What Went Wrong at Blockbuster?

When my family first started renting movies back in the 80’s we went to a small mom-and-pop establishment called Carmen Video in Camarillo, CA. It was decked out like a movie theatre complete with a popcorn machine – something modern movie rental establishments look nothing like.

Sometime in the mid-80’s the first Blockbuster video opened up in town and within 18 months Carmen Video closed its doors forever. Between you and me- I think the only reason it stayed in business as long as it did is due to a selection of adult videos that they kept locked up in an adults only section (more like a cellar) of the store, which I never went into.

Blockbuster put Carmen Video out of business, and dominated the home movie rental business for years, because it had the lots of copies of the latest movies. They also had a huge selection of video games.

In September 2010 Blockbuster filed for Chapter 11 bankruptcy protection. In early 2011 they approached their creditors for more money- more debt, which is bad when you are already bankrupt.

What happened? Karma? Poor management? Bad investments? Antiquated business model? Competition? A combination of all these things?

There is never a single reason businesses go out under (excepting natural disasters)- but it eventually comes down to not making enough money to keep feeding business machine. If I were, however, to postulate a single reason why Blockbuster is in Chapter 11 – I would say that Blockbuster has suffered from an identity crisis the past few years.

I think this identity crisis has its genesis with the founding and success of Netflix.

Blockbuster hands out free memberships and charges for each movie one rents while Netflix charges money for memberships, or subscriptions, and hands out movies for free.  Blockbuster leases retail space and pays for employees to help customers while Netflix pays for postage and automated warehouse systems.

The models are very different and this is why Netflix has been so successful. This success freaked out Blockbuster. However, Blockbuster’s model isn’t broken; they just haven’t been true to it. Instead of evolving the model that made them successful, Blockbuster attempted to emulate the success of Netflix’s model.

How does one evolve a successful business model? One should start by re-visiting the three sources of operational competitive advantage: Cost, Response, and Differentiation.

The base Netflix subscription is under $10/month and it allows one to rent one movie at a time and stream video to an iPhone, iPad, videogame system, or computer. Netflix’s model creates competitive advantage through price and differentiation. In addition, they operate with less overhead. However, it takes time, usually a couple of days, to send videos through the mail and the newest releases are not immediately available. Some movies might never become available for streaming. This leaves room for Blockbuster to exploit response as a source of competitive advantage. Using response as a competitive advantage has been exploited by successful companies like SAS and SAS responds to customer input to develop and evolve products and responds to its customers order with very quick and reliable delivery. Blockbuster gets the newest releases to its customers faster than Netflix – they should tell people about this (recently they have, but they should have started saying it in 1997 when Netflix hit the street).

The kicker here is that Blockbuster has always had this competitive advantage over Netflix, but instead of exploiting this advantage they invested millions of dollars in setting up, operating, and promoting a Netflix-like mail order video rental system. It’s never a good idea to be second into the market – at best, the second firm to the market can only hope to earn a fraction of the pioneer’s market share.

This is, in part, a marketing problem. Good marketing keeps you in touch with what your customers and the market demand. If Blockbuster was in-touch with its customers it might have realized that they do not want a Netflix-like system from Blockbuster – they just wanted the newest releases and lots of them right now, not 2 weeks from now. These data would have changed Blockbusters messaging and Blockbuster may have been able to invest the money it spent setting up its mail-order system with a system that just streamed the newest releases (they have just recently done this).

They also may have found out that their customers may have been keen to the idea of monthly subscriptions rather than paying per movie. Just a theory – I know I’d love that.

Again, I don’t work for or Bloomberg, so I have no insight as to what might have gone wrong operationally or financially – I can only comment from a marketing perspective.

The lesson to be learned here is that staying in touch with your customers can help you evolve your business model. Evolving your current model prevents costly mistakes, exploits competitive advantages, and maintains identity or position.