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

Includes: BBI, NFLX
by: Davis Freeberg

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:

"'We are confident,' he added, 'that we will end the year after only four and half months with more subscribers than Netflix (NASDAQ:NFLX) had after its first three and a half years.'"
"Blockbuster said it hoped to have two million subscribers by the end of March 2006."
"Antioco said the service now has more than 1 million subscribers and is on pace to have 2 million by the end of 2005."
"'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.""
"'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.'"
"'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.'"
"'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.'"
"'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

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