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Lessons from Blockbuster's failure

By JAMES COAKES Published 30th Sep 2014
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Blockbuster could have bought Netflix, but instead they went out of business.

Staying ahead in business is always about flexibility and vision, no matter what industry you're in, but when it comes to digital technology it's more important than ever. Much like EMI rejected the Beatles, and both Yahoo and Excite turned down buying Google for $1 million and $1.6 million respectively, the formerly-great video rental chain Blockbuster once had the opportunity to buy Netflix, but declined. Netflix is now one of the world's most successful dotcoms, while Blockbuster has gone the way of the dodo.

Blockbuster Versus Netflix

Blockbuster was a North American video rental chain founded in 1985. The company's success was founded on an innovative method of warehouse management and store administration that allowed owner David Cook to customise a specific outlet's stock according to the demographics of the neighbourhood in which it was situated. After Cook sold the company in the late 1980s, the new owners set about opening new stores and acquiring rival chains to rebrand as Blockbuster stores. As well as this the company began to acquire music stores, branded as Blockbuster Music, and opened indoor entertainment centres. In the 1990s expanded into the UK by purchasing and rebranding the Ritz Video chain.

In the first decade of the new millennium Blockbuster continued to expand its reach, and at its height in 2004, it had more than 9,000 stores and 60,000 employees. However, by 2010 the company was $900 million in debt and ready to file for bankruptcy. What happened? Essentially new technology overcame them. Netflix arrived, along with companies like Redbox, and video-on-demand. These services allowed consumers to stream movies online, any time, effectively rendering Blockbuster obsolete.

Netflix was founded in 1997 by Marc Randolph and Reed Hastings, who launched the site in August of that year. Netflix was originally a movie-by-mail service, with customers using the website to order rental DVDs. In 2000 the company adopted a flat-fee system with no due dates, no late fees, and unlimited rentals, and in 2007, introduced the video-on-demand concept. By early 2010 Netflix had 14 million subscribers, and was North America's biggest source of evening internet traffic, and at the end of 2011, had over 24 million subscribers.

A Lost Opportunity

In 2014, Netflix is available in 41 countries, and has 50 million subscribers, but in 2000, the company was struggling with just 300,000 subscribers and heavily reliant on the US postal service. Netflix was losing money and looking for a solution. The CEO of Netflix, Reed Hastings, met with Blockbuster executives with an idea: Hastings proposed that Netflix sell a 49% share in the company to Blockbuster for $50 million, and become Blockbuster's streaming service, taking on the company's name in the transition. The Blockbuster execs passed. With the dotcom bubble recently burst, and most of North America still using dial-up, they decided that the risk versus reward wasn't in Blockbuster's favour.

The rest is history: Netfix went public in 2002, and started turning a profit the very next year, while Blockbuster, too late in launching its own online subscription service to eke out a profitable market share, went into a rapid decline. Netflix is now worth an estimated $28 billion, and Blockbuster is nothing but a cautionary tale.

These cautionary tales are common in business and they tend to be driven by disruptive new technology. This can move very fast, particularly in the new digital age. Today's successful company can be rendered obsolete in a matter of months. What can executives do to protect their company from this? Clearly it's not practical to just buy every potential competitor who comes along.

The driving emotion in decision making in the case of Blockbuster and in Excite's turning down Google was fear. In the Blockbuster case the fear was caused by the recent dotcom bubble burst. That is almost understandable.

However, when Excite turned down Google it was because they tested the search engine side by side with theirs and were shocked by how good it was in comparison. They feared that if they backed Google then their own product would be abandoned. It was a threat. Actually their judgement was sound, they were quite right. Their decision not to buy Google, however, was just plain nuts. They literally folded.

Disruptive competition and obsolescence can be pretty uncomfortable ideas to consider, but they are not going away. Sticking your head in the sand is not an alternative. When did you last discuss this with your management team?

 

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155 weeks ago, by Mike
Few companies manage to cannibalise themselves even if they see that in the long run they are doomed to someone else destroying them. Blockbuster like most retail companies was in essence a property company. It was unable to continue to service its leases. It's financials and logistics were about operating multi store locations. They would have had to focus on isolating the online business from the cost base of the bricks and mortar business and just taking the revenues from it to service rents. Without having something else to sell in the shops it would still have been doomed. You cannot have the cost structure of an offline business with the economics of an online business, which is why considering strategy in a void is pointless.
154 weeks ago, by Jeff
We used to see this a lot in the travel industry. There were continual consolidations over the 25 years I was in it. Companies would be bought by others and then usually disappear within a couple of years as the new owners didn't sufficiently understand the new acquisitions' business models or appeal, and eventually the bean counters would take over and the brand and ethos would be eventually diluted so much as to be unrecognisable. The thing would then just turn into an unprofitable division, and be shut. Amongst the many, you may remember the following holiday companies this happened to - Horizon; Wings/OSL; Sovereign; Enterprise.

Unless Blockbuster were going to let the new boys have their head, it would probably not have worked. Someone else would have come along and done it better anyway.
154 weeks ago, by James
That companies would sooner put their head in the sand than change is astonishing really. Is there a difference between owner managers and hired managers in these situations.

Mike insight about some companies being property companies funded by a business model is a good one. Can anyone name any more?
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