Blockbuster Hits 2 Million Online Subs - At Netflix's Expense?

Proving it’s better to show up late than never, Blockbuster Inc. (BBI) announced that they finally hit their goal of 2 million subscribers for their online DVD program. To be honest, when Blockbuster originally told investors that they only had 1.5 million subscribers at the end of September, I didn’t think that they’d ever be able to sign up a half a million subscribers by the end of the year, especially when 100,000 of their 1.5 million members were, at the time, customers using the free Blockbuster promotion.

Nonetheless, the company has posted strong subscriber gains over the last three months and has finished out the year with 2 million paying subscribers and another 200,000 members using their free trial plan. Two million has been a goal for Blockbuster pretty much since the inception of their online program. In the past, the company has indicated that they saw this number as a key tipping point, at which their online program could become profitable.

Given the escalation in free promotions for their total access plan, it would be interesting to see if 2 million continues to be a point of critical mass for the company. Regardless of what it took to get there, after struggling for so long to hit that 2 million level, Blockbuster should certainly feel pleased about reaching this goal.

To highlight this accomplishment, I thought I’d retrace some of the steps Blockbuster took along the way to get to this point:

10/14/04
"'We are confident,' he added, 'that we will end the year after only four and half months with more subscribers than Netflix (NFLX) had after its first three and a half years.'"
05/20/2005
"Blockbuster said it hoped to have two million subscribers by the end of March 2006."
08/22/05
"Antioco said the service now has more than 1 million subscribers and is on pace to have 2 million by the end of 2005."
11/08/05
"'Online is business that you really can’t grow without continuous spending on marketing', Antioco said. 'All of that will return next year, and we still expect to reach 2 million subscribers sometime in 2006 and to be operating Blockbuster Online profitably by early 2007.""
03/09/06
"'In 2005, we grew our online subscriber base from 400,000 subs at the start of the year to around 1.2 million by year-end . . . Based on what we were seeing, we believe our goal of 2 million subscribers by the end of 2006 is attainable.'"
04/27/06
"'Looking at our online business, we continue to believe we will meet or exceed our goals of 2 million subscribers by year end, with the majority of subscribers being added in the last half of the year.'"
07/27/06
"'We still remain confident about hitting our goal of 2 million subscribers by year-end, largely through the efforts of our in-store sales force. Other benefits of using our store assets to recruit online subs are low subscriber acquisition costs. Our stores are the least expensive recruitment channel we have.'"
11/02/06
"'Well, I think we’ve said all along this year that knowing what our plans were, that we would ramp up our marketing activities based on seasonality and based on having something to say to consumers in the marketplace. They’re here, both the seasonality and a program that’s worth talking about. None of that is outside of the guidance we had previously provided you regarding this, that we would hit 2 million subscribers and that our online business year on year would contribute positively to year-on-year profitability. That remains in place.'"

While I’m sure that Blockbuster had originally hoped to hit the 2 million mark much earlier, their strong customer additions in just 3 months demonstrate both how appealing the DVD by mail business model actually is and the potential for growth with the right mix of marketing spending. It remains to be seen whether Blockbuster’s recent gains came at Netflix’s loss or if their subscriber gains were part of a larger growth of the market for online DVDs. If Netflix also hits their previously stated goal of 6.3 million subscribers by year’s end, it would mean that the entire online DVD market grew by 1.3 million subscribers in just a three month period.

Disclosure: Author is long NFLX

Related: Blockbuster Surprises Investors With 2 Million Online Subscribers

BBI vs. NFLX 1 yr chart

Comments

[borisb:]

good points. it looks like United Kindom household penetrations already exceed 30%,
this would translate to a US market 110 million @30% of 33 million. with the combined
(Netflix + Blockbuster) already nearly 8.3 million its suffice to say another 25 million-ish
new subscribers is up for grabs, tempered by Video On Demand defectors. I would say
Blockbuster is finally in a position to grab some low hanging fruit. But the promotions
to do it are not good, while Netflix is enjoying profitable growth. I was stunned
by Netflix's 3rd quarter cash flow figure of $75 million, but this may no be sustainable
with the Blockbuster push. But i got to tell you, if you have a advanced digital cable box
with the free on demand offerrings by Comcast or similiar ,and pump it up with DVR feature,
there isnt much need for any of this DVD by mail. netflix tries to rent you old catalog titles,
the same way a cheap radio station uses worn out old songs. But most of the catalog movies
are on the digital cable box and the on demand is expanding rapidly. Plus the digital cable boxs will only advance more in the future.

2007 Jan 06 09:55 AM

[Rick Hanley:]

Doesn't quite fit but it says to me that it would be a miracle if Netflix added 500,000.

Quarterly Subscriber Additions
Total Subscribers q/q change Gross Additions q/q change Quit Netflix Net Additions
4th Qtr 2004 2,610 783 402 381
1st Qtr 2005 3,018 15.63% 945 20.69% 537 408
2nd Qtr 2005 3,196 5.90% 707 -25.19% 529 178
3rd Qtr 2005 3,592 12.39% 921 30.27% 525 396
4th Qtr 2005 4,179 16.34% 1,156 25.52% 569 587
1st Qtr 2006 4,866 16.44% 1,377 19.12% 690 687
2nd Qtr 2006 5,169 6.23% 1,070 -22.29% 767 303
3rd Qtr 2006 5,662 9.54% 1,310 22.43% 817 493

2007 Jan 11 01:38 AM