Internet technology can address many of the limitations of the traditional business model (Figure 3). The internet allowed companies to publish general information about their services such as locations, information on new releases, promotional materials, as well as giving the consumers the capability to search/browse movies by title, genre, actor/actress, director, etc (e.g. Blockbuster Video, and Hollywood Video). This gave the customers the freedom to browse and search for their choices on-line, but did not provide information on availability of video nor eliminate the physical need for the customer to go to the store to pickup, pay and return a video.

Beyond enhancing the traditional business model, the internet has enabled the creation of a new business model. Firms such as Kozmo.com and NetFlix.com utilize a new model that addresses the limitation mentioned above while providing other advantages to the consumer. Perhaps the biggest advantage of the new model (Figure 4) is its use of a web storefront, thereby eliminating the need for customers to go to the store.

Figure 3: The traditional business model, where a customer must physically go into a store to browse, pickup and return the movie.

 

 

Figure 4: The new business model after internet impact, where a customer browses and makes their selection from their PC using a web store front.

 

Under this new model, customers view information on the web, where the site provides search and browsing capability. Customers place their order through the website and pay by credit card. Products are then delivered from a centralized distribution warehouse to the customer through an order fulfillment process. Firms currently competing in this space offer different methods of delivery and pickup. We will explore the options and their comparative advantages in our analysis.

 

Differences Between the Traditional and New Models

The new business model offers significant increase in customer convenience. The business can "get the movie you, want when you want it" and to you without you ever leaving home. A virtual storefront gives customers real time access to the company's inventory systems from home. While Blockbuster allows its website visitors to browse titles, it does not give the customer information about a particular store's inventory.

A web storefront also provides customers with a more rich purchase environment. A customer can browse generally as well as to locate specific titles more easily. In a physical store, customer only have video jacket information and top ten lists, but the web can also provide additional information at the time of rental decision such as peer or critical reviews, movie credits, running time, story synopsis, and movie trailers. The web also allows customers to browse under a variety of criteria (e.g. actors, directors, awards won) where as in the store customer can browse only in genre and by title.

The internet model also affords the firm many operational advantages. First, it eliminates the need for physical store locations, given that the purchase is made on line and the product delivered to the home. This then enables the company to keep a central warehouse. The pooling of inventory provides more efficient inventory management yielding higher overall inventory turns and lower carrying costs. Firms also have fewer physical constraints given lower space cost, which allows them to stock a wider variety of "impulse items" such as snacks, food, books, magazines, etc.

Another advantage of the web is that the companies are able to gather more accurate and complete customer information through tracking the customer's clicks while on the site. In addition to tracking their browsing behavior, companies can also record the rental history of each customer. The website interaction then allows firms to fully utilize that information. For example, firms can use the website to make recommendations for a customer's next rental based on that customer's profile and rental history. Other e-retailers such as Amazon.com pioneered this technique.

 On the back end of this new business model is a need for a very complex and efficient order fulfillment process and system. There are currently two prevailing methods in the market for getting the videos to the customer and back, home delivery and express post. Two examples of home delivery players are Kozmo and VideoCache, who guarantee delivery of the movie and other snacks or drinks within the hour. Customers also have the option of returning the videos to drop-off locations, or for an additional charge, they would pick them up from the customer's home.

The home delivery model takes advantage of the growing trend of providing "instant gratification" and ultimate convenience for the customer. Joseph Park, Kozmo's founder and CEO says: "Kozmo is all about instant gratification." He adds: "[Kozmo] is supposed to be the Nirvana sought by the impulse-oriented and the time-starved." (10) This is consistent with a prevailing trend on the web:

Sure, the Web is great in offering an almost overwhelming amount of choice. And it's remarkably convenient, letting people shop day or night without leaving their homes or offices. But once customers order online, they have to wait to have their products shipped. No surprise, then, that a whole host of companies, from online grocery store Webvan to concierge service Streamline, have put together their own warehouses and fleet of trucks to offer home delivery. (11)

The other major model is the express post. There are numerous rent-by-mail video and DVD sites ranging from those with main stream appeal, NetFlix, Rick's Video and Video Library to niche market players, Video Vault and The Video Wasteland. The leading player, NetFlix rents DVDs, promises delivery in two days and provide a postage paid envelope for returns after seven days. While this model captures all the web storefront related advantages, they cannot provide the instant gratification and impulse items popular with some customers.

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