Netflix killed Blockbuster, right? That's been the conventional wisdom for a decade, as Blockbuster went through bankruptcy and withered down to single remaining franchise in Oregon.

But there's more to it, as journalist Ben Unglesbee just reported for the industry site, Retail Dive

(There's also a really interesting backstory about why Unglesbee wrote this 7,000-word story to begin with. I write about that separately on Understandably.)

After digging through old Securities and Exchange Commission reports, talking with former Blockbuster executives and franchisees, and frankly just reassembling the chronology, he comes up with seven additional factors besides Netflix and streaming technology.

I think it's an instructive list for any business owner for two reasons:

  • First, because it shows how simple narratives are often incomplete. 
  • And second, because it demonstrates how in any industry, smart interesting businesses can find themselves under attack from many different directions at once. Presuming the problem is just one thing and defending against it can be a recipe for collapse.

Here's a list of the factors Unglesbee identifies in the demise of Blockbuster. As one former franchisee put it to him: "[T]he conventional wisdom is that it just happened because technology killed it. Well, that's part of it, but it's not the whole story."

Overall unprofitability

From 1996 to 2010, Blockbuster was only profitable during two years. And between 2002 and 2006, it lost about $4.4 billion. 

"One hole in the standard Netflix-killed-Blockbuster narrative is the fact that Blockbuster was unprofitable as far back as 1997," Unglesbee writes. "Put simply, Blockbuster was kind of a mess for much of its life, and long before Netflix was a major player."

The rise of DVDs

It wasn't just that DVDs were lighter less costly to manufacture and mail. It's that studios priced them lower -- making it not much more expensive to buy a DVD than to rent one at Blockbuster.

Massive debt

In 1994, Viacom purchased Blockbuster, and as Unglesbee puts it. Ten years later, Blockbuster spun off, but had to take out a $905 million loan to pay a special dividend to Viacom shareholders for the privilege. 

If not for that debt, a former analyst suggests to Unglesbee, "it probably would have survived a lot longer."

Too-fast growth

Author Josh Greenberg, who wrote a book called From Betamax to Blockbuster, tells Unglesbee that super-fast growth was built into Blockbuster's early DNA:

The Blockbuster strategy was simple -- pump as much money as possible into buying local and regional chains while keeping centralized control over the look and feel of individual stores," Greenberg writes. The company got so efficient at opening new stores, he notes, that it could pack everything needed to open a store into a tractor-trailer, in the order it would be needed.

Late fees

This was the scourge of Blockbuster: return a movie, go back to rent another one, and find out that you owed $20 in late fees. In fact, Netflix founder Reed Hastings later claimed that he started Netflix because he'd owed $40 in late fees on the movie Apollo 13

That was a "convenient fiction," a Netflix executive later admitted, but it plugged into how much people hated them. And Blockbuster found they were an albatross: a bad part of their business model, even though ultimately dropping them didn't lead to more rentals.

Walmart, Target and Best Buy

These other big retailers got into the video rental market -- but were ultimately able to price it all far lower, because they could use DVDs as a loss leader just to get customers in the stores.

Other video chains

The threat wasn't just from Netflix and technology and big chains. There were also other smaller video chains, like Hollywood Video. 

"Hollywood ... just beat them like a drum," a former franchisee told Unglesbee. "They had taken our business model and used it to just destroy Blockbuster in head-to-head competition."

'The list is long'

This isn't to say that Netflix wasn't part of what killed Blockbuster -- just that there were also other big factors that people seem to forget.

Also, while Blockbuster could have bought Netflix flat out for $50 million back in about 2000, that's not quite as great an "in retrospect" moment as people like to imagine. For one thing, Neflix in 2000 wasn't anywhere near the company it is today.

"So who or what really killed Blockbuster?" Unglesbee writes.  "The list of suspects and accomplices is long and depends on who you ask," adding: "It built a high-cost physical retail business ... When that set of circumstances changed, when content was more efficiently delivered digitally, Blockbuster's model became obsolete."
 

Published on: Oct 12, 2019
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