Technology Marketing

1. Would you have been long (buy) or short (sell) Blockbuster stock at the time of the case material written? How about Netflix? Why?

Hindsight is always 20/20 when it comes to picking the right stock, and at the time of the case material, there was clearly a lot of confusion and speculation as to which player in the video-on-demand (VOD) and DVD rental industry would come out on top. Although Reed Hastings, CEO of Netflix, had as early as 2000 predicted the inevitable shift from physical DVDs to online video content, and Blockbuster with its delayed but arguably comprehensive response to the evolving VOD space, both companies faced an uncertain strategic advantage. The business model was challenging, and several players, along with traditional cable access providers, were already jumping into the lucrative space. The business model was complicated by licensing issues, customer value propositions, logistics, technology, and other factors. Rapidly changing business strategies would lead to revolutionary changes in customer offerings – the scrapping of late fees, and the ease of unsubscribing for example.

In early 2007, Netflix's stock price was downgraded by an analyst at Roth Capital Partners: "Blockbuster's new Total Access program will continue to siphon Netflix's new subscriber pipeline" (http://articles.chicagotribune.com). Netflix shares experienced their biggest one-day drop of the year: "Blockbuster allows customers who rent movies by mail to return them to the company's stores for a quicker rental exchange". This analyst's statement reveals the mindset of investors at the time – even Blockbuster's copying of the Netflix mail-order DVD business model was seen as a potential to win the battle.

Later on that year, a poster at hackingnetflix.com commented: "Blockbuster took me from a $20 a weekend in store customer, then online and then a $0 a weekend customer. I'm sure that will raise the stock price. MORONS!" (http://www.hackingnetflix.com).

Netflix's share price had hovered around the 20-something mark for several years leading up to 2007. Investors were still beaten by the 2000 NASDAQ crash, and faith in Blockbuster's dominance was still relatively strong. However, Netflix seemed to be more flexible and adaptive, and Hastings had already wowed investors with his quick changing business strategies and his keen eye on future developments. An intuitive investor could certainly have sensed the inevitable demise of Blockbuster with its sluggish, copy-cat response to VOD, and reliance on over 4000 brick-and-mortar stores. Netflix's buoyancy, software expertise, customer-centric business model, carefully footed approach to VOD, and strong brand name were the necessary ingredients needed to have formed my buy thesis for its stock in 2007, and a sell position on Blockbuster.