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When Netflix Knocks Out Blockbuster, Blame Canada

Netflix Canada

Ah, Canada. The true north, strong and free, as its anthem sings. Here, Blockbuster's Canadian subsidiary is indeed strong—at least, much stronger than it is in the U.S.—and free—or at least, debt-free. Unlike its American counterpart, which is mired in nearly $1 billion of debt, Blockbuster Canada Co. has remained strong, with more than 450 stores and annual sales around $400 million. But don't expect this success story to last too much longer—Netflix is expanding north, in a move that could seriously damage Blockbuster's Canadian operations.

Netflix announced today that it will be launching a streaming-only service in Canada this fall. It's main competitors up north will be Blockbuster and Zip.ca, a privately owned kiosk and DVD-mailing service that's a spitting image of Netflix (just check out its homepage), but without Netflix's killer online-streaming capability. "The future really is streaming," says Steve Swasey, VP of corporate communications at Netflix. "Netflix is growing very robustly in the U.S., and we hope that our neighbors up north will enjoy the service."

Swasey says Netflix chose Canada for several reasons. Besides it's close proximity to the U.S., Canada benefits from having a high-broadband penetration, close to 75%, which is obviously crucial for launching a streaming service. Moreover, Swasey explains that the availability of content licensing also played a big factor in choosing Canada as Netflix's next stop. Is Canada an untapped market for streaming services? "That's what we're going to see," says Swasey, who points out that excitement has been high so far about the company's launch. "We're very confident with the robust offerings Netflix provides."

Up until now, without competition from Netflix, Canada has remained one of the last vestiges of Blockbuster's dominance. In May, CFO Tom Casey even suggested that Canada may serve as a saving grace for the ailing company. "When we look at alternatives for capital raising, Canada is a candidate for using its collateral to provide financing," Casey told the Globe and Mail of the company's plans to refinance during its near-bankruptcy troubles. There are signs however that Blockbuster Canada is already beginning to flounder, even before Netflix floods the market with its new popular service. Sales in 2009 plummeted 17% from the year before.

And Netflix's expansion this fall will only hurt Blockbuster and eat away at its market share. Though the video-rental giant's CEO Jim Keyes believes Netflix appeals to a different market, telling Fast Company recently that the two companies have "different business model[s]," it's clear Netflix has had a huge impact on Blockbuster in the U.S. According to shareholder and now-Blockbuster board member Greg Meyer, since 2007, "Netflix stock is up 500% and the price of Blockbuster stock is down 90%." Indeed, with colossal revenue losses and stores closing worldwide, Blockbuster's share price has dropped to just 12 cents, while Netflix has risen to around $120 based on strong quarterly showings.

When I asked recently whether Blockbuster's financial woes were due in part to Netflix's success, Blockbuster's CEO disagreed, before admitting that Blockbuster had actually lost a significant number of customers to the service. "We were sitting on 45% of the market," Keyes argued. "Anyone with that much market share is vulnerable to new competitors." We'll see if that vulnerability applies north of the U.S. border, too.

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