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2010 was a banner year for Netflix. The former video rental by mail service evolved into something bigger, attaining the laser focus of the entire industry due to its business practices. Effectively, Netflix ended one war last year, positioned itself to win another, and accidentally (?) started a third.

The war Netflix ended was its conflict with Blockbuster, who can no longer be seriously described as anything other than a fading challenger in the video rental marketplace. Time and again, Blockbuster’s team of decision makers proved far too slow to react and far too dated in their evaluations of consumer behavior to pose a continued threat to Netflix. Oddly, the advance in popularity of Netflix’s remaining major competitor, Redbox, proved to be the deathblow to Blockbuster. The company never positioned itself effectively for pricing battles, which is why a subscription mail service was able to gain a strong foothold in the video rental market in the first. When Redbox started placing vending machines at most major shopping centers and charging only a dollar a rental, Blockbuster showed how hopelessly out of touch it was. They countered by creating their own machines and set their rental prices at $1.99. To Blockbuster, simply putting their corporate logo on the kiosks should justify a 100% surcharge. The results were predictable and in fact predicted in this forum over the past 24 months.

With Blockbuster and its equally dated competitor, Movie Gallery, collapsing over the past two years, Netflix took complete control of the video rental industry. On the date when Blockbuster declared bankruptcy, Netflix’s market share in the video rental market was 36%, almost the equal of all brick and mortal video stores combined, 39%. Netflix was also far ahead of Redbox’s 25% market share; the battle for video rentals is over and Netflix is the winner.

Rather than rest on their laurels, Netflix management demonstrated the sort of proactive leadership sorely lacking at Blockbuster. Beginning in January when they made a deal with Warner Bros., Netflix placed their focus squarely upon the evolving video streaming market. The outcome has exceeded even their best case scenario results. Netflix had forecasted 3.6 million new subscribers in 2010; the actual total was 7.7 million. They added 3.1 million subscribers in the fourth quarter alone. The key was not the physical media by mail service. Instead, it was the addition of a new $7.99 monthly plan for streaming rentals only. Over a third of new Netflix users during the applicable time frame chose that, the lowest priced pricing tier for their service.

There are several aspects of Netflix’s ascension that are noteworthy. If we define them as a video subscription company, their current subscriber base of over 20 million places it ahead of Time Warner Cable as the second largest such company in existence. Only Comcast with their 23.8 million subscribers are ahead of Netflix. If the latter company’s assertion that they should have 22 million subscribers by the end of March holds true, Comcast will be pushed to second place by the middle of 2011. Conversely, if we define Netflix as a (new and different) pay channel, their numbers are superior to Showtime (18.5 million subscribers) and Starz (17.4 million). The latter is particularly noteworthy in that access to the Starz catalog is key to Netflix’s soaring popularity as a streaming video service. With that contract set to expire in the first quarter of 2012, Starz may no longer welcome the idea of aiding Netflix, who has evolved from an ally into a major competitor. In fact, only HBO has a larger built-in subscriber base with 28.3 million. If Netflix adds the same number of customers as last year, they will be neck and neck with HBO by the end of 2011.

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