Sunday, April 22, 2007

Blockbuster v NetFlix: Lessons for software vendors considering SaaS

NetFlix nearly killed Blockbuster by revolutionizing the video rental business with its SaaS-like subscription pricing model and Web2.0-like community referrals. Blockbuster has fought back hard for its life and there are signs now that the tide may be turning in its favor. But Blockbuster lost nearly 75% of its $4 billion market cap over last 4 years.

The Downfall: NetFlix v BlockBuster 5-year chart

The Comeback:NetFlix v BlockBuster 1-year chart

This fight has some lessons for both the newcomer SaaS players as well as established software companies that see their turf being slowly attacked. Here are some key takeaways:
  • Subscription-based pricing works: Consumers (and enterprises) prefer subscription pricing as it gives them a simple and easily controllable handle on cost. In a household with children, or even just a couple, its hard to track who has rented and returned how many movies. Simplicity works. If you are a software vendor that does not yet have a subscription pricing model, this could really hurt you. In fact, you don't have to be a SaaS vendor to offer subscription pricing.
  • Fads can kill your established business: NetFlix was a fad when it started. Yuppies in San Francisco and New York were doing it. But over time, the word of mouth spread and the ease of use, lack of late fees and pricing model won many millions over to NetFlix. So yes, the young SaaS company founded by 3 engineers and 2 VPs from your company may not have all the functionality but they can still significantly impact your business over time. Take them seriously.
  • Fight with all you have, not a me-too: Blockbuster's first (late) response was to offer a me-too plan. The plan did not work- very few people signed up for Blockbuster's NetFlix look-alike plan. It was only after Blockbuster improvised and provided significant value add by allowing renters to return the movies and get new ones from their neighbourhood stores did customers see real value in staying with or switching to Blockbuster. Lesson for the software vendor- leverage your on-premise software assets in combination with your new on-demand offering to beat the SaaS newcomer. An example of this would be if a traditional vendor combined SaaS CRM with say on-premise BI offered all in a subscription model.
The fight for the SaaS market has barely begun and some early players have a mindshare lead but they should be ready to see established Blockbusters to respond with Enhanced SaaS. And the established software vendors should learn from Blockbuster and not wait five years to respond adequately loosing a lot of money in the process.

1 comment:

Anonymous said...

I was a Netflix fan for a long time, and then I switched to Blockbuster. I loved the ability to turn you movies into the store to get new ones right away. Unfortunately Blockbuster has put a cap of 5 exchanges on it now.

Here is a poll: Blockbuster or Netflix