Before Netflix, there was Blockbuster.
The current situation of “stream-your-entertainment-to-your-living room” was not a thing two decades back. Blockbuster started at a time before CDs became a household staple and reigned supreme in the movie-rental industry for at least a decade or two. At its peak in 2004, Blockbuster had over 9,000 physical locations.
But, as of writing this article, the company is virtually non-existent and only one Blockbuster store remains standing.
How did it get to this?
Blockbuster – Redefining Home Entertainment
Blockbuster was founded in October 1985 by a businessman named David Cook as a movie-rental store. The first Blockbuster store was opened in Dallas, Texas and it was a huge success.
Blockbuster’s business model was simple – Blockbuster allowed its customers to rent movies from their store for a period after which they had to return it.
Blockbuster would rent it until it recovers the cost spent in acquiring it after which it would just sell the movie copies for full price.
The company would buy movies in bulk, allowing them to save a lot via discounts and its popularity also allowed it to strike up revenue-sharing deals with movie studios.
This enabled Blockbuster to not only provide movie rentals for cheap but also to sustain itself against competition such as the local, stand-alone video rental businesses.
People loved the large variety and low prices offered by Blockbuster and the fact that they could pick up movies for a small price and return it once they were done watching. Not only did this allow people with less disposable income to watch movies rather than going theatres or waiting long for it to be aired on cable television, the experience of finding new movies that Blockbuster provided was unique.
Within three years from being founded, Blockbuster became the largest video rental business in the US with over 200 stores. All of this was before the internet became a household staple. Blockbuster became one of the very few options for enjoying movies, the other options being the theatres and cable television. This was a time when the VHS tapes were just beginning to become popular and laserdiscs were still a few years away from becoming the mainstream.
Blockbuster was immensely successful and started expanding rapidly by franchising its stores. By 1993, Blockbuster had over 3,600 stores covering most of the United States and even started acquiring local rental shops to convert them to a Blockbuster store. Blockbuster also started expanding its operations to other countries – it had stores open in the United Kingdom, Japan, Australia and parts of Latin America.
Blockbuster did not take long to become a multi-billion dollar company and it even branched out – Blockbuster started providing video game rentals as well as music rentals along with movie rentals.
But all of this came to an end and this raises the question –
How did Blockbuster go bankrupt when it seemed like nothing would go wrong for the movie-rental giant and shrink to just a single store that exists as a relic of the past?
Reasons For Blockbuster’s Failure
The answer for failure of Blockbuster is not straightforward and requires an in-depth look at how things panned out for Blockbuster. While most term Netflix to be the cause of Blockbuster’s decline, but that does not paint the entire picture.
Netflix & Subscription Model
It can be said that Netflix played a role in the decline of Blockbuster.
Netflix began in 1997, 12 years after Blockbuster began and it operated in the same movie-rental industry as Blockbuster right from the start. What most do not know about Netflix is that it started by mailing the movie rentals right to the customer’s doorstep upon signing up for its service by paying a monthly subscription fee.
Not only that, for a fixed monthly subscription fee, Netflix also allowed customers to rent an unlimited number of movies that were then mailed to them and returning one was as simple as mailing it back.
This proved to be more convenient for most customers and made a dent in Blockbuster’s customer-numbers since they were able to not only have unlimited movies mailed to their doorstep but for the same amount as it would take for a one-time trip to a Blockbuster store.
As a matter of fact, Netflix still offers the option of mailing DVDs to your doorstep.
Also, Netflix did not beat Blockbuster by bringing movie streaming right off the bat –it was only 10 years after Netflix was founded that it bought in the option of streaming movies and other content over the internet.
Failed Attempts At Innovating
It is not to be said that Blockbuster was ignorant of the rising competition nor the newer technologies that were cropping up as years passed. Blockbuster even started offering its own video-on-demand service in 2001. The service was planned to allow users to rent and watch movies right from their homes using fibre optic technology.
This service would have changed the industry just as it did with its movie rentals, had it seen the light of the day. Remember this was 7 years before Netflix brought its on-demand movie streaming service.
But it never worked out in the end since Blockbuster’s partner Enron filed for bankruptcy soon after and the technology never really worked as intended at the time. Apart from that, it was stated that obtaining large quantities of movies to make the service viable was quite harder than it had imagined it to be.
Not Acquiring Netflix
In 2000, Blockbuster declined to purchase Netflix for $ 50 million. This was considered to be a major misstep in Blockbuster’s decision making.
This was at a time when the internet had just become a household thing and video streaming hadn’t been introduced. Also, Blockbuster scoffed at the viability of Netflix’s subscription-based movie rental mailing service.
Failing To Restructure
If Blockbuster had to compete with the convenience of Netflix, it had to change its operating model to something similar to them.
This meant that Blockbuster had to let go of a large chunk of its revenue stream – late fees. Late fees were charged to customers returning the rental copies after their rental period had ended. For Blockbuster to move onto the subscription model meant that it had to give up on an established, well-paying revenue stream and this could have made Blockbuster hesitate on switching their business model entirely.
Ironically, it had to give-in soon after and the late fees were soon removed while its operation model remained the same.
This proved to be the final nail in the coffin for Blockbuster.
In 2010, Blockbuster filed for bankruptcy and was bought by Dish Network for around $ 320 million in 2011. Not long after, it was decided to shut down its physical locations along with the termination of its video-on-demand service in 2015.
As of 2020, just one Blockbuster store remains – in Bend, Oregon – and this is because the place actually lacks high-speed internet, rendering streaming services unviable.
While the reasons for failure would usually lie in failing to innovate or poor management decisions, that does not entirely define the case here. Blockbuster’s decline was the result of different reasons which can be attributed to –
- Failing to innovate “quickly”
- Failing to restructure its operating model to change with the changing times and advancements made in technology
Blockbuster was never ignorant of Netflix or other DVD stores. Blockbuster tried its best to change its operating model but failed to do so in the end and the rest is history.
With the current over-saturation of streaming services, Blockbuster could play to the nostalgia and the sheer feeling of being able to own a physical copy with today’s consumers. While it seems very unlikely, one way would be to operate as a boutique experience on a smaller scale while being focused on providing streaming services.
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Every entrepreneur I know has their favorite excuse for a previous failure – an investor backed out, the economy took a downturn, or a supplier delivered bad quality. These things outside your control do happen, but based on my years of experience as a startup advisor and angel investor, I still see too many strategies leading to failure that are inside the entrepreneur decision realm.
I certainly agree that starting a business is fraught with risk, and none of us get it all right the first time. It’s important to learn from your own mistakes, but it’s even smarter to learn from someone else’s mistakes, without paying their high price in time lost, cost, and pain. In that spirit, I offer my perspective on ten common startup failure sources that rarely get admitted by entrepreneurs:
- Choose to skip the written business plan. I believe the old adage that you don’t know what you don’t know until you try to write it down. A business plan is for you first, not investors. The discipline of writing down your plan is the best way to make sure you understand how to transform your idea into a business, and how to communicate it.
- Offer free solutions to bring in more customers. Don’t get caught in the myth that you shouldn’t worry about monetization until after you have a large customer base. Viral marketing costs real money, and your support staff and hosting systems cost even more. Even non-profits need a profitable business model to offset staff and operating costs.
- Assume passion level defines business opportunity. There is no substitute for market research to confirm that your passion matches a real need in the market. Not every great idea is a viable business. Social causes are great, but your ability to sustain your value contribution is directly linked to your ability to find paying customers.
- Practice dreaming more than doing. Dreamers come up with ideas, and do-ers come up with businesses. Building a successful business is all about execution. Don’t try to build a business unless you are comfortable with risk, uncertainty, responsibility, and hard decisions. Dreams may motivate your team, but customers expect real solutions.
- Convinced that many existing players means room for ‘me-too.’ Jumping into a crowded space is a great way to get lost quickly. Your chances of success are much greater if you target an under-served niche, or bring a new quantum leap in value over existing competitors. ‘Easier-to-use’ and other fuzzy terms won’t get any attention.
- Bypasses intellectual property as not worth the cost. ‘First-to-market’ is not a sustainable competitive advantage for startups, since sleeping giants do wake up when they see traction, and they can smash newcomers quickly. Patents and trademarks are very valuable in attracting investors for scaling, as well as future premium buyouts.
- Thinks boundless energy is equal to experience. The real secrets of any business domain are not intuitively obvious, nor available in books. Many entrepreneurs tackle a completely unknown business domain, because the solution looks obvious, and they plan to work very hard. Usually it pays to work in an industry for a while, before you try to fix it.
- Willing to start today and find resources later. Cash is always hard to find, but in many cases it’s even harder to find access to needed distribution channels, government contract expertise, or the special skills required to deliver your solution. Entrepreneurs need to spend time working on the business, as well as in the business.
- Finish the product before marketing begins. It’s never too early to start marketing, since it usually takes as long to build marketing momentum as it does to build a product. No startup can afford to do these serially. In today’s information age, it takes time and money to make your solution visible. Marketing should start before product development.
- Just give up and start over when tired and frustrated. In my experience, most startup success back-stories include an entrepreneur that simply would not give up, despite seemingly impossible odds. Most great entrepreneurs, including Steve Jobs and Thomas Edison, overcame multiple setbacks before they built their legacy of success.
None of these issues involve rocket science or MBAs. The best entrepreneurs just temper their passion with reality checks and street smarts, derived from their advisors and learning from their peers. It’s good to avoid making the same mistake twice, but it’s even more important to avoid making the same mistake as others before you, and expecting a better outcome. Even the best excuses don’t lead to success.
Startup Professionals Musings