Perhaps no other example quite defines the concept of industry disruption as the Blockbuster / Netflix story. It will potentially go down as one of the biggest forehead-slaps and missed opportunities in history. The short version of the story is this: Blockbuster had the opportunity to buy Netflix and didn’t. Blockbuster has since gone under and Netflix, well… you know how they turned out.
Here are 3 interesting facts about the blunder that illustrate how critical it is for business owners to recognize disruption and take steps to ensure they thrive in a climate of constant change.
Blockbuster’s CEO Didn’t Look at The Bigger Picture
Netflix CEO and co-founder Reed Hastings had tried a few times to court Blockbuster chief John Antioco and get him to buy Netflix (which at the time was only a DVD-by-mail rental company) for $50 million dollars (the company is now worth $19.7 billion). Rumor has it Hastings was practically laughed out of the boardroom each time he made an offer to Antioco, who was known to be a tough negotiator.
Now, some might say that at the time Antioco was being a smart businessman. After all, Netflix was losing money back in the early aughts. But the lesson here is that Antioco was looking at rather obvious information right in front of him. He lacked the vision to see the bigger picture and where the future of the home video industry was headed.
One Bad Decision Led to Others
As if suddenly realizing it needed to jump on the video-on-demand bandwagon, Blockbuster inked a 20-year-exclusive video-on-demand pact with Enron Broadband services as the energy conglom launched into telecom. Only nine months later, Blockbuster canceled the pact due to the Enron scandal.
Next, and quite late to the party, Blockbuster tried to launch its own DVD-by-mail business and rental kiosks but found it hard at that point to compete against Netflix and Redbox.
And perhaps the straw that broke Blockbuster’s back was when, in 2008, then CEO Jim Keyes made a $1 billion bid to buy Circuit City, but the electronics retailer closed its doors in 2009 after going bankrupt.
At the time, Wedbush Morgan Securities wrote in a research note that Blockbuster’s offer bordered “on being reckless,” and that Circuit City “appears to be in the middle of a death spiral.”
Blockbuster’s Profits Were Tied to Something Their Customers Hated
Any entrepreneurial summer camp will start off with a lesson about the need to tie your profits to what your customers value. Blockbuster’s profits had to be able to sustain the worldwide stores and staffing levels. Much of their profit relied on something their customers despised – late fees.
Think about it, a huge portion of the revenue Blockbuster needed to stay in business was a revenue stream Netflix didn’t even have. With Netflix, customers could keep the DVDs as long as they wanted so there were no late fees – ever.
When consumers heard Netflix’s original ad campaign, “The end of late fees,” Blockbuster heard a death knell.
Blockbuster ended up filing for bankruptcy in 2010 when it lost $1.1 billion dollars. At the time, it was valued at around $24 million, while Netflix’s worth had already risen to roughly $13 billion. Ouch.
Dish Network, the third-biggest U.S. pay-TV operator bought Blockbuster in 2011 for $320 million (you could have had Netflix for only $50 million), tried to keep the brand relevant and the stores open, but by 2014, all outlets officially closed.
Perhaps it was a PR stunt or perhaps it was legitimate, but the final film rental from Blockbuster was “This is the End.”