Using Porter's Five Forces Model to Evaluate Movie Rentals

One hotly contested and highly competitive industry is the movie rental business. You can rent videos from local video rental stores, you can order pay-per-view from the comfort of your own home, and you can rent videos from the Web at such sites as NetFlix. Using Porter's Five Forces Model, evaluate the relative attractiveness of entering the movie rental business. Is buyer power low or high? Is supplier power low or high? Which substitute products and services are perceived as threats? Can new entrants easily enter the market? What are the barriers to entry? What is the level of rivalry among existing competitors? What is your overall view of the movie rental business? Is it a good or bad industry to enter? Why?

The model I will be using to evaluate the relative attractiveness of entering the movie rental business is the Redbox model. Redbox has become a leader in kiosk DVD rentals with low prices and ease of renting movies.

Buying power is high in the general video market because there are many choices for consumers. However Redbox because of their low overhead costs, machines versus people, they can offer their product at a lower price giving them a competitive advantage. Even though prices for newer types of DVD’s (Blu-ray) have gone up, consumers are still only willing to pay a set price for that product, so companies make less of a profit on each sale,

Supplier power is low because there are only a few distributors and they all sell their products at similar price levels. The bargaining power of the customer determines the pressure customers put on a particular market. Redbox’s business model considers this in the following ways: Customers generally do not buy large volumes of the product. There are only a few operators in the industry. The fixed cost by suppliers is high, but this applies to competitors as well. There is really no legal substitute for the product. Customers are price-sensitive, but Redbox provides the product cheaper then all of its competitors. Customers cannot produce the product. The product is of strategically importance – entertainment.

The threat of alternative products does not exist. It is only the distribution of the product that has alternative modes. The customer gets the same brand of the same quality with Redbox as with any other seller in the industry. There is no notable difference in the price for performance – except the ease of obtaining Redbox’s products. One of the downsides of the Redbox model is there is no direct customer service. However, customer service can be accessed online but it is not immediate.

Redbox’s business model deals with the different pressures of new entrants in the following ways: Competition would have to develop an enterprise of significant size to be considered a threat. The have secured many of the prize locations for their kiosks (Wal-Mart, McDonald’s, Walgreen’s). A company would be hard pressed to find better locations to compete on the same level as redbox. Considering the volume of hardware, software and personnel; the initial cost to competitors would be very high.
The machines are extremely expensive plus having the software and personnel to run them are another cost barrier. Existing competitors, (Blockbusters, Netflix) though experienced, are not prepared to compete in a kiosk rental capacity. But Blockbuster is moving in that direction. Blockbuster has said that they will close some of their stores and put in kiosks instead. The new business will be called Blockbuster Express. The loyalty in this industry is to the product, not the distributor. Existing competitors will have to completely reinvent their business to compete in that market. Most competitors’ strategies are out-dated and are playing catch up to Redbox’s business model, The product is the same between competitors; it is Redbox’s kiosk presence and price point that makes it more attractive. The market growth is constant.

Rivalry among competitors is very high and they are always looking for more ways to bring the customer to them and away from the competition. They use advertising, promotions, and price cuts to get customers to use them. Redbox has done a good job of competing by using the low price of its product verses its competition. Before Redbox, an average rental was between three and four dollars for one or two nights. With redbox lowering the price to one dollar a night and using the convenience of an ATM style platform, it set the competitors scrambling to match that price point.

I have a different view of the movie industry then most because I have owned my own video rental store for the last ten years. When I first started out, we only had VHS tapes and they were very expensive to buy for rentals, but this was offset by the fact that you could not buy new releases at Wal-Mart for 30 to 45 days after their initial release.
So the customer had to rent from you, if they wanted to see the movie sooner. With the invention of the DVD, the studios began selling to Wal-Mart on the same day it came out at the video store. So now customers could buy it instead of renting it. For the store, my cost came down, but so did the profits. Then with Redbox entering the market the total price point changed. The dollar price point does not leave much room for profit unless there is a large turnover. The small mom and pop stores are hard pressed to compete in this market because they can not buy in volume or sell as many products to make it affordable.

The movie rental business is still a good business to enter because there will always be a demand for movie rentals. Not everyone is interested in owning all of the movies that come out. However, if I were starting my business today, I would not open a brick and mortar store; I would try to get into the kiosk market. However, I would do it in a way that would be unique. I would enter smaller markets with less competition and sell my product at a higher price than Redbox, but cheaper then the brick and mortar stores. I would also offer movies that are hard to get or have a cult following, such as John Wayne movies. The movie rental business is not dead, but the rules have definitely changed.

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