Blockbuster: We killed it

People born in the 21st century may not remember Blockbuster, once the US’s leading DVD rental chain. But it is the name that rings a bell for those who grew up in the 20th century. My first part-time job in US was at a Blockbuster store. Browsing through the shelves to look for the movie for the week was exciting as almost as the movie itself.

At its peak, Blockbuster wasn’t just a video store. It was THE video store, a titan of the entertainment industry. At its height, Blockbuster had more locations than many countries in the world had movie theaters. It employed nearly a million people and generated more than U$ 6 billion a year.

So, why did Blockbuster fail? How exactly did Blockbuster experience such a meteoric rise? And more importantly, what drove this Behemoth to go from over 9,000 stores in 2004 to just one today?

From its inception in 1985, Blockbuster operated on a very simple business model. It bought movies in bulk at very cheap prices and rented them to customers for a small fee. After recouping its cost, the company would then sell the movie at a discount and then move on to a newer release.

Once you do that with thousands of different movies, you’ve got an incredibly lucrative business model. So lucrative in fact that by the early 1990s Blockbuster had begun to grow exponentially. In less than 10 years, the company went from one tiny location in Texas to opening a new store every 24 hours. The company even began to branch out in other areas, famously winning a lawsuit in 1989 against Nintendo that allowed it to rent out video games.

So, why did it fail? Well, many blame the decline and fall of Blockbuster on Netflix. There is a lot of truth to that, but not always for the reason people think.

Blockbuster was actually given the opportunity to buy Netflix for $50 million. Considering Netflix’s market cap today, this was arguably one of the worst missed opportunities in history. But contrary to popular perception, Blockbuster was not at all oblivious to the threat Netflix posed. In fact, the company’s own annual reports listed them as their chief rival.

When we consider the fact that Blockbuster collected more than $800 million from just late fees alone in the same year that they were offered to buy Netflix, they had every reason to believe they could win.

But ironically it is actually the late fees that explain the collapse of Blockbuster far more than their failure to buy Netflix. Blockbuster did not accept that the service built its brand has become outdated. Instead of embracing the change, they tried to overwhelm this new kind in the town by scaling up their old style. It was a typical David versus Goliath style showdown.

Netflix did not kill Blockbusters so much as YOU, namely the paying customer. We often forget this fact and instead focus on how one company triumphed over the other, but the whole reason Netflix defeated its rival was because the marketplace wanted more flexible and convenient ways to enjoy movies. Blockbuster failed to address the changing demand of its customers. If it had overhauled its business, it would have been what Netflix is today.

The story of blockbuster isn’t just about a collapse of a business. It is about the collapse of a way of doing business. Blockbuster didn’t fail because it did not acquire Netflix. It failed because it did not meet the desires of its customers the way Netflix did.