A Blockbuster Blunder

POINT TO PONDER

"The highest form of ignorance is rejecting what you don't know." 

                                               -Wayne Dyer

 

STORY LINE

In 2000, a one year old company with a growing subscriber base called NETFLIX approached the video goliath BLOCKBUSTER VIDEO with the offer of a partnership. Netflix was hoping to offer DVD delivery to Blockbuster's clients while Netflix would promote in house rentals at Blockbuster store locations. 

At the time, Blockbuster was the leader in store video rentals and Netflix had a unique market share that offered customers the chance to have their movies delivered right to their homes. Netflix eliminated the need to get in your car and drive to the store to get your entertainment as well as eliminating the late fees that often accomanied having to return DVDs to store locations. 

At the time, Blockbuster couldn't understand the model of a home delivery system. Barry McCarthy (Netflix's former CFO) claims that Blockbuster representatives, "just about laughed us out of their office. At least initially, they thought we were a very small niche business." 

It turns out the rejection was a good thing for Netflix. McCarthy claims that, "gradually over time, as we grew our market, his (John Antioco, Bluckbuster's CEO) thinking evolved but initially they ignored us and that was much to our advantage."

Why? 

It allowed Netflix to grow unburdened by the decline of Blockbuster's quickly outdated service. Blockbuster, however, was locked into a model where customers had to visit their stores in order to get their DVDs, where Netflix understood that customers wanted to have their entertainment delivered right to their homes and without fear of the late fees that Blockbuster enforced. Blockbuster had simply lost touch with what their customer base wanted - an easy way to get their entertainment, free from any penalities or late fees.

Incidentally, Netflix's founder Reed Hastings was a former Blockbuster customer. In 1997, Hastings returned a copy of Apollo 13 six weeks late and incurring a $40 late fee. It was this experience that motivated him to start Netflix because he understood, as a customer, that there was a better way to receive and return movies. Netflix saw the need and eventually filled it. Blockbuster couldn't see that. 

The result? Blockbuster filed for Bankruptcy in 2010 with reported losses around 1.1 billion. At the same time Netflix's worth rose to approximately 13 billion according to Variety's senior editor, Marc Graser. And Netflix has no signs of slowing. The company continues to grow, now offering streaming (and eliminating the need for DVDs altogether) as well producing their own hit shows such as HOUSE OF CARDS and ORANGE IS THE NEW BLACK that can only be accessed on their online subscription service. 

It appears Blockbuster has proved that the old adage is true, "what you don't know can kill you." 

 

Comments

[jerry]

There are many similar examples in electronics industry as well. Keep learning and maintain business acumen.

[BHSC]

It is amazing how often these type business cases occur… big one day, gone the next….

Thanks for sharing!

“For over a thousand years Roman conquerors returning from the wars enjoyed the honor of triumph, a tumultuous parade. In the procession came trumpeteers, musicians and strange animals from conquered territories, together with carts laden with treasure and captured armaments. The conquerors rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children robed in white stood with him in the chariot or rode the trace horses. A slave stood behind the conqueror holding a golden crown and whispering in his ear a warning: that all glory is fleeting.”

― George S. Patton Jr.

[NJ]

We often use current situation and technology capabity to assess future business feasibility.

[Eastcoast]

This story, to me, simply confirms John Hussman’s quote on risk, “People vastly overestimate their ability to recognize risk and underestimate what it takes to avoid it….). To often, people think in two dimensions (the current market and the current competitors); not considering those risks from above which can descend upon them and remove them from the face of the earth.

When I worked at Union Carbide, they had a process for making ethylene glycol (used in the production of anti-freeze and polyester fiber) and their annual production was around 3 billion pounds. In a commodity business, margins are thin, so if you don’t have the lowest cost process, you will lose your shirt. Now all companies would license their process (for the immediate income and also a royalty if the buyer adopted the process. Union Carbide would typically buy other processes and evaluate them just to make sure their current process was competitive . Yes, it was expensive, but it was information they could not afford to be without. It’s like insurance and you insure what you cannot afford to lose. When someone has an idea which threatens your very existence, you evaluate it, even if their probability of success is low (because you can’t afford the downside).

[micro CEO]

Yes, there are so many examples like this. Of course it is easy to speak in hindsight, and the real trick is to identify the shifting trends of change and to act upon them. Few challenges are more difficult than giving up a known, good thing with a proven history, in exchange for an unknown new thing with large risks and (by definition) no track record of success. So it happens again and again in the history of business and industry. And well that it should be this way. For who wants an eternal monopoly?
Another classic story of paradigm shift in technology is that of the swiss movement watch vs. the quartz movement. A patent for the quartz mechanism was actually filed by Swiss engineer Max Hetzel. This became the Accutron from Bulova. But as the story goes, no one believed consumers would be interested in such a gimmick, compared to the real watches made with real Swiss engineering. Or at least they did not focus enough attention on it, until 90% of the watch market was already taken by Japanese manufacturers like Citizen and Seiko. Seiko Quartz Astron was first to market in around 1970.
http://fee.org/freeman/detail/markets-in-time-the-rise-fall-and-revival-of-swiss-watchmaking

But the mystery remains... how to identify emerging disruptive trends and then convince an incumbent corporate leadership to throw their weight behind it. It is inherently difficult (innovator's dilemma), and perhaps society at large is better off for this disadvantage.

[Singapore Sling]

This also applies to employees… one must continue to upgrade one’s skill sets or one can easily become a dead wood in a changing organization.

[Am I Ignorant?]

my take on this matter is somewhat different. Here ignorance is not the issue. Blockbuster failed to do their homework with changing needs of the customers and market. Like Kodak film, Polaroid, Nokia, Blueberry.. they underestimated (or ignored) the fast and powerful effects of new technologies and how to take advantage of them. Also, it takes about 20 years or so for a generation shift. With new generations come new views, ideas, likes and dislikes... Blockbuster management probably had old dogs still at guard who were content with their glorious past!! We must credit Blockbuster for catering to the customers for two decades or more... Being a giant for a long time. Like any thing else, they had to make room for the new comers on the block. We can see in the history - The Roman empire, the British empire, The Pyramid kings, etc... once mighty and sounding immortal.... are all things of past... Can we say that they all were ignorant?