Jeff Bezos comments on the online movie rental business in an interview with Wired editor Chris Anderson:
Q: What about videos? Netflix says it believes you're going to enter their rental-by-mail business.
A: Our policy is not to preannounce what we might do.
But that is a business we know something about. One of the big costs
here is that an extremely large fraction of those monthly subscription
fees are used to acquire new customers. Amazon is well positioned to
offer a low-priced service of high quality, and we wouldn't have to pay
heavy marketing fees.
In fact, this is a general thing that
we've done that has been very helpful to our business. About three
years ago we stopped doing television advertising. We did a
15-month-long test of TV advertising in two markets - Portland, Oregon,
and Minneapolis - to see how much it drove our sales. And it worked,
but not as much as the kind of price elasticity we knew we could get
from taking those ad dollars and giving them back to consumers. So we
put all that money into lower product prices and free shipping. That
has significantly accelerated the growth of our business.
Blockbuster clearly has the same idea, and thinks it can acquire
customers for its online movie rental service via in-store advertising.
Same too with Wal-mart. The only difference is that Amazon and Wal-mart
don't cannibalize their current businesses to the same extent as