On the afternoon of January 21, 2007, Netflix CEO and cofounder Reed Hastings was alone in his Park City, Utah home. Netflix was, at the time, known as an online DVD rental company — customers would visit the website, place their orders for DVDs, and have the DVDs shipped in the mail to them. In order to get their next rentals, customers would then have to ship their previously loaned DVDs back to the company. This was a win-win — Netflix had no physical presence, and customers paid only a monthly subscription fee for access to the entire library.
The business was bifurcated, with independently owned and operated stores on one hand and chains like Blockbuster on the other. The chains were typically ‘family friendly,’ which means they didn’t rent or sell pornography. The independent shops typically rented and sometimes sold pornography out of an access controlled area at a premium, and used that revenue to subsidize other rentals
I double dipped Netflix and Blockbuster rentals by mail when Blockbuster was competing directly with Netflix and both services were cheap, but I can count on one hand the number of times I walked into a chain video store, because I always lived near an independent store that was cheaper. (The surviving video store that’s ~12 km from me is about on par per rental in nominal terms today with Blockbuster at its lowest pricing)
The U.S. chains are all gone now. But with respect to surviving disruptive shifts, Family Video is worth a look. They were privately held, like Dick Portillo they owned the real estate underneath their stores, and they transitioned into a commercial property management company when the pandemic motivated them to close in 2021 due to minimal foot traffic and the absence of new product as a consequence of the shutdown of film production
Substantial debt once again creates a critical (eventually existential) weakness.
I remember there was an earlier own goal that preceded the Keyes’ in-store double-down own goal. In the fall of 2000, when Netflix was wary of their own financial position in burning cash on the way to an unknown future date of profitability, and after equity funding dried up shortly after the dot-com collapse, it floated to Blockbuster that they should formally join forces, at least commercially, or they could buy Netflix for $50 million. Whoops! That would’ve been a doozy for Netflix’s shareholders but instead it was a doozy for Blockbuster’s.
Similar to some other Navigating Disruption cases, it’s interesting to think about who had the better product for consumers. In other words, which one is Cheaper, Better, Faster? Total Access may have been a nice bridge for consumers who were already used to going to the store, or who were visiting a Blockbuster because it was next to the grocery store or in a convenient “add-on” location to a shopping trip. And with more new releases available immediately in-store, Blockbuster customers could satisfy their FOMO and instant gratification itches. But longer term, was this going to be the Cheaper, Better, Faster solution for consumers?
Netflix had Cinematch, which was the name for their recommendation engine, and customers liked this feature (Better). Netflix figured out next-day shipping in 2001 with localized hubs (Faster and Better; 5 years before the launch of Blockbuster’s Total Access). Netflix had the Better and Faster product (despite throttling heavy users). Blockbuster initially held the upper hand on Cheaper, and made a step in the right direction for the customer with No Late Fees and Total Access (which was really just a price-per-rental-lowering mechanism). It couldn’t sustain these, because of its debt load, and retreated to the inferior in-person rental experience.
Netflix was lucky that Blockbuster didn’t buy it in 2000 and lucky that Blockbuster had too much debt. The incumbent market structure of an oligopoly, and the wake of the dot-com crash suppressing interest in startups, were helpful too because there wasn’t another potential formidable competitor (Hollywood Video was apparently a weak competitor).
(An aside, the reading of this case felt a bit easier than some of the other recent ones. Can’t put my finger on exactly why though. Maybe it felt more narrative?)
Well, I think in a world where there hasn’t been any disruption for a while, leverage becomes more common, as the world is predictable and so borrowing makes sense. It was interesting with this case though that this levelled the playing field with Netflix the startup that was also cash limited. Maybe the cases where the incumbent is not leveraged are the ones where it crushes the newcomers trying to use innovation to break in?
Generally agree but there are many reasons companies are attracted to debt. Blockbuster took on $1B of debt in 2004, so it’s not like that was far removed from major risk volatility events. Viacom wanted the proceeds for a special dividend ahead of the full divestiture of Blockbuster.
+1 to this. The characters are certainly more colorful than in other cases, but the writing enhanced the dramatic tension by bringing the antagonists into and out of view. I thought Antioco was safe from Icahn after they made peace over the failed Hollywood Video acquisition, so I gasped internally when he slashed the bonus payment a few sections later. Hastings comes and goes as well. I thought of Rule 30 from 50 Writing Tools: “to generate suspense, use internal cliffhangers”. Icahn is introduced as a Gordon Gekko-like villain, and we all know that Hastings wins in the end. But they both lurk around the edges of Antioco’s story at times. You’re left wondering which will deal the fatal blow. Bravo, Cedric (or, if Cedric didn’t write it: bravo, contract-case-writer!)
I get that the debt load put pressure on Blockbuster, but interest payments didn’t fire a competent CEO over a contractually earned $3 million bonus and replace him with someone who believed the rise of the internet would coincide with increased retail foot traffic. Really a remarkable story about how pride, respect, and judgment matter so much in business.
Lastly, for me, the case contrasts with how comfortable Bezos was running Prime at a loss because of the confidence he had in the endgame.
(After selling his Blockbuster stake at a huge loss, Icahn bought a block of Netflix stock in 2010 and made a profit of ~US $2 billion in total by the time he sold his remaining stake in 2015. One person’s make or break scenario is another’s affordable loss bet)
Yeah really liked this case for a bunch of reasons:
I thought I knew the Netflix story pretty well, but have never heard it from the Blockbuster perspective. Back in the early 2010s I thought it was such an obvious idea that Blockbuster should combine their in-store footprint with a Netflix mailing model to kill Netflix. Turns out they were trying!
This redeems John Antioco as a leader/exec than most narratives typically portray him. Fwiw, the “$50M offer” to buy Netflix seems apocryphal, as does the story about Blockbuster execs laughing Hastings/Randolph out of the room: https://pod.wave.co/podcast/how-i-built-this-with-guy-raz/netflix-reed-hastings-were-not-a-family-the-provocative-idea-that-helped-build-a-streaming-giant. (it seems that Marc Randolph and Reed Hastings have different memories here; I trust Hastings’ recollection more because “large-co-didn’t-see-partner-potential” is more mundane and less sexy for selling books than “large-co-missed-golden-ticket-due-to-arrogance”.
This strikes me as a cool nuanced instantiation of Counter-positioning as a moat. On the one hand, counter-positioning worked: the antibodies inside of Blockbuster (or outside/inside, in the case of Icahn joining the board) made it hard for Blockbuster to truly adopt the new model. But on the other hand, it’s a lot less deterministic than “incumbent can’t respond to challenger because it hurts their business”: there is a world where Blockbuster may have actually starved Netflix out, or at least gotten a really good deal for its online business. A reminder that strategic moats != destiny.