Blockbuster is a long-established player in the video rental business and has been in the industry...

    

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Blockbuster is a long-established player in the video rental business and has been in the industry since 1985. Back then, the industry was mostly small-time vendors distributed throughout a neighborhood within a few city blocks. By 2005, Blockbuster soon became a giant and had the coverage of 25 countries and a total of 9,100 stores worldwide. This success is enjoyed by only a few companies in any industry. At that time, VHS systems and VCRs were most popular. CD and DVD technologies were slowly gaining popularity but were really a novelty. Blockbuster rental stores worldwide were equipped with point-of-sale systems and bar code scanners to simplify inventory management and to track sales patterns to improve marketing decisions. By 2004, Blockbuster had 40% control of the U.S. video rental market, which was estimated between US$7 billion and $9 billion per annumn. Its annual video sales reached an unprecedented US$16 billion. In 1998, there was another competitor emerging with a business model never seen before. The company was Netflix Inc. Its core-value proposition was convenience for the video-rental customers by using the internet to facilitate order placements and payments. Delivery was entrusted to standard shipping services, which included the postal service. The proposed business model also eliminated the need for a physical store like Blockbuster. Users could log on online and create a wish list of movies they wanted to rent. They paid a monthly fee and would have Netflix mail the movies to them. Customers could receive up to three movies at any time, and they could keep them for as long as they liked without penalty charges. The monthly fees were as low as US$4.99 and postage fees were waived for the return as well. For US$19.95 a month, Netflix customers could access thousands of movie titles without ever having to leave home. Kegan Research LLC predicted that online movie rentals were to reach USS3 billion by 2009. The technology that Netflix used, coupled with the subscription model, would really give it a huge share of the potential market. Blockbuster, threatened by the presence of a new competitor, quickly launched its own subscription service called the Movie Pass and another service called the Game Pass that both had no late fees. Blockbuster chose to remain both online and in traditional brick and mortar. Although Blockbuster had a great distribution network, the setback was increasing operating costs over time at physical stores and the loss of late penalty fees that were slowly eating into its revenue stream. Meanwhile, Netflix's customer base had grown enormously and a new threat was quickly emerging. Cable companies worked with renowned movie studios to sell movies via a Video on Demand (VOD) model that allowed customers to watch movies for only 24 hours. This worked well for customers who had cable services. Also, iTunes had proved that people were willing to buy copyrighted material via digitally legal downloads for US$0.99 per download for a song. TiVo later introduced a digital video IC el не e S e. e S 1 1 J EXAM CODE 02 recorder combined with VOD capabilities. Also, the potential of Google acquiring YouTube soon created a new threat that was never envisaged. The financial statements of Netflix and Blockbuster are presented below: Netflix US$'m 325:4 (248.5) 76.9 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance cost Profit before tax Income tax expense Net profit for the period Non-current assets: Property, plant and equipment Manufacturing licences Current assets: Inventories Trade receivables Cash Equity and liabilities: Issued share capital Shares reserved for issue Revaluation reserve Accumulated profits SUS'm Netflix 18-19/09 2021 ERCITY OF CAPE COAST OF DISTANCE EDUCATION MINATIONS ONIT 48.7 27.4 338.5 75.2 24-2 2-3 80.1 40.3 146.9 9 (18.3) (29.4) 29.2 (14.2) 15.0 US$'m (4.2) 10.8 413.7 76.1 489.8 Blockbuster US$'m 261.2 (201.3) 59.9 (16.7) (23.5) 19.7 (11.2) 8.5 32.6 26.5 6.2 Blockbuster US$'m US$'m 193.3 82.7 24.2 (3.7) 4.8 21.8 32.5 276.0 65.3 341.3 78.5 Non-current liabilities: Interest-bearing borrowings Deferred tax Current liabilities: Trade payables Short-term borrowings b) c) 244.1 26.7 59.9 12.2 72.1 489.8 270.8 219.6 8.2 32.4 2.6 227.5 REQUIRED Describe the technological forces that challenged the Blockbuster model. [5 marks] 35.0 341.3 Evaluate the performance of the two companies in terms of managerial decisions using a common size statement. [5 marks] Examine the distress level of the two companies using Altman's Multiple Discriminant Model. [10 marks] [Total: 20 marks] Blockbuster is a long-established player in the video rental business and has been in the industry since 1985. Back then, the industry was mostly small-time vendors distributed throughout a neighborhood within a few city blocks. By 2005, Blockbuster soon became a giant and had the coverage of 25 countries and a total of 9,100 stores worldwide. This success is enjoyed by only a few companies in any industry. At that time, VHS systems and VCRs were most popular. CD and DVD technologies were slowly gaining popularity but were really a novelty. Blockbuster rental stores worldwide were equipped with point-of-sale systems and bar code scanners to simplify inventory management and to track sales patterns to improve marketing decisions. By 2004, Blockbuster had 40% control of the U.S. video rental market, which was estimated between US$7 billion and $9 billion per annumn. Its annual video sales reached an unprecedented US$16 billion. In 1998, there was another competitor emerging with a business model never seen before. The company was Netflix Inc. Its core-value proposition was convenience for the video-rental customers by using the internet to facilitate order placements and payments. Delivery was entrusted to standard shipping services, which included the postal service. The proposed business model also eliminated the need for a physical store like Blockbuster. Users could log on online and create a wish list of movies they wanted to rent. They paid a monthly fee and would have Netflix mail the movies to them. Customers could receive up to three movies at any time, and they could keep them for as long as they liked without penalty charges. The monthly fees were as low as US$4.99 and postage fees were waived for the return as well. For US$19.95 a month, Netflix customers could access thousands of movie titles without ever having to leave home. Kegan Research LLC predicted that online movie rentals were to reach USS3 billion by 2009. The technology that Netflix used, coupled with the subscription model, would really give it a huge share of the potential market. Blockbuster, threatened by the presence of a new competitor, quickly launched its own subscription service called the Movie Pass and another service called the Game Pass that both had no late fees. Blockbuster chose to remain both online and in traditional brick and mortar. Although Blockbuster had a great distribution network, the setback was increasing operating costs over time at physical stores and the loss of late penalty fees that were slowly eating into its revenue stream. Meanwhile, Netflix's customer base had grown enormously and a new threat was quickly emerging. Cable companies worked with renowned movie studios to sell movies via a Video on Demand (VOD) model that allowed customers to watch movies for only 24 hours. This worked well for customers who had cable services. Also, iTunes had proved that people were willing to buy copyrighted material via digitally legal downloads for US$0.99 per download for a song. TiVo later introduced a digital video IC el не e S e. e S 1 1 J EXAM CODE 02 recorder combined with VOD capabilities. Also, the potential of Google acquiring YouTube soon created a new threat that was never envisaged. The financial statements of Netflix and Blockbuster are presented below: Netflix US$'m 325:4 (248.5) 76.9 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance cost Profit before tax Income tax expense Net profit for the period Non-current assets: Property, plant and equipment Manufacturing licences Current assets: Inventories Trade receivables Cash Equity and liabilities: Issued share capital Shares reserved for issue Revaluation reserve Accumulated profits SUS'm Netflix 18-19/09 2021 ERCITY OF CAPE COAST OF DISTANCE EDUCATION MINATIONS ONIT 48.7 27.4 338.5 75.2 24-2 2-3 80.1 40.3 146.9 9 (18.3) (29.4) 29.2 (14.2) 15.0 US$'m (4.2) 10.8 413.7 76.1 489.8 Blockbuster US$'m 261.2 (201.3) 59.9 (16.7) (23.5) 19.7 (11.2) 8.5 32.6 26.5 6.2 Blockbuster US$'m US$'m 193.3 82.7 24.2 (3.7) 4.8 21.8 32.5 276.0 65.3 341.3 78.5 Non-current liabilities: Interest-bearing borrowings Deferred tax Current liabilities: Trade payables Short-term borrowings b) c) 244.1 26.7 59.9 12.2 72.1 489.8 270.8 219.6 8.2 32.4 2.6 227.5 REQUIRED Describe the technological forces that challenged the Blockbuster model. [5 marks] 35.0 341.3 Evaluate the performance of the two companies in terms of managerial decisions using a common size statement. [5 marks] Examine the distress level of the two companies using Altman's Multiple Discriminant Model. [10 marks] [Total: 20 marks]

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a Technological forces that challenged the Blockbuster model Emergence of Netflix Netflix introduced an innovative business model that leveraged the internet for convenience in ordering and payments I... View the full answer