Founded in 1997, Netflix began operations by offering DVD rentals and sales. At the time, DVDs were a new format. Rather than establishing brick and mortar retail locations with VHS tapes, Netflix delivered movies by mail, which was both a disrupting idea and well-suited to the new, sturdy and slim DVD format. To deliver its DVDs into the hands of its customers, Netflix invested in warehousing and distribution. By early 2000, Netflix’s traditional pay-per-rent business model, the same model used by rival Blockbuster, was replaced by a monthly subscription-based revenue model where you placed movie titles in a queue, receiving unlimited DVDs throughout the month with the sole limit on the number of DVDs you could borrow at any one time. Netflix allowed you to keep the discs for as long as you wanted. Their revolutionary idea was that customers received new movies when the old ones were returned — with no due dates or late fees. This further cemented Netflix’s reputation as an industry disrupter, breaking with the industry’s way of doing business on a pay-per-rental basis, effectively taking on the home video sales and rental industry. In one fell swoop, by eliminating due dates and late fees, Netflix found a way to give customers what they truly longed for, setting the stage for future growth and dominance of the entire industry.
By the time Netflix showed up on the scene with its video rental-by-mail service, it appeared to be a classic case of David vs. Goliath. In fact, in the year 2000 –perhaps realizing that it’d be easier to fight alongside Blockbuster than against them — Netflix co-founder and CEO Reed Hastings approached Blockbuster’s then CEO, John Antioco, with a merger proposal. Netflix proposed that it be acquired by Blockbuster for USD 50 million, recommending the companies join forces. Netflix would manage Blockbuster’s online brand and Blockbuster would promote Netflix in stores. At the time, Blockbuster was at the top of the video rental industry and the company balked at the idea of partnering with an upstart. They refused to move away from physical retail stores (in the years that followed they doubled down on their retail store strategy) and they rejected the idea of eliminating their late fees. Perhaps more tellingly, they rebuffed the idea of moving toward a digital platform. The company hadn’t yet understood how vital the digital platform would be to its survival.
Just a few years later in 2004, Blockbuster’s CEO at the time, John Antioco, finally recognized that Netflix and others had altered the movie rental landscape and decided to invest heavily in the digital platform, planning to spend USD 200 million to launch Blockbuster Online. Under Antioco, Blockbuster likewise planned to eliminate late fees, at another USD 200 million investment. Up until this point in time, even though late fees were a major customer irritant, Blockbuster, with its thousands of retail locations, millions of customers and massive marketing budget, had until then relied on these fees as a key source of revenue. It’s easy to see how these planned investments would have negatively impacted Blockbuster’s bottom line in the short term. The company’s board moved against Antioco. He lost their confidence and left the company by July 2007. The new CEO reversed Antioco’s changes, in an unsuccessful attempt to increase profitability.
In 2010, Netflix was signing deals with names like Sony, Paramount, Lionsgate, and Disney to help them grab a 20% market share of North American viewing traffic. On July 1st of the same year, Blockbuster was de-listed from the New York Stock Exchange and filed for bankruptcy having incurred nearly USD 1 billion in losses.
Key takeaways from the Netflix vs. Blockbuster saga
1. Never forget what you are really selling
For years, Blockbuster dominated the video rental space. But at some point, they lost sight of what business they were really in. Instead of focusing on delivering incredible (and affordable) entertainment to their customers — something Netflix definitely has down — Blockbuster put more stock in the model they were comfortable using. And hey, who can blame them? Back before the internet became integrated into nearly every facet of our lives, it was hard to imagine brick-and-mortar Blockbuster stores disappearing. Blockbuster initially succeeded because they did one core job better than anyone else: delivering entertainment to people’s homes. But as we all know, technologies change. And instead of investing all of their efforts into finding a new way to deliver on their true purpose (more on that in the next section), Blockbuster’s innovation stagnated.
2. You need to be willing to adapt
When you dig into the Netflix vs. Blockbuster story, it becomes clear that Blockbuster eventually realized that the Netflix model was the future. And they did make changes to address it. But in the end, it was too late. Blockbuster could never fully evolve into the modern business it needed to be in order to compete with Netflix. Technologies improve. Industries change. In order to grow, you need to keep a pulse on the ever-evolving needs and preferences of your customers so you can make changes to your model accordingly. So even if you learn how to dominate a specific channel, you need to remember that all channels, no matter how popular they are today, could someday fade into oblivion…just like brick-and-mortar Blockbuster locations did. The key to surviving, and thriving? Embrace change.
3. The customer driven approach always wins
As we’ve already established, there were several factors that contributed to the company’s downfall, including not understanding what business they were really in — entertainment, not retail — and not being flexible enough to adapt. But another key piece of the puzzle was Blockbuster’s unwillingness to put their customers first. The company’s revenue relied (massively) on charging late fees. At the same time, the company cut its late-fee revenue stream, it was building out its online platform cost another $200 million. If you add up these two costs, Blockbuster paid $400 million in an effort to modernize and remain competitive with Netflix. We’ll never know if this plan would have succeeded. Shortly after this modernization effort, Antioco was ousted by the board after the changes were made. Blockbuster then returned to their company-driven ways…and went bankrupt a few years later.
Sources:
https://www.mbaknol.com/management-case-studies/case-study-how-netflix-took-down-blockbuster/
https://dune.it/why-go-digital-2/
https://strategyjourney.com/winning-the-customer-journey-battle-netflix-vs-blockbuster-case-study/
https://www.inc.com/magazine/20071001/netflix-vs-blockbuster-what-would-you-do.html
https://www.vanityfair.com/news/2019/09/netflixs-crazy-doomed-meeting-with-blockbuster
