8 Reasons Why Blockbuster Failed & Filed for Bankruptcy
Before the advent of streaming Blockbuster was a popular video rental store where customers could rent their favourite movies on VHS tapes or DVDs and watch them at home. While it’s hard to imagine having to leave the comfort of your home to rent a movie, at one time in the 1990s and the early 2000s Blockbuster was extremely popular. It was the largest video rental company in the world with over 9,000 stores and over 50 million members. Fast forward 20 years and now there is only one Blockbuster store left in Bend Oregon.
So what happened? While most talk of Blockbuster’s demise center on the rise of Netflix, Blockbuster made many strategic errors throughout its history that caused it to have such a stunning fall from grace. If you are curious about why only one Blockbuster store remains today then consider these eight reasons for why it is no longer the juggernaut it once was.
1. Walking away from the deal of the century. Blockbuster made a critical error when it walked away from a deal with Netflix. Netflix wanted to sell its company to Blockbuster for $50 million in 2000, yes this really happened. Netflix was still a young upstart in those days having only launched its business three years earlier. If the deal went through Netflix would have managed Blockbuster’s online business.
At the time Blockbuster could have afforded the purchase price since it had raised $465 million in an IPO a year earlier. But Blockbuster passed on the deal claiming the price was too high. Speaking about what happened, Netflix’s former CFO Barry McCarthy says Blockbuster “laughed us out of their office.”
Three years after Blockbuster turned down Netflix’s offer Netflix had more than one million subscribers and by 2006 Netflix had six million subscribers. Before too long Netflix was no longer the underdog, it was building a loyal and growing customer base.
2. An inability to pivot quickly. Blockbuster was skeptical about the potential of renting DVDs online and sending them to customers via mail the way Netflix did. But customers enjoyed Netflix’s service because it was convenient. You no longer had to go to a Blockbuster to get the movie you wanted to see or the video game you wanted to play. Instead you could simply go online, select the movie you wanted to see and voila it would show up in your mailbox a few days later. It’s not unlike Amazon’s entrance into the eCommerce market in the 1990s. Amazon provided a more convenient way to shop but it was difficult for many companies at that time to see the potential of eCommerce. As Netflix continued to gain subscribers it took Blockbuster six years to launch a similar service of its own in 2004 called Blockbuster Online.
While Netflix was able to eat its own lunch by launching a small streaming service in 2007 which would eventually displace its video rental business Blockbuster was unable to pivot fast enough again into streaming, essentially sealing its fate. “My greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something — like AOL (AOL) dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly,” said Reid Hastings, Netflix’s co-founder and co-CEO.
3. Poor execution. One of Blockbuster’s main sources of revenues were late fees. If you didn’t return your movie rental on time you were charged a dollar a day. Those fees amounted to $800 million in 2000 or 16% of Blockbuster’s revenues. Netflix on the other hand did not charge any late fees at all just one flat fee. In fact, Hastings started Netflix because he was annoyed about a $40 late fee he had to pay for renting out Apollo 13 from Blockbuster.
But to compete with Netflix’s growing business Blockbuster ending up cancelling late fees putting a dent in its revenues. But even when Blockbuster cancelled late fees it couldn’t catch a break. It faced a new challenge in that customers started to keep movies for longer periods of time, since there was no penalty, meaning that those titles weren’t available to be rented out to others.
In 2006 Blockbuster launched a program called Total Access where online customers could return rentals to Blockbuster stores and in exchange they received a DVD rental for free all for one low flat fee. The program was hugely successful but it came at a cost, Blockbuster lost $2 each time a customer exchanged a DVD through the program. To stem heavy losses from the program Blockbuster had to raise the price of the program causing customer churn.
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4. Inability to compete with larger rivals. While many focus on Netflix’s singular role in Blockbuster’s demise big box retailers like Walmart, Target and Best Buy also played a role. They priced DVDs cheaply using them as loss leaders to get customers in the door. That reduced the need for customers to rent as many DVDs eating into Blockbuster’s revenues.
5. A flawed business model. Blockbuster struggled financially throughout much of its history. For example, between 1996 and 2010 Blockbuster was only profitable in two of those years which brings into question the overall viability of Blockbuster’s business model even before other competitors entered the market making it even more difficult for Blockbuster to succeed.
6. Activist investors with the wrong vision. Carl Icahn, an activist investor on Blockbuster’s board faught against Blockbuster’s move into the online rental business preferring the company to stick with its brick and mortar roots. To this end Icahn led the ouster of John Antioco who was Blockbuster’s CEO for a decade starting in 1997 and then installed Jim Keys as CEO of Blockbuster, in 2007.
Keys, like Icahn, was committed to Blockbuster’s brick and mortar business. Niko Celentano a former Blockbuster shareholder wrote this about Keys after Blockbuster filed for bankruptcy in 2010: “Jim Keyes is the main reason Blockbuster is in this position today due to his denial of being in a business model that did not work anymore. If Jim Keyes would have seen the changes that were evolving in this industry in the past few years, Blockbuster would not have been in the courts today filing Chapter 11 bk protection.... Jim Keyes has failed in his job as CEO of Blockbuster and should resign immediately."
7. A heavy debt burden. Viacom bought Blockbuster in 1994 and then spun it out in 2004. As part of the deal Blockbuster had to pay a $5 per share dividend which caused Blockbuster to take out a $905 million loan to pay for the dividend. By the time Blockbuster filed for bankruptcy in 2010 it had $1 billion in debt. “If it hadn’t been for their debt, they could have killed us,” said Hastings.
In bankruptcy proceedings Blockbuster was acquired by Dish Network for $320 million a far cry from the Blockbuster of 2004 when it generated $5.9 billion in revenues. Then in 2013 Dish Network announced it was closing nearly all of the remaining Blockbuster stores in the United States which had dwindled down to about 300 at that time.
Looking back, Icahn says: “Blockbuster turned out to be the worst investment I ever made. It failed because of too much debt and changes in the industry. It had too many stores, Netflix created a better business model, and then Redbox kiosks and the whole digital phenomenon eliminated the need for consumers to go to a separate DVD store.”
8. Hubris. “I’ve been frankly confused by this fascination that everybody has with Netflix…Netflix doesn’t really have or do anything that we can’t or don’t already do ourselves,” said Keyes in 2008. Two years later Blockbuster was bankrupt. A healthy degree of hubris ended up being the fatal thorn in Blockbuster’s side. Blockbuster couldn’t see past its previous success to see the change on the horizon and then once it did it was too slow to react.