Blockbuster – From Blockbuster to Bomb: An Industry Leader’s Stunning Failure
What led to the downfall of the industry giant Blockbuster ? On its peak in 2002 it was valued $5 billion, 9 years later it was sold for only a little over $300 million and was shut down entirely in 2014. Blockbuster is a perfect example for losing the game of digitalization by sticking too long to an outdated strategy and failing to understand market changes which other exploit.
Blockbuster is a loser of digitalization because it was unable to cope with the changing market environment: It sticked far too long to an outdated strategy and failed to understand market changes that others eagerly exploited.
Pre-Digitalization – the video rental business
The original video rental business was pretty straight forward: On the one side you had a high demand for home videos which still account for for 45% of the revenue for the movie industry (2009). Yet the prizes for tapes were very high. Rental stores like Blockbuster came in who rent you the tapes and after several rents they yielded 100% profits. The main value creation were costs.
Digitalization – New opportunities for value creation
The digitalization did not only change the distributions channels but also the value creation of the movie rental space. Looking at the value video rentals create, you can clearly see why Blockbuster lost that game to Netflix&Co:
- Costs: Due to digitalization the physical products (e.g.DVDs), distributions channels and retailing operations have gone digital and Blockbusters stores and inventories became expensive liabilities rather than competitive resources. —>Blockbuster´s commitment to their vast retail network made them unable to compete in pricing and profitability overall. In 2008, Blockbuster had been in the red for ten of the previous eleven years.
- Convenience: Early the development from customers going to a rental store to going online was obvious. In 2005 66% of movie industry rental revenues came from in-store rentals, but already in 2009 this dropped to less than 50%. —> Again, Blockbuster was to slow and committed to the old strategy. As late as in November, 2013 Blockbuster´s CEO Joseph P. Clayton said, “This is not an easy decision, yet consumer demand is clearly moving to digital distribution of video entertainment.” to justify the closing of physical distribution elements. This quote reveals that Blockbuster continued to struggle with digitalization until the end and that digital distribution with its many folded advantages have not been fully understood.
- „Consultation“:Already before ranking and suggestion systems were widely used in e-commerce, Blockbuster could have seen the signs: For years Blockbuster´s movie rentals were driven by box office popularity of movies and not by store experience. People went to Blockbuster to rent a movie they have missed watching in the theatre but not because they want get inspired by new movies they might not know. Instead of introducing pre-digitalized suggestion systems (e.g. store associates suggesting movies, rating websites) they introduced impulsive buying items (e.g. toys and candy) to increase money spent per customer but not number of customers/movies rented. Digitalization of the movie library and algorithms make it easier than ever to rate movies and receive recommendation for movies we did not know, bringing the customer a greater experience and many more movies watched per customer. —> Blockbuster has failed to create nor exploit any of the values which come with a digitalized recommendation systems.
Blockbuster´s incapability of adapting it´s strategy and resources to the digitalized age while having fast-moving competitors such as Netflix led inevitably to its bankruptcy in 2014.
Thanks for the post Florian! Isn’t it ridiculous/scary that such a large and (then)-powerful company like Blockbuster just could not figure out how to adapt to new global trends?
Part of me wonders if Blockbuster was just too scared to shift from its initially strong capabilities of providing physical movies to a more digital approach. Sure, they may not have had the technical expertise to do so (e.g., software engineers who could create platforms and allow the company to provide Netflix-type of model), however you wonder why they didn’t acquire those capabilities (or honestly, acquire Netflix itself). They had the resources (cash, strong customer base, etc.) — they just could not figure out how to deploy those resources in the new market it seems.
Either they refused to believe that customers would prefer suggested movies, easier accessibility, etc. (which is mindblowing to me), or they focused too much on their model of selling perhaps high-margin ancillary products (i.e., toys, candy) vs. capturing value in what the customers came to their stores for (or both).
I think it definitely had a lot to do with the impulse purchases, like the candy and toys. If you look at grocery stores, I’ve seen figures like 60% of purchases are impulse buys, so it doesn’t seem a stretch to me to think that maybe 20-30% of Blockbuster’s sales were from those ancillaries. It would be interesting to see how their financials without those were doing even at the time they were successful- I would guess that they weren’t great. They may have seen themselves failing in the movies-only business and thought Netflix would do the same; losing to piracy for people who just wanted to watch it once, losing to Amazon for people who wanted to buy the disks.
I think that Blockbuster is an interesting example of a infrastructure model that is so asset heavy that it can be difficult to reinvent. With the number of physical locations with rent and overhead along with the inventory of dvds required to service all of those locations, it is not a surprise that when faced with a leaner model such as Netflix’s dvd by mail and then again by digital streaming, they simply could not compete. I even question, however, as to whether they could have responded sooner. How do you compete when your cost structure is so great in comparison to the disruptive asset light model that Netflix and digital streaming brought into the industry?
In my opinion, Blockbuster really did make some terrible management mistakes and had wrong judgement about the changes the industry would go through. They did not see that expensive retail stores/distribution are not competitive resources anymore and that creation of value for the customer changes dramatically. In fact, Blockbuster could have adapted to it and e.g. bought Netflix: In early 2000s, Netflix Co-founder Reed Hastings offered Blockbuster to buy Netflix for $50 million dollar – a sum which would have been nothing for Blockbuster at that time.
This is an epic example of a massive loss in failure to cope with the Digital Revolution – thanks for writing on this. Based on the learnings of Blockbuster, and apart from the overarching lesson of “coping with change,” I do wonder if there are any specific lessons we can learn based on how Blockbuster’s decisions were made, or future projections that should have been (but weren’t) thought about, to think about what they might have done to survive the digital revolution. While we see Netflix as a clear model winner, it isn’t the only way players in the industry could have won — it’s only the clearest by virtue of the fact that Netflix happens to be today’s winner. For example, YouTube, Amazon, and Redbox have all encroached on overlapping spaces with Netflix, albeit with diverse approaches; with a few tweaks, it is possible that Blockbuster, while not necessarily being able to cement its former position on-top, could have made viable transitions.