Hello everybody, Tom Ellsworth here, and welcome to Case Studies with the Biz Doc.
This is where we study what happened to other companies to find important lessons out of
the case study that you can apply to your business today, or the one you're going to
build tomorrow.
This week we're going to talk about Blockbuster.
Remember Blockbuster?
Big video rental chain.
Well, Blockbuster didn't have a very good sequel when it was time for the digital era
and they flopped.
And we're going to find out why, and how you can avoid it.
Before we do that, and talk about all the badness and what happened, let's go back and
talk about what was really a pretty good opening and a pretty good launch for Blockbuster.
They were actually founded in 1985, in Dallas, Texas, by a guy that had experience with databases.
And he did a really good job of designing some early analysis tools where they would
determine what videos that they were going to put in what locations based on the neighborhood
and what people liked.
It was pretty sharp thinking way back then.
And before long, they were up and running and really getting off the ground.
Along the way, they offered franchise opportunities.
So you could get yourself a piece of this action and get in on this Blockbuster deal,
renting big video tapes to all Americans so they could go home and watch a popular movie
with their family.
It attracted the attention of a guy named Wayne Huizenga.
Now Wayne Huizenga was a high-flying guy with a company called Waste Management.
And he thought it would be so cool to have a franchise of Blockbuster, that he bought
the whole company.
And he paid $18.5 million for it.
Can you believe that?
After two years, $18.5 million.
You know, we did a previous case study on a company called Groupon where after two years
Google offered six billion dollars.
And they didn't take it!
If you want to know that story, go watch the Groupon case study.
But back at Blockbuster, after two years, Wayne Huizenga of Waste Management buys them
for $18.5 million.
And then Wayne, he was a pretty good executive.
And he and his partners started putting things to work and before long, they had 2800 stores.
Now I say before long because it took them about five years, but they just put these
management principles, they acquired some companies, and they were just a freight train,
and all of a sudden there were 2800 stores.
So popular, that Viacom, the big media company paid 8.4 billion for Blockbuster in 1994.
That's a pretty good payday for Wayne Huizenga and his buddies.
And their plan was interesting.
Blockbuster had $1.25 billion in the bank!
Cash in the bank.
And they were bought in what's called a stock swap, where Viacom gave them stock in Viacom,
worth this $8.4 billion and they bought the company, Blockbuster, complete with its bank
account, with all that money in it.
And you know what they were going to do?
They were going to use some of that money to actually go buy Paramount Studios.
Well if that sounds like creative and confusing deal making, we'll soon find out that it was.
But the bottom line is, you probably shouldn't have the finance guys making acquisitions.
This should be strategy.
And I think when you're thinking that I'll just buy this company, it will stay profitable,
there's an assumption, and I'll take this billion dollars inside it and I'm just going
to go buy this other company over here, this movie studio, there's another assumption,
well, maybe someday I'll do a case study on Viacom.
But meanwhile, now Blockbuster is part of Viacom and Wayne Huizenga and his guys have
been paid handsomely.
Well, that was in 1994.
And three years later, in Silicon Valley, California, a guy named Reed Hastings was
really pissed off because Blockbuster charged him $40 because he was late returning Apollo
13.
Well, he got really annoyed with that, and he started thinking it over, and saying, "isn't
there a better way to do this?
Isn't there something that could be done?"
And he just started thinking about it and strategically he came up with it and he created
a company called Netflix.
So Netflix starts with good strategic thinking and a lot of things there.
But also, a little bit of the spark there was somebody returning an Apollo 13 and getting
charged $40 in late fees.
So, Netflix, it was very interesting.
They took advantage of the fact that video tape weighed this much, but a DVD was really
light.
You could put a DVD in a simple little envelope and, you remember those Netflix, those red
and white envelopes, made of that special material that would protect the DVD.
They just mailed it to you!
It was about as, just a tiny bit heavier than a letter you could get.
But there was a DVD.
And you would watch it.
The other thing they did is they invested in technology and they started saying, you
know, if we mail them to people, they're not going to like the store to browse, and we
can have a selection on the website, but what if we start paying attention to what they're
renting, and what they like.
And then we say, maybe we'll let them rent something that they think is interesting based
on what they've already rented.
And better yet, instead of charging them per DVD rental, which wasn't really popular at
Blockbuster, and had its issues with late fees, and Netflix found some issue there,
too, so Netflix said, the hell with it.
Why don't we make a subscription and you could rent up to this many DVDs a month?
And then we could always send you some that maybe we think that you would find interesting.
Or we'll put it on like a list and tell you, hey, we think you'll like this, and we'll
put this on a list so it will come up and say, you seem to like action adventure movies,
maybe you'd like this one, too.
Help people discover movies that they hadn't thought about.
Well, guess what?
Netflix took off.
We all know it took off.
And they're off and running.
Meanwhile, Viacom is saying, well, you know, let's make some money off this Blockbuster
thing.
Let's do something about it.
And in 1999, they sent Blockbuster public, had an IPO, Initial Public Offering, which
is the initials for what happens when you go on the stock market for the first time.
And Viacom sent Blockbuster out, and they're on the stock market.
And as you can see, it was kind of a rocky ride initially, and then in 2002, you see
right here, there's another IPO.
That one belonged to Netflix.
So now Blockbuster is on the stock market.
And their value, when they were out there on that stock market, $2.6 billion.
Wait a minute.
Didn't I say that Viacom paid $8.4 billion for them?
Hmmm.
. . could it be that things were starting to happen?
Well, there were.
You know, it was very interesting.
In the year 2,000, shortly after the IPO, Blockbuster announced that they had, for the
year, you know, their revenues.
And they were talking about revenue and talking about how many videos people would rent.
And they slipped in this little fact, that they made $800 million on late fees.
$800 million on late fees?
You know, there's a word for that.
DAMN!
You know, good grief?
So you're making money on videos, but you're making money on late fees?
To me, that means that there's $800 million worth of annoyed consumers that maybe returned
it a day late or a week late.
Okay, if you're like my brother and you turn it in a week late, you should pay a late fee.
But if you're just a day late, give me a break.
Do you want me to rent from you tomorrow?
Or do you want to just find ways to like just dig at me?
Well, needless to say, there was a lot of people that looked at that and said, you know,
gosh, that seems like a lot of money on late fees.
Are American consumers that irresponsible, or are you that greedy?
Well, greedy or not, anyway, Blockbuster was still moving along, and in 2004, Blockbuster
would be at its peak, with 9,000 stores globally.
9,000 stores.
Well, the Internet happened in 1996, well a little bit before that, obviously, but 1996,
the Netscape browser gave birth to the Internet, and this is eight years later.
And the Internet's doing a lot of things.
And Blockbuster, with a competitor out there in Netflix is still leasing new locations,
renting new locations, buying new locations, and they had 9,000 stores globally.
Which means they had 9,000 payments on real estate.
9,000 leases or things.
And 9,000 locations that needed employees.
You're probably smelling what I'm tasting when I say that is that hmmm.
. . really?
Was that really the business to be in, with all those people and all those locations and
all that stuff?
Well, at that time, they were worth nearly $5 billion, and that would be the peak for
Blockbuster, because Netflix and it's mail out service and its subscription service,
and it's really amazing, I remember it, I don't know if you remember it, recommendation
that would introduce you to movies that you might like, based on other movies you watched.
It was working pretty good.
And after their IPO, do you see which way they were going?
And so, here you had 2004, Netflix was doing well, Americans are loving it, Blockbuster
starting to shift, and the entire history and future of Blockbuster can get summed up
in one two-year period, '04 to '06.
And I call this the showdown at the O.K. Corral.
Now never mind what that is.
That's the name of an old movie.
But it was when these two gun fighters met, and this was you against me, and only one
of us is coming out of here alive.
And in '04, Blockbuster announced a mailing service to mail out DVDs and to mail out rentals
to America.
And then initially, the stock market thought, "oh no, poor Netflix!
Because big giant Blockbuster has now got this service."
And it went down.
But you know what?
Nimble, quick, new Blockbuster, you know, with a mailing service, no, that's not what
it was.
It was old, slow Blockbuster trying to do a mailing service.
And soon we would find out that the financial results weren't there and they weren't doing
so well.
And, Netflix recovered and kept pumping along.
And what you had here, was Blockbuster trapped with all those locations and all that real
estate.
And they had this legacy mindset, that they would just add things on to it.
They had a new CEO in there somewhere who had actually come from 7-11.
And do you remember when Blockbusters basically became convenience stores?
They had coke and candy and all this stuff, and you could rent video games.
Well, renting a video game's smart.
That's similar to renting a movie.
But all that other crap in there, c'mon, it's like who were you?
I remember going into Blockbuster and being just amazed at the amount of extra stuff that
was there beyond movies.
So needless to say, they're starting to have issues, starting to have troubles.
And, guess what?
At the end of those two years, we see where this went.
Netflix recovered, and Blockbuster heads to the place where bad sequels go to die.
Sort of like Dumb and Dumber 2, right?
It wasn't even nearly as good as the first movie.
The first movie was a blockbuster.
It was a blockbuster for Wayne Huizenga and bringing the way to get movies to you and
me.
But when the Internet came along, and digital technologies came along, and they charged
40 bucks to a guy named Reed Hastings who got pissed off about paying that fee for returning
Apollo 13, guess what?
Things changed.
And Blockbuster had all that money in the bank, all that resource.
Heck, they were owned by Viacom, a giant media company that owned a movie studio.
And yet, they fumbled the opportunity, because legacy thinking.
At one point, they had executives that had come over from Wal-Mart.
At one part they had executives come over from 7-11.
That doesn't sound like forward thinking to me.
Even if those executives were really good, smart people.
That just doesn't seem like forward thinking.
So here you had it.
A bad ending, and a sad thing.
And I'll tell you a little side story.
In 2006 and 7, right here, I was working at a company called GoTV.
And we were one of the first companies that had put video on cell phones.
And what had happened is I had seen how we were using our technology and I thought, why
doesn't somebody see about maybe putting eventually movies on cell phones?
And I, if you read my bio, and you know I came from Sprint and I built some of the most
innovative rate plans on the planet that changed an industry, helped change the industry with
all the good people at Sprint that were around me.
Well, I looked at it and I said, you know, I think there's something here.
So I had called Blockbuster and I said, "Listen, I've got technology and I've got the ability
to do this.
You've got all these relationships with the studios.
Let's put this together.
There was a CEO at the time.
His name was James Keyes.
He had just come to Blockbuster after the previous CEO was let go, for reasons that
are pretty obvious on the blue line.
And I sat with their people and I said, Look, you know, let's do this.
I've got the technology, you've got all these licenses and all this content, let's go ahead
and do that.
And they sat there, telling me, that the wireless carriers won't do it, they won't do this,
they won't do that.
You don't understand.
They won't let people pay that much for data.
People will get mad that the data costs so much.
And I looked across the table and I'm like, wait a minute.
Who do you think you're talking to?
Right?
Maybe I should leave the room and you should go check up on my LinkedIn and then I'll come
back, because as you will see, I built rate plans in this industry.
I built rate plans, and I'm working for a company right now that's building video technology
for the future.
You know what that told me?
That told me that even though they had Keyes, that new CEO, that they were dead.
Right?
You know what?
Blockbuster's all about movies.
And it reminds me of a movie.
Remember in the Matrix, remember in the Matrix, "Your men are already dead."
And they were dead.
They declared bankruptcy in 2010.
Dead.
And it didn't have to be that way.
Because let's look at what they had.
#1, they were owned by Viacom.
They had access to content.
They were connected to a media company.
#2, they had money.
At one point they had $1.2 billion in the bank, that Viacom actually, the reason they
bought them was to get at that money.
They were public on the stock market.
They were doing okay.
They could see the future.
They saw a competitor emerge.
They just didn't react fast enough.
And their legacy thinking was tied to their legacy business model.
And somebody was probably thinking, you know, how are we going to get rid of all these locations?
How are we going to sell all this real estate?
Well, you know what, that should have been a problem that you put innovation in force
and find somebody that can buy your real estate and figure it out, because you're going to
die if you stayed there.
They just didn't do it.
They had everything they needed, including being able to watch Netflix start and say,
wow, maybe something's going on here.
And by the time they decided they're going to go out and compete with Netflix, Netflix
was founded in 1997.
They gave Netflix a seven-year head start before they introduced a mail out system in
2004.
You know, a funny side story that's not so funny if you're looking at this side of the
blue line is that in the early 2000, Netflix had actually gone to Blockbuster and said,
hey, you got all these relationships, you got all these movies, why don't we offer a
mail service to be an additional way people could rent movies.
They could return them at the Blockbuster store, but they could get them by mail whenever
they want.
They said, we could do that.
And actually, depending on who you listen to, the myth vs. reality is they were laughed
out of the office or Blockbuster just said they didn't think it was a very good idea.
But the fact is, the fox was in the hen house talking to them about a partnership that never
happened.
And then some years later, you know, the rest is history.
And I think that's an interesting note that also helps you understand just how Blockbuster
didn't understand what was going on.
And how they missed cues in the market, including one that was sitting in their conference room,
offering to partner with them, to offer a mail service, to go right next to physical
video rental.
Blockbuster didn't run to a digital future, and as a matter of fact, they had everything
they needed to succeed.
Instead, they slid to a future death because of their past decisions.
That's it.
So, when you look at it, the thing for yourself to remember is, don't let a decision you make
over here become your permanently entrenched thinking.
Think of it as just a decision you made at a point in time and any decision you make,
big or small, I may have to undo this decision someday.
And just teach your mind to be flexible.
Blockbuster had it happen.
Many companies had it happen.
I'm going to be flexible.
I'm going to be malleable and I'm going to be ready for the future.
If I have to change something, I'm never going to say, "I can't.
I'm a video renter with stores, and that's what I'll always be."
No, I'm a person with a relationship with Americans that want to love movies.
Can you think if those two attitudes were different?
There you have it.
Well, anyway, that's the Blockbuster case study for this week, and of course, as usual,
please subscribe to Valuetainment, the best channel on the Internet for content for entrepreneurs.
Until next time, with another case study, I'm Tom Ellsworth, and I hope I left you,
better than I found you.