How Netflix Crushed Blockbuster.

Introduction

It was started in the mid 80’s and grew into a multi-million-dollar empire. Blockbuster became the ubiquitous name associated with anything outside of movie theaters. At its peak, it had about 9,000 retail stores and even went public in the late 90’s. By 2010 though it filed for bankruptcy protection and shortly thereafter would close all its stores and lay off all its employees. This short paper will look at 5 key missteps Blockbuster made that led to its ultimate demise.

How did Blockbuster end up in bankruptcy court?

Many business people and just about every business class across every higher learning institution have studied this classic case of David and Goliath, how a giant rose and fell, and how a small start-up grew to be ten times larger than Blockbuster ever was. From its founding in 1997, Netflix had a vision, it was a very simple concept—provide its customers a simpler and more convenient way to rent movies—the problem it faced though was how could it grow against the market domination of Blockbuster Video?

The initial model was similar to that of Blockbuster i.e. charge a set fee for each DVD rented. However, its CEO Reed Hastings made a strategic business decision that would ultimately lead to Blockbusters demise. Why not charge a flat monthly fee and let the consumer rent as many movies as they want—with no late fees! Keep in mind, in 2000 Blockbuster took in almost $800 million in late fees, which accounted for roughly 16% of its revenue.” (Phillips & Ferdman, 2013)

What a huge loss it would be to lose 16% of your revenue stream in a very short period of time when your customers simply switched their preference overnight. This was the first nail in Blockbusters coffin. There would be several more missteps that would follow that many who have studied what happened and place blame upon its then-CEO John Antioco. We will look at those next and how their totality, combined with decisions made within Blockbusters board and key management, or lack thereof, would ensure a relatively quick death for Blockbuster.

Blockbusters top five (5) missteps over the last decade that doomed it.

In 2000, after founding Netflix 3 years earlier out of frustration over late fees from renting Apollo 13, Reed Hastings flew to Dallas to propose to Blockbusters CEO, John Antioco a merger whereby Netflix would run Blockbuster’s online brand and Blockbuster would promote Netflix in its brick and mortar stores, which at that point amounted to over 9,000 worldwide. He was laughed out of the room. Many pundits agree that Antioco was a very competent and smart CEO. His greatest shortcoming was not being able to see, or understand, networks of unseen connections. (Satell, 2014)

The five key areas that caused Blockbuster’s demise were:

  • The social epidemic it caused
  • The threshold model Netflix employed
  • A different network altogether
  • New Strategy in a networked world
  • Failure to adapt and identify and mutiny from within Blockbuster

The social epidemic Blockbuster caused was forcing people to come to its locations and the fact that they charged late fees. By getting rid of costly retail locations, Netflix passed on these cost savings to its customers. You paid one flat subscription fee monthly and could watch as many movies as you wanted and could keep them for as long as you wanted. This niche service would be the final nail in Blockbusters’ coffin.

Next, the threshold model that Netflix relied upon, tapped into people returning the movie when their threshold for watching it was reached. This was a brilliant insight and model that understood, people would eventually return the movie, without any penalty. Still though, the biggest hurdle was getting people to understand that a movie being mailed to you wasn’t cumbersome and Blockbuster hedged its future growth on the fact that people liked coming in to browse at their selections.

However, the biggest hurdle was getting people to understand that a movie being mailed to you wasn’t cumbersome and Blockbuster hedged its future growth on the fact that people liked coming in to browse at their selections. “Scientists call this the threshold model of collective behavior.” (Satell, 2014)

So how did this apply to Blockbuster and Netflix? It became a matter of varying levels of resistance to any given or new idea. In this case, I will no longer go into a building to decide what DVD I want, instead, I’ll order it and keep it for as long as I want and order as many movies as I want. Everett Rogers’ formulated the “diffusion of innovation”diagram below in the 1960’s and best explains this model.

diffusion-of-innovatins

Diffusion Of Innovation

After Blockbuster’s CEO finally saw that Netflix and Redbox for that matter were real threats to Blockbuster, he began the knee-jerk executive decision of trying to stop the bleeding by discontinuing late fees and investing heavily into digital platforms. This was one of his next missteps and miscalculations by failing to understand a different network was emerging.

The result was $200 million dollars of lost revenue in the form of late fees that were scrapped and another $200 million that was spent investing into a digital platform. Profits plummeted and in 5 years Blockbuster would be bankrupt. Antioco failed to understand and realize how quickly a niche could snowball into a viral cascade. Then he failed to create a network that could support the transition of his new ideas of change throughout the entire organization.

The new strategy in a networked world that was emerging was one of online social platforms; companies such as Facebook, Twitter and others began to change our social paradigm and habits as consumers. Blockbuster thought it would forever be the largest player in the industry and that people would always go to its stores, even if the technology changed by which they viewed movies.

The failure to adapt and evolve caused Netflix to take market share from Blockbuster. “The irony is that Blockbuster failed because its leadership had built a well-oiled operational machine.  It was a very tight network that could execute with extreme efficiency, but poorly suited to let in new information.” (Satell, 2014)

Conclusion

Blockbuster’s rise to dominance and subsequent fall from grace has been studied intently. In less than 30 years it rose to 9,000 stores globally, was worth about $8.4B and even went public, by 2013 though it was completely gone. One thing is glaringly apparent; there are no definitive answers in a world that still thinks there is a recipe for business. So long as business people understand that understanding how networks work and researching the ones that affect your business, you may be able to forego the trials and tribulations blockbuster went through.

References

Satell, G. (2014, September 5). A Look Back At Why Blockbuster Really Failed And Why It Didn’t Have To – Forbes. Retrieved from http://www.forbes.com/sites/gregsatell/2014/09/05/a-look-back-at-why-blockbuster-really-failed-and-why-it-didnt-have-to/

Newman, R. (2010, September 23). How Netflix (and Blockbuster) Killed Blockbuster – US News. Retrieved from http://money.usnews.com/money/blogs/flowchart/2010/09/23/how-netflix-and-blockbuster-killed-blockbuster

Phillips, M., & Ferdman, R. (2013, November 6). A brief, illustrated history of Blockbuster, which is closing the last of its US stores – Quartz. Retrieved from http://qz.com/144372/a-brief-illustrated-history-of-blockbuster-which-is-closing-the-last-of-its-us-stores/

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2 Responses to How Netflix Crushed Blockbuster.

  1. Kuni says:

    Did you know Barry Zale (MMA ’74) was a major player in Blockbuster in the 90s?

    Like

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