Charging $17.99 a month for an unlimited number of movie rentals (three at one time), Netflix revolutionized the movie rental business with a one-day mailing service for DVDs and acquired 12 million subscribers and $1.5 billion in revenue. However, Blockbuster, the video rental giant from the earlier $5.5 billion bricks-and-mortar movie rental business, decided to enter the mail-in delivery and online-DVD rental businesses. Blockbuster (now a division of Dish Network) drove prices down to $14.99, attracting 2 million subscribers. Netflix responded with a cut-rate service of one movie at a time for $9.99 per month, which drove the net profit right out of the business.
Movie studios like Viacom and Time Warner also entered the market with direct-to-the-customer video on demand delivered over the broadband web. Following two months of theatre-only releases, the studios asked $20 to $25 per showing. This fee is five times what it costs to rent a second-run or classic movie from the cable companies and 10 times Netflix’s or Redbox’s SI.99 or SI fees for overnight rentals. At such exorbitant prices, the studios earn a 70 percent margin, but the –16.0 price elasticity of home entertainment suggests an eight-fold increase in volume for half-price promotions. On-demand broadband movies and Blu-ray are the only two growing segments of consumer demand for video
Who are Netflix's and Redbox's suppliers? Are the in a position to appropriate much of the value in the value chain? Why or why not?
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