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You may have heard the argument that this company was meant to be what Netflix is today.
But it may not be all that simple. So, let's talk about Blockbuster, the movie rental giant
that dominated the market and delivered home entertainment to virtually everybody in the
US during a couple of decades, reaching its pinnacle in the late 1990s; and then succumbed
to the changes that the new millennium brought.
Yeah, let's remember the old days of physically going to a video store, walking around endless
shelves loaded with VHS or DVD movie titles and video-games, that you would rent to take
home, enjoy, and then head back to the store to return them. The younger ones may find
all that to be ridiculous, but for those in your mid-late twenties or more, it certainly
brings a few memories. That's right, what is now just "Netflix and chill," whatever
that means to you… back in the 80s and 90s was the whole thrill of the family trip to
Blockbuster to pick up the weekend movies and luckily some popcorn and goodies.
In this episode, we will go over what happened to Blockbuster, how it managed to become the
most significant movie rental service globally. We'll review its business model and what happened
to it when on-demand video and online streaming emerged.
This is Company Forensics: Blockbuster.
You may think Blockbuster is a perfect example of a business left behind by technology and
new consumer behavior.
But at the end of the day, the truth is that by 2004 they had more than 9000 stores in
the US and around the globe, employing more than 80,00 people. Those would sound like
good numbers for any business, if only the Internet wasn't just about to take over and
revolutionize the market entirely, leaving all those thousands of stores pretty much
obsolete.
So, let's remember history and go back to the golden age of video rental to review how
this company rose to what it became.
The first Blockbuster store was opened in 1985, in Dallas, Texas, by a local entrepreneur
named David Cook, who worked as a software developer for oil and gas companies, mainly
writing computer programs to run inventories.
Along with his wife, they got interested
in the video rental business, and thanks to his background, they realized that most video
stores were mainly small, family businesses with a reduced inventory of their movie titles
and therefore limited offer to the public. All this gave Cook the idea to create the
first super brand for video rentals.
His background proved useful when they finally opened the first Blockbuster store with an
inventory of 8,000 tapes and a brand new computer system to manage it, making the rest of the
local stores look very modest. The store was a hit, and they realized there was a bigger
appetite for video rental than they first expected, defeating the idea that rentals
were mostly exclusive to movie hits and new releases.
The Cooks set out to raise money for further expansion
with an initial stock offering. They started franchising the brand and built a $6-million
warehouse to help sustain and support future growth by allowing new stores to open quickly.
Interestingly enough, Blockbuster stores reportedly had a custom-made inventory to their neighborhood,
based on local demographics.
Among other things, the efficiency in inventory management allowed Blockbuster to be the only
video rental to have the actual tapes and discs displayed on the shelves. With this,
the public could just pick them up, checkout in the counter, and leave, as opposed to the
traditional procedure where stores would showcase empty boxes and then have to go to the back
and get the actual movies for the customer.
That somehow reminds me of how ToysR us changed the concept of toy stores by merely stacking
up toys on shelves and hallways for the first time. We made a video about that. Check it out.
But after the initial investment, the Cooks had a hard time raising money for more expansion,
and soon Blockbuster was facing debt. Cook was also starting to worry about
the rise of cable TV and the threat that it could pose to video rental. So, less than
two years later, he sold the majority of the company to a group of three investors who
already owned some of the franchises. One of these investors was Wayne Huizenga, an
accomplished American businessman that ended up becoming the head of the company.
By 1987, Blockbuster
was operating 133 stores and had become one of the country's largest video chain in terms
of revenue. Sales went from $7.4 million in 1986 to $43.2 million that year. By the end
of the next year, there were already 400 Blockbuster stores.
However, at that crazy growth pace, soon in the early 90s, the video rental market started
looking saturated in the US
Entering the new decade, the company's earnings came from an impressive
114% growth rate in 1988 to a still-great 93% in 1989 down to a good 48% in 1990, starting
to show a concerning trend.
Besides this, the threat of cable TV companies was getting real. For reference, in 1991,
Time Warner announced it would upgrade its cable system, and only three days after that,
Blockbuster's shares dropped more than 10 percent.
So, the company soon started looking for expansion abroad and continued its strategy of acquiring
more of the leading video store chains in countries like Japan or the United Kingdom,
where they bought the largest one at the moment, Citivision PLC, for $135M.
Finally reaching a presence in
24 countries in the coming years.
In 1992 Blockbuster went on a series of agreements to diversify the company's operations beyond
the core movie rental business. Soon came other incursions like Blockbuster Music, a
merger of some music companies, and things like an agreement with the British conglomerate
Virgin Group to set up megastores in the US, Europe, and Australia. Already in December
that year, the first such store opened in Los Angeles. Huizenga envisioned these stores
not only renting videos, but also selling and renting music, computer programs, games,
and other in-store attractions like arcades and even live performances.
He even dreamed of a full-blown amusement park, but as you know, that never happened.
By 1993, the multi-billion blue and yellow Blockbuster logo was in more than 3,400 video
stores worldwide. With its ever-growing corporate activities, Blockbuster was committed to diversification
as a means of ensuring its future, and its response to facing the advance of new formats
like video-on-demand and satellite TV. This strategy reached a peak when the company went
for a $4.7 billion valuated merger with media giant Viacom Inc. It was also Huizenga's sign
off from the company, as he would leave just shortly after.
That merge deal was controversial, as it reportedly was an unprecedented move from Viacom in its
plan to take Paramount out of QVC Network's hands, in the epic bid war they held to own
Paramount. Viacom and Blockbuster valued their stock-swap merger at $8.4 billion, and Viacom
said it would raise its bid to $105 a share, totaling $6.5 billion, for 50.1% of Paramount's
stock.
But back to Blockbuster, this can be considered the beginning of the end. And we haven't even
talked about Netflix, but we'll get there just now. So, under Viacom's tutelage, the
company pretty much stopped growing and started the downhill. During the early years of the
new millennium, Blockbuster's competitors included cable and satellite companies offering
video-on-demand, online movie rentals offering mail-orders, and large retailers like Wal-Mart
Stores that sold inexpensive movies and games.
All this left Blockbuster sort of besieged for the years to come, but there were also
a series of questionable decisions they made. For example, they turned down deals that would
later prove very successful, like rejecting an exclusivity deal from Warner Bros., to
rent new DVD releases for some time before they went on sale to the general public. Blockbuster
Walmart seized the opportunity and a few years later surpassed
Blockbuster as the studios' single largest source of revenue.
They also turned down not one, but to deals from Netflix. First, in 2000,
they decided not to acquire the platform for $50M. Later they also turned down Netflix's
offer to run Blockbuster's online video service.
In 1999, Blockbuster went public and released an IPO at $15 a share, below the range analysts
who follow the industry had anticipated.
Making around $465M. In July 2010, Blockbuster was delisted
from the New York Stock Exchange.
But back to the 2000, they went after other salvation-type operations like partnering
up with Enron in 2004, to develop their late video-on-demand platform, in response to what
Netflix had been successfully doing for years. Doing most of the work, Enron built a
robust video-on-demand platform that was developed and tested with customers. But soon, they
faced the fact that Blockbuster was still so focused on keeping at bay the once-lucrative
video stores, and doubted that they wouldn't supply enough titles and support for the video-on-demand
business. As a result, the whole thing was just canceled, and Enron's stock plummeted
afterwards.
Within a few years, Netflix and other competitors began to eat into Blockbuster's profits, not
by undercutting it, but by reinventing video rental in the digital age. So, let's take
a quick look at business models and what Netflix was doing to innovate while Blockbuster moved
through the new millennium with the clumsiness of an old giant.
You may have heard the cheesy story that Netflix was created after its founder, Reed Hastings,
was upset for having to pay $40 on late fees for returning a movie to Blockbuster.
Allegedly, Apollo 13.
Yeah, late fees, we all hated them, but they were kind of a necessary evil to the rental
business model.
The profits from those late fees were fat, accounting for an essential percentage of
the company's earnings, reportedly generating incomes of up to $800M at one point. Yeah,
that sounds greedy. And even when they tried to get rid of them, they didn't. In 2005,
they implemented a new policy that charged you the full price of the movie or game after
eight days, which you could cancel by returning the product in question and paying a restocking
fee. The move backfired, and more than 40 states filed suit against the company for
false advertising.
On the other hand, already in the late '90s, Netflix was experimenting with new ways to
rent movies, non-dependant on brick and mortar stores, and started their DVD mailing system.
Let's make a quick comparison of both models.
You already know the traditional Blockbuster way. It had physical stores where you would
go, pick up movies, take them home for three days and then head back to the store to return
them. With time, this concept was enriched with in-store attractions and related sales,
making it an enjoyable experience. Remember the excitement of going after the new movie
releases or picking up the latest video games after having walked around the store, laying
your eyes on all the titles. It was undoubtedly a weekend plan for families and friends.
But then, of course, was the pain of going back to return them after only three days,
or assuming the punishment of paying those hatred late fees. There was certainly a lot
of mobilization there and the collateral pains of it.
On the other hand, Netflix was looking for ways to simplify the process and even get
rid of late fees, despite they also had them in the very beginning. So, they came up with
the DVD mailing system, where you would sign up for a membership and be able to choose
movie titles to be directly mailed to your home. Once you
were done, just sent them back, with prepaid return envelopes that were also provided.
This felt new and fresh at the time, but they only had around 300,000 members, as opposed
to the millions in Blockbuster. Later on, with this system, you would only get new movies
after you had returned the ones you got, allowing you to get rid of late fees.
But this mailing system relied on the postal service and implied waiting one day or more
to get your movies when in Blockbuster you could just go and pick it up. Also, the movie
catalog Netflix offered at first was just ridiculously smaller than Blockbusters.
However, this placed Netflix as a fresh face in the market and made manifest their will
to innovate and provide different, better solutions to movie rentals. But in the process,
they realized Blockbuster's competition was still just smashing in terms of magnitude,
and it was then when they proposed to sell them the company. For Blockbuster, turning
down the offer ended up being bitter, very bitter… but for Netflix, it ended up being
a good thing, as it probably urged them to push harder towards innovation and competition.
For some time, Netflix had considered offering movies online, but it was only in the mid-2000s
that data speeds and bandwidth costs had improved sufficiently to allow customers to download
their films. The original idea was a "Netflix box" that could download videos overnight,
and be ready to watch the next day. By February 2007, they had delivered its billionth DVD
and began to move away from that original core business, by introducing video on demand
via the Internet. And we all know the rest of the story.
In January 2013, Netflix reported that it had added 2M US customers during the fourth
quarter of 2012, reaching 27.1 million streaming customers in that country and a total of 29.4
million total customers globally. Already in September that same year, Netflix reported
its total of global streaming subscribers at 40.4 million. Four years later, by October
2018, Netflix's customer base more than tripled, reaching 137 million worldwide and confirming
its rank as by far the world's largest online subscription video service.
So, yeah, at the end of the day, maybe Blockbuster was meant to be what Netflix is today, considering
they were the single most prominent brand in movie rentals and had the business muscle
to lead an industry revolution. And yeah, they were stubborn about sticking to brick
and mortar stores and those lucrative late fees from the old business model. Clearly,
they failed to evolve the business alongside technology and new consumer behavior.
It's arguable, and maybe a bit unfair, to say that their biggest mistake was to turn
down on Netflix. In hindsight, we know that closing that deal would've provided them with
the new blood required to innovate their already large business, and if that had happened,
maybe the color of online streaming wouldn't be red as it is today, but blue and yellow.
Now, if you are stuck at home and get really tired of Netflix,
what I would recommend is checking out our Startup Cafe.
This is a channel on our Discord server where entrepreneurs can just interact and have a chat.
I hang out in there sometimes.
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That's all for today. See you next week.