Case study Blockbuster: Why is it necessary to innovate?

Blockbuster was an American video store franchise, specializing in movie and video game rentals through physical stores, mail-order, and on-demand services, during the 1990s and early 2000s. It was very thriving and popular in the audiovisual industry and had very high profits. But one day, it made a bad decision when it had the chance to grow which resulted in bankruptcy.

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Once again we return to the case studies of very popular and profitable companies that, due to making bad decisions or being induced by very serious economic crises, ended up in bankruptcy. This time, we will talk about the Blockbuster case, its success story, a missed opportunity, and the disastrous consequences of letting it pass.

What was Blockbuster?

Blockbuster was founded in 1985 by David Cook, who ran a software company for oil companies in Texas. After a couple of years, and when that industry had run out of steam in the 1980s, his wife advised him to create a home theater rental franchise, which at the time, movie rentals were a highly profitable business.

To distinguish itself from the competition, its establishment adapted to the demand for a broader catalog of up to 6,500 references, longer rentals so that people could take more films, and greater inventory control through its automated system, with which detected consumer preferences. Quite a novelty for the time, which is why it was positioned as an avant-garde company in terms of video rentals.

From that moment on, its growth in two years was quite rapid, since it managed to open 20 stores and 20 franchises. By then, Blockbuster had become the benchmark for video stores, and as of 1990, it was already expanding into the international markets of Europe and Latin America.

In 1997, the board of directors appointed John Antioco as CEO, who successfully ran the movie rental business, first on VHS and, later on, DVD for several years. A year later, Blockbuster still controlled 25% of the world market, due to important strategic alliances with renowned production companies.

Strategic alliances to annul the competition.

Starting in 1987, Blockbuster dedicated itself to absorbing video store chains and ended up ousting the competition, overtaken by a larger catalog. The explanation for this enormous catalog was because, unlike the small video stores, which paid a high amount of money per film and recovered their investment thanks to rentals, Blockbuster reached direct agreements with the production companies, for which they obtained movies at a lower cost.

While it is true that most of the business was with major production companies, class B production companies also provided very good profits, since they represented 70% of rentals during the 1980s.

The offer of movies was similar to that of other video stores, so premieres had higher priority. Over time, the remaining copies and those withdrawn from circulation were put up for sale.

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The Netflix proposal that Blockbuster rejected.

The popular Netflix, before becoming the most viewed platform worldwide, also operated as a movie rental store, only this one did it online, so, thinking about the future, Netflix was destined to succeed, unlike its rival Blockbuster. But it is time to tell you how the link between the two companies was born and the beginning of the end of Blockbuster.

In the early 2000s, Netflix was a small video rental company, but what set it apart from Blockbuster was that its business model accepted subscription payment and allowed users an unlimited number of movies and TV series. They could order online and there were no penalties for returning films late.

Instead, Blockbuster charged for DVD rentals and made their profits from the fines they collected for late DVD returns.

However, the beginnings of the relationship were not exactly cordial. It all started when the owner of Netflix, Reed Hastings, before creating the company, went to rent a movie from Blockbuster and took longer than indicated to return it, for which the rental store charged him a high surcharge that Hasting did not want to pay. So he decided to create a business, also a movie rental business, that didn't charge customers late fees for returning movies.

By the time Reed Hasting had already established his business, he thought that Blockbuster, being as important as it was, and Netflix should stop being rivals and create a strategic alliance to strengthen the market. But Antioco did not think it was a good deal and turned it down.

Netflix's strategy to establish that alliance was for Blockbuster to acquire it for 50 million. Then, the visionary project that Netflix aimed at was to offer its DVD rental service through email and via streaming. Although Blockbuster had the resources to do this business, it seemed more profitable to continue as it was. This is how Blockbuster lost the chance of a lifetime by resisting change.

A year after this offer, video rentals became obsolete in the United States and, later, in the rest of the world. In the following years, the company lost users due to the success of Netflix, and the streaming service it offered was much more interesting for Blockbuster customers, who preferred to switch to Netflix.

The bankruptcy and definitive closure of Blockbuster.

Since the mid-2000s, Blockbuster has not been able to face the obsolescence of the physical format in the face of new forms of consumption as disparate as cable television, self-service stores, video on demand, and even piracy, before which there was no planned strategy.

In some countries such as Spain and Ecuador, it was immediately withdrawn from the market, while in others such as Mexico and Argentina it had to be readapted.

As a last resort, in 2010 the group reinstated the late penalties it had eliminated five years earlier. However, on September 23, 2010, Blockbuster declared bankruptcy. At that time, more than 3,000 stores were still open in the United States.

Despite several attempts to restructure its debt, in March 2011 the United States Department of Justice ruled that the company should be liquidated.

Blockbuster was taken over in April 2011 by Dish Network, the largest pay-TV provider in the United States, for $320 million. Its initial goal was to accomplish the gradual closure of the remaining 1,700 stores and retain the brand to launch a video-on-demand service to compete with Netflix.

However, the plans did not prosper and two years later the complete closure of all video stores was announced as of January 2014.

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The face of defeat.

Other very large companies, despite the bad decisions they made, were able to recover and re-enter the market, such as Nokia and Blackberry, but others weren't so lucky and ended up in bankruptcy, such as Pan American, Daewoo, and Blockbuster, among others.

With the Blockbuster case, we have learned how resistance to change can render a profitable business obsolete and bankrupt. Blockbuster had everything to stay: sufficient financial capital, a recognized brand that customers chose, but it did not see the end of an era, the era of movies on DVDs and Blu Ray and the advent of the digital age.

And it was at that moment when Netflix, its main competitor, the same one that could be an ally to conquer the movie market of digital platforms, took an unattainable advantage that meant its ruin, at least for now. If it comes back in the future to reinvent the brand with something newer than Netflix, only time will tell.