20 to $25 per showing. This fee is five times what it costs to rent a second-run or classic movie from the cable companies and 10times Netflix’s or Red box’s $1.99 or $1 fees for overnight rentals. At such exorbitant prices, the studios earn a 70 percent margin, but studies of price elasticity in home entertainment experiments suggest an eight-fold increase in volume for half-price promotions. On-demand movie rentals and Blu-ray retail sales are the only two growing segments of consumer demand for video (see Figure 10.12). Use Porter ‘s Five Forces model to answer the following questions:

Are there any economies of scale in the on-demand video rental business to serve as a barrier to the entry of Amazon?

Explanation / Answer

QEStion

Are there any economies of scale in the on-demand video rental business to serve as a barrier to the entry of Amazon?

ANSWER:

Porter's 5 Forces

Michael Porter argued that there are five forces that shape every market in the economy. The forces result in identifiable measures of :

AMAZON entry :

Any new entrant will choose the segment that is growing fast enough in order to capture a share of the profits. Since Netflix and Blockbuster price-war has resulted in self-destruction of profits from the online-video rental market, the two other segments that are growing are the only option s for Amazon.

Now Amazon has huge network advantages, in terms of service delivery and cost-structures as they are the leaders in the online-internet based e-commerce industry. This inevitably offers a huge advantage in terms of entry as the cost of entry is the lowest for them. Amazon could perhaps do the on-demand video business at a much lower cost than any of the existing players like blue-ray retail, to add any new product to their portfolio. Any other potential competitor might find it very expensive to enter the market and compete with Amazon.

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