The Rise And Fall Of Blockbuster: Wow, What A Difference!

Blockbuster’s Rise to Fame:

David Cook, the founder of Blockbuster Video, got his start by making software for oil and gas companies in 1978. But just after six months after taking his company public, the oil and gas industry started to struggle due to a surplus of oil and Cook started to lose his customers. (Lavender, 2022). So, Cook started a new business and in July 1985, called it Blockbuster Video.

At the time, most video stores were small both in size and selection, so Cook’s plan was to carry an enormous inventory of video tapes in large stores that stayed opened late. (Lavender, 2022). Cook built a distribution center for his stores that used an electronic barcode system to manage inventory, capitalizing on his earlier experience in the software database industry. The distribution center allowed Blockbuster to dispense and hold movies that weren't needed at one location and route them to another location.

Franchising:

Upon initial success of the first Blockbuster, Cook opened three more Blockbusters within a year and began franchising the company. Blockbuster began to expand not only in locations but also in content. In 1987, the company began to rent out video games from its locations (Logotech, 2021).

In that same year, Waste Management co-founder, Wayne Huizenga acquired several Blockbuster stores. Huizenga embarked on an aggressive expansion program. When Huizenga got into the Blockbuster business, the company only had 19 locations. Under Huizenga’s rapid expansion, Blockbuster had 400 locations by the end of 1988. The expansion was so rapid that for a period of time there was a new Blockbuster opening every 24 hours by 1990 (Logotech, 2021).

Revenue Sharing:

Originally, the economics for the video rental business were the same whether it was Blockbuster or an independent. Everyone bought their movies directly from the studios for around $70-$75. But in 1998, Blockbuster again revolutionized the industry by entering into a revenue-sharing deal with the studios. (Logotech, 2021). The studios would get a percentage of Blockbuster’s revenues and in exchange Blockbuster cut their cost down to around $2-$5 a tape. And that was the beginning and the end of the mom-and-pop stores (Cachon, 2000).

The Battle of Late Fees:

In 1997, Reed Hastings and his friend founded a new video rental company called Netflix with the goal to find a solution to everyone’s late fee “problem.” While Blockbuster offered a per movie rental charge, which could get costly if renting several movies for the whole family, Netflix offered a straightforward monthly subscription with unlimited access to all their movies, two discs out-at-a-time, no late fees, free shipping and return, with the ability to cancel anytime.

Additionally, if a Blockbuster customer was late on their return, they were subject to pay a late fee for every day they were late. Blockbuster’s model depended on customers returning videos in a timely manner or perhaps, in an untimely manner. In fact, Blockbuster's late fees were a significant portion of their revenue. It was reported that Blockbuster made $800 million in late fees in one year alone.

Redbox:

Redbox is known for its low-cost, convenient DVD rental vending machines and mail orders. Different from its competitors, Redbox kiosks are located at high-traffic locations such as Walmart, McDonald’s and popular drug stores. Unfortunately, the industry shifted toward streaming content at a time when Redbox was still figuring its kiosk-based business model. In 2012, Redbox launched Redbox Instant, a long overdue video streaming service, at the same price as rival Netflix but it now had to contend with Hulu, Amazon and Netflix. Redbox then shut down its streaming service falling back onto its kiosk model.

The Fall of Blockbuster:

Blockbuster, once a leader in video rental business with about 50 million customers and 9,000 stores, was not ready for the change that was clear on the horizon: the internet. It took Blockbuster six years to start Blockbuster Online to compete with Netflix but by then, Netflix had revolutionized the industry again with its streaming services and Blockbuster was unable to pivot fast enough.

From 1996 to 2010 Blockbuster was only profitable for two years. It carried a huge debt that caused them to go bankrupt. “If it hadn’t been for their debt, they could have killed us,” said Hastings, the founder of Netflix.

A Missed Opportunity:

In 2000, Netflix executives flew to Dallas on a last-minute flight to meet with John Antioco, CEO of Blockbuster, about an opportunity to purchase Netflix for $50 million (Randolph, 2019). While Antioco and his team had concerns regarding Netflix’s lack of financial sustainability, as well as the “dot-com hysteria” (Randolph, 2019), the cost is what seemed to end any type of potential deal. Ultimately, Blockbuster’s complacency and lack of foresight regarding the internet is what led them to make another one of their many bad decisions. While this was not the cause of their demise, it was certainly one of the nails in the coffin.

Hot Potato:

The common theme behind Blockbuster’s many ownership changes was survival. When the original owner, David Cook, needed a cash infusion after failing to raise money with a public offering (Poggi, 2010), Wayne Huizenga and other former Waste Management executives purchased 60% of the company. Huizenga had big plans for Blockbuster to become a leading media company with “rented movies, sold music, computer programs, video games and featured virtual reality entertainment arcades” and to achieve these goals, he proposed a $4.7 billion merger with Viacom. After stalled merger talks and negatively impacted stock prices, Viacom decided to buy Blockbuster outright in 1994 for $8.4 billion with hopes that Blockbuster’s cash flow would help it recover from their debt incurred as a result of their purchase of Paramount. Unfortunately, within two years of the purchase, Blockbuster lost half of its value, leaving Viacom with no choice but to split from the company in 2004.

A few years later, the recession hit and with $1 billion in debt, Blockbuster’s only choice was to file for bankruptcy. Dish Network became the last and current owner of Blockbuster assets which they acquired through a bankruptcy auction in 2011.

A model for the music industry?

Much like their movie counterparts VHS and DVD, compact discs (CDs) have suffered a similar decline. The movie and television industries have moved away from physical media to streaming providers such as Netflix, Amazon Prime Video, Disney+, etc., that charge one monthly fee for unlimited access to their digital video collections. Similarly, music listeners want more than just buying full albums on CDs or listening to the radio. The music industry has changed from purchasing songs individually with iTunes and digital radio stations like Pandora to the currently popular streaming services of Spotify and Apple Music that allow users to pay a monthly fee for access to listen and download millions of songs.

Why not books?

The book industry does have book streaming services, so to speak, in the form of eBooks and audiobooks. It even has book rental services as well, although mostly confined to the educational field in the form of eTextbook rentals. But the story with books [pun intended] and the digital revolution is much more complicated than with its movie and music counterparts.

According to a Pew Research Center study, 37% of American claim they only read print books, 28% claim they read both print and eBooks, and a staggeringly low 7% say they only read eBooks. (Errera, 2022). This is reflected in the fact that physical books are still the largest revenue generator for publishers accounting for 74.7% of total revenue and eBooks only accounting for 7.48% of revenue. (Errera, 2022).

It would seem that when it comes to books, there is something in the physical media that is inseparable to the experience. That is likely why (1) 66% of readers believe that physical books over a more unique and fulfilling reading experience, (2) that college students say they retain information longer when read in the physical format, (3) physical books don’t cause as much eye strain as eBooks do, (4) children learn belter with physical books, and (5) 64% of employees prefer physical memos over digital communication. (Errera, 2022).

The Cost to Society:

So, what is the cost to society of tangible media? In a world where perspectives and attitudes change quickly and greatly, that can mean that content may get censored or removed from a service entirely. (Moore, 2021). The great thing about physical media is that it always belongs to you. (Riu, 2021).

But the true cost is best put in this excerpt. “The final but perhaps most important thing that makes physical media special is how it brings people together. Making a new friend at a used record store. Discovering a new movie while wandering through Best Buy. Sparking a friendly debate over a book proudly displayed on one’s shelf. This is the culture of physical media. This is the joy of physical media.” (Moore, 2021).

References:

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Ferber, T. (2017, August 29). This Look Back At Netflix's Early Days Will Blow Your Mind. Retrieved from https://www.bustle.com/p/what-was-netflix-like-20-years- ago-Spoiler-alert-its-almost-unrecognizable-79755

Huddleston, T. (2021, January 12). Netflix didn’t kill Blockbuster — how Netflix almost lost the movie rental wars. CNBC. Retrieved April 17, 2022, from https://www.cnbc.com/2020/09/22/how-netflix-almost-lost-the-movie-rental-wars- to-blockbuster.html

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Moore, M. (2021, July 28). Do we still need physical media? Aesthetics for Birds. Retrieved from https://aestheticsforbirds.com/2021/07/28/do-we-still-need- physical-media/

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Randolph, M. (2019, September 17). He "was struggling not to laugh”: Inside Netflix's crazy, doomed sales pitch to blockbuster. Vanity Fair. Retrieved April 14, 2022, from https://www.vanityfair.com/news/2019/09/netflixs-crazy-doomed-meeting- with-blockbuster

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Waniata, R. (2018, February 7). The Life and Times of the Late, Great CD. Digital Trends. Retrieved April 15, 2022, from https://www.digitaltrends.com/features/the-history-of-the-cds-rise-and-fall/