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Blockbuster Busted Part 1: An S-Curve Analysis

While there are exceptions, the evolution of most technologies and companies can be depicted with the help of an S-curve. Similar to the birth, growth and maturity phases of living organisms, the S-curve analogy shows the rise and fall of companies and industries in terms of growth. Blockbuster is a classic case of the S-curve blues, hitting a stall point, and failing to adapt to the changing environment.

The argument could be made that Blockbuster was disrupted by other more innovative and motivated companies, but the fact still remains that Blockbuster’s management team made strategic decisions that caused more pain than their actual competitors did. In this post, we explore how Blockbuster was busted by taking a historical look at their S-curve and considering—from a strategic perspective—what Blockbuster missed.

 

 

The Blockbuster Timeline

The first Blockbuster store opened October 1985 in Dallas; it started as a small neighborhood business. By the mid-1980s, Blockbuster was acquired by Wayne Huizenga and John Melk. In a relatively short time, Blockbuster grew from 133 stores in 1987 to 3,400 in 1993; in 1994 it was acquired by Viacom, the telecom conglomerate, for $8.4 billion. From 1994 to the early 2000s, Blockbuster was on blockbuster growth, peaking at 9,100 stores in 2004 with revenues upwards of $6 billion. Blockbuster started down a fast slippery slope in 2004 however, from which it would never recover.

Blockbuster’s main growth strategy was based on acquiring independent video stores across the U.S. and internationally. Blockbuster was experiencing massive growth and significant gross margins and growing profits; so, why would Blockbuster even consider new, untested, technology? Why would a company like Netflix, or any online streaming, even be worth a look? Netflix was founded in 1998 by Reed Hastings because, coincidentally, he lost Blockbuster’s Apollo 13 video, and when he returned it was hit with a $40 late fee. As Hastings told The New York Times:

“I got the idea for Netflix after my company was acquired. I had a big late fee for ‘Apollo 13.’ It was six weeks late and I owed the video store $40. I had misplaced the cassette. It was all my fault. I didn’t want to tell my wife about it. And I said to myself, ‘I’m going to compromise the integrity of my marriage over a late fee?’ Later, on my way to the gym, I realized they had a much better business model. You could pay $30 or $40 a month and work out as little or as much as you wanted.”

To make Blockbuster feel even more secure, by 2000, Netflix was losing money—a lot of it; Reed Hastings proceeded to exhaust all options, one of which was to set up a meeting with Blockbuster’s then CEO, John Antioco. Blockbuster was given a chance to buy out Netflix for $50 million, just drops in the bucket for a company that had just raised over $5 billion in an IPO a year earlier. Blockbuster laughed them out of the room, literally, and at the time, Blockbuster was right to do so. Would customers be willing to order DVDs online and wait for their arrival by mail several days later when they can walk into a store and pick up their favorite movie? Netflix did not charge for late fees, something that was a key source of income and profit for Blockbuster. The greatest change was that broadband didn’t exist, only dial up. Did Blockbuster consider the crossroads of broadband and Internet streaming, or how the Internet adoption rate would change or what broadband technology would do in the near future? Blockbuster was right at that time, but not considering the scenario of next-day delivered DVDs with complementary streaming proved to be a critical mistake.

It wasn’t until 2003 when Netflix finally posted a profit, and market competition only became hotter in 2002 with a new rival, Redbox; Redbox started to make waves based on a revolutionary concept of using automated rental kiosks and partnerships with grocery stores and gas stations. In the meantime, by 2004, Blockbuster hit its peak with 9,100 stores, four years after Netflix and two after Redbox. Blockbuster was flying high. In 2004, Blockbuster split from Viacom and introduced Blockbuster.com, the online competitor to Netflix. By the time Blockbuster finally got into the mail DVD market in 2004, Netflix had already grown to $270 million in revenue and 1 million subscribers.

With great success comes challenges, and 2007, little did Blockbuster know, would become its stall point. Revenue had dropped to just over $5 billion and 5,100 stores, compared to 9,100 three years before, though Blockbuster did still have a commanding market share of the video industry with over 50 million members worldwide. Meanwhile, Netflix quietly grew to $1.25 billion with 7.5 million subscribers; Reed Hastings tried again to convince Blockbuster to acquire the struggling start-up DVD rental company, but still was denied. Fierce market competition was taking a toll on Netflix; subscribers were down, it was paying the highest per user acquisition cost to date, just over $48 per user, and the rental market was becoming more saturated. Netflix took the bull by the horns and put in place a complementary business model innovation by adding streaming content in conjunction with the mail order rental market. Both strategies from Netflix and Redbox, online and kiosk, Blockbuster ignored.

The last straw—a CEO shakeup—broke Blockbuster’s back. The new CEO, Jim Keyes, decided to remove Blockbuster from the digital space and focus on the brick-and-mortar model. As quoted from this article, “The new man didn’t understand what business Blockbuster was really in. He started changing the game plan, including pulling out of their Internet efforts. Within 18 months, he had lost 85% of the capital value of the company.”

By 2009, Blockbuster started to feel the consequences of previous strategic decisions. Revenue had dropped to $4.1 billion and 4,500 stores. With a last-ditch effort, Blockbuster Express was introduced to compete with Redbox. Blockbuster was now distributing through retail, rental kiosks, and DVD rental. Blockbuster finally busted in 2010 filing for bankruptcy protection in September. Revenue was down to $3 billion and 3,000 stores, with the final nail in the coffin of just under $1 billion in debt. Blockbuster, once a $6 billion company, now was only valued at $24 million.

In 2011, Blockbuster finally jumped into the streaming space, but that market was fierce with Hulu, Amazon and the previous laugh of the town, Netflix. The main strategic advantage Blockbuster saw was the business model ecosystem of online, kiosk and brick-and-mortar. Customers could rent from any of the three platforms, and then return to the local store, hoping to capture a seemingly instant gratification competitive advantage.

By the end of 2011, revenue was down below $1 billion, 1,500 stores, and declining. By 2013, revenue was only $120 million by Q2 and 50 stores and the online mail-service was shut down in December. In April 2011, Blockbuster was acquired in bankruptcy court for $320 million.

Currently, Blockbuster is keeping content live with Blockbuster On-Demand streaming, a part of the Dish Network service package. Non-subscribers are also able to access movie content on any device for $2.99 per movie.

Lessons Learned and the Blockbuster S-Curve

Blockbuster’s rise and fall lends itself to a classic S-Curve depiction. After the initial start-up, acquisitions and positioning, Blockbuster was off and running, growing exponentially from 1987 to 1993 with a compound annual growth rate (CAGR) of 58 percent. From 1993 to 2004, however, growth slowed to a CAGR of just over 8 percent. The long painful decline started in 2004, producing a CAGR of -13 percent from 2004 to 2009 and -59 percent growth from 2009 to 2013.

Looking back, hindsight is always 20/20, but what was it from a strategic perspective that Blockbuster just didn’t get right?

There are three strategic points worth pointing out that had critical roles in Blockbuster’s fate:

  • The obvious: not buying Netflix; of course, if Blockbuster did acquire Netflix, it may have died with the rest of the company in 2011.
  • Not only changing CEOs, but also shedding their total access strategy in favor of a brick-and-mortar retail model focused more on selling add-on items, such as candy and popcorn.
  • The underlying root cause: a company that would never adapt, pivot or modify its existing mental models and biases of what the movie industry was or could be.

Finally, a few questions to ask when contemplating not just what Blockbuster did, but why:

  • Did Blockbuster pay attention to the changes in the external environment or scenarios of how the world could be different in the movie rental business?
  • Did Blockbuster understand the true customer need and the problem to be solved?
  • Did Blockbuster focus any attention on the shifting marketplace trends?
  • Did Blockbuster consider any of the competition seriously?
  • Did Blockbuster not focus on a core business by diversifying itself in too many places?
  • Did Blockbuster employ the best business model to compete in the changing market space?

History has shown that no company should take its position for granted. Every S-curve gets replaced at some point in time. In fact, the only guarantee for success is to re-invent the business to keep relevant within an ever changing market. If you don’t, someone else will.  

By Derek Bennington and Dr. Phil Samuel