Fallen Giants: Blockbuster

Imagine if Netflix was a physical store where millions of people religiously go to choose from a wide selection of movies and shows. Imagine browsing physical aisles containing thousands of titles along with dozens of other movie-lovers walking around the vibrant store.

A place like this really did exist, and its name was Blockbuster.

Glory Days

Blockbuster was a cultural phenomenon in the 1990s and early-2000s. Millions of people flooded the stores weekly to hunt for movies, shows, and even video games to rent. Reaching 9,000 stores at its peak, Blockbuster served as a social hub for entertainment seekers and it was common to run into friends during your movie hunt. Blockbuster was also famous for its huge candy section and popcorn giveaways, producing a movie theater atmosphere.

Blockbuster was founded in 1985 by David Cook in Dallas, Texas. By the early 1990s, it was the king of video rental retail, and in 1994 it was acquired by Viacom for $8.4 Billion. In 2004, Blockbuster boasted an annual revenue of $5.9 billion to go along with a $5 billion market cap.

What Went Wrong?

One day back in 1997, a long-time Blockbuster customer became infuriated when he was hit with a $40 late fee from his local Blockbuster. This customer was Reed Hastings, the founder, and CEO of Netflix. He then became determined to start a superior video rental service that would bypass requiring a physical location and deliver the DVDs via mail.

Netflix attained solid growth in its first few years, but Blockbuster had enormous brand equity and a vastly larger inventory of movie titles. They should have been able to crush Netflix and continue their reign atop the video rental industry. However, they became complacent and felt invincible as the head of the video rental industry, while Netflix was stealing their customers. Netflix rolled out its now famous streaming subscription service in 2007 and surpassed Blockbuster in annual revenue in 2009. Netflix along with other new video rental services like Redbox and on-demand platforms effectively eliminated the need of going to a physical store to rent DVDs. Blockbuster was becoming an extra and unnecessary step in the video rental process.

To make matters worse, Blockbuster famously passed on an offer from Reed Hastings in 2000, to buy Netflix for $50 million. Then CEO, John Antioco regarded it as a “very small niche business”, displaying a clear lack of vision for the future of his industry.

Blockbuster was plagued by an utter failure to innovate and adapt to changes in technology and distribution preferences. They also irritated their customers with excessive late fees as well as fees for not rewinding VHS tapes. Late return fees raked in $800 million (16% of annual revenue) in the year 2000 alone. By damaging their relationship with their customers, it became easier for people to abandon them when new options arose.

Consumers tend to prefer the more convenient option, and with the need to drive to a physical store to obtain movies, it was only a matter of time before Blockbuster went under.

Industry Impact

Netflix grew rapidly and Viacom sold off Blockbuster in 2004 after annual revenues were starting to decline. In September of 2010, Blockbuster filed for bankruptcy. In 2013, they announced plans to close all remaining stores.

Blockbuster became dangerously comfortable being an industry leader and was usurped by innovative competitors like Netflix, Redbox, and various video on-demand services. They were too slow to react to the success Netflix had with eliminating steps in the video rental process. Blockbuster had no vision of the future of their industry and was oblivious to consumer preferences. They even embarrassingly attempted to acquire fellow business disaster Circuit City in 2008.

Netflix currently boasts a $155 billion market cap, a vastly superior number to Blockbuster’s peak at $5 Billion. By creating a product that adhered to the customers wants, Netflix has essentially wiped out the video-rental industry and pioneered the streaming industry.

Key Takeaways

Listening to the consumer and designing your product or service around their desires and convenience is a recipe for success!

Wise companies currently use Blockbuster as a lesson of poor business decisions to avoid. They serve as a perfect reminder about the importance of innovation, having a clear vision for the future, and refusing to be complacent in today’s competitive business environment.

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