By Michael Woloszynowicz

By Michael Woloszynowicz

Wednesday, September 22, 2010

Business Lessons from Blockbuster's Failure

With Blockbuster's Chapter 11 filing looming, it seems a fitting time to reflect on what went wrong and what businesses can learn from it. Many would simply label Blockbuster a casualty of Schumpeter’s theory of creative destruction, and in many cases it is, but the fact remains that its current position could have been avoided.

Back in 2002 Blockbuster was thriving as the dominant source for movie rentals, enjoying a lofty market capitalization of $6B; this was also the same time that Netflix IPO'd on the Nasdaq. The Netflix IPO wasn't a complete success as its share price quickly receded from $15/share at the time of the IPO to around $6/share. At the time Netflix's business model was quite different from what it is today. Netflix serviced customers by creating a subscription based service that allowed users to rent as many movies as they wanted for a fixed price of $20/month. At the time Netflix was mailing the physical DVD discs to its customers and received returns in the same manner. Given the poor performance of the IPO Blockbuster shrugged Netflix off as another fad and proceeded with business as usual. Today the landscape is very different with Netflix’s dominance steadily growing and its stock price climbing to over $150/share. Netflix's market cap is now $6.8B while Blockbuster's was about $200M a year ago and a paltry $20M prior to the Chapter 11 announcement.

So where did Blockbuster go wrong? Their main folly was failing to see the forest from the trees. In response to Netflix's proposition of convenience, Blockbuster announced that they will let people return videos whenever they like, with no penalty for lateness. What this did is further increase their capital costs, which were already drastically higher than Netflix’s given their need for physical locations. This of course did little to improve business as customer defections continued and revenues dropped. Because of Blockbusters high capital costs, the decrease in revenue caused profits to tumble into the red, the company closed store locations which made it even more inconvenient for customers to rent movies, further driving them into the arms of Netflix. The real hit to their business came in 2007 when Netflix launched a download version of their service and soon after, iTunes began distributing movies to its portable devices and Apple TV. In this case Blockbusters mistake was that it failed to follow Clay Christensen's theory of "the job". Blockbuster continued to see itself as a provider of movie and game rentals rather than a distributor of entertainment. By locking itself into this narrow view, they ignored the innovations happening around them and believed that people wanted to come into the store and talk to their staff, get recommendations, and make their choice, but of course this was not the case. The internet provided all the recommendations they needed and the convenience of renting with a few mouse clicks became impossible to beat. To further compound their problems, the recession as well as growing concerns about the environment took hold, so people were less and less willing to spend money on gas and make two trips to rent a movie. Realizing that Netflix and iTunes were serious threats to their business, Blockbuster began opening automated kiosks in grocery stores and other locations to increase convenience, as well as creating an on demand service that would stream movies to portable devices, PVR's and computers. But all this was too little too late, and the crutch of servicing its large debt load and high capital costs proved too much in the face of their entrenched and thriving competitors.

The key lesson to take away is that no matter how successful you are today, tomorrow brings no guarantees. With the world evolving at a rapid pace, companies must look at their business from a "job" perspective and identify the trends that can threaten or disrupt their means of fulfilling the job they're being hired for. Taking a sufficiently high level view of the job, companies should perform periodic Five Forces and SWOT analyses to see what growing threats exist and where their weaknesses lie in relation to these threats. By continually comparing their value proposition to those of competitors a company can proactively rather than reactively respond to upstarts and generate a new short and long term business strategy.
So what could Blockbuster have done, well I will summarize some of my thoughts but I hope to leave this as a discussion for comments on this post.
  • Purchased Neflix in 2001, this may not have been necessary if blockbuster had simply repositioned itself and modified its strategy
  • Opened kiosks much earlier and began closing stores, this would have reduced capital costs and improved convenience
  • Emulated Neflix’s early model of subscriptions and distribution through mail
  • Entered the on demand space much earlier, before Netflix and iTunes took over the market
Although hindsight is 20/20, there were numerous points where Blockbuster should have recognized serious threats to its business model and used its then powerful brand name and market share to reposition itself. Alas, by taking an incorrect view of their business and failing to account for the disruptive innovations around them, Blockbuster has crumbled just days shy of its 25th anniversary. 

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