How Netflix eliminated Blockbuster

In today's age of online streaming and instant access to an endless library of audiovisual content, it's easy to forget that there was a time when renting a movie meant a visit to a video store.

Blockbuster, once a giant in the entertainment industry, became a victim of rapid technological evolution and innovation by companies like Netflix. In this article, we will explore the story of how Netflix managed to crush Blockbuster and forever change the way we consume entertainment.

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The Rise of Blockbuster

Blockbuster went bankrupt in 2003, but before we dive into its downfall, it's important to understand its rise in the 1980s. The story begins with David Cook, a former oil industry employee, who founded the first Blockbuster in 1985 in Dallas, Texas.

At the time, the video rental industry was not particularly exciting or sophisticated. Stores offered a limited selection of popular films, and distributors charged a high price for each copy.

Cook, however, had a special vision and skills in databases. He implemented a computerized system to manage movie inventory and offered an impressive selection of 10,000 titles per store, which made all the difference.

Within a short time, Blockbuster expanded to 19 stores.

The Expansion with Wayne Huizenga

Blockbuster's growth did not stop there. In the 1980s, Wayne Huizenga, one of the investors, invested $18 million, which today would be equivalent to $65 million with inflation.

David Cook sold his shares at that time, allowing Wayne Huizenga to lead Blockbuster's expansion. The company acquired competitors and opened thousands of stores in the United States and Europe.

They also started renting video games, which led them to face Nintendo in court.

By 1992, Blockbuster had 1,800 franchises worldwide, and in 1994, a communications giant acquired the company for a staggering $8.4 billion, which would be worth $16 billion in today's money. Blockbuster became a publicly traded company and was at the top of the video rental industry.

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The Netflix Challenge

However, in 1997, a competitor emerged that would change everything: Netflix. Founded by Reed Hastings and Mark Brandon, Netflix offered an unlimited DVD home delivery service for a flat monthly fee. In 2000, Netflix offered to sell itself to Blockbuster for just $50 million — an offer that Blockbuster’s CEO at the time said was denied.

This refusal is considered a critical mistake in Blockbuster's history.

In addition to Netflix, other competitors emerged such as Redbox and digital studios offering contactless DVD rentals. Despite this growing competition, Blockbuster remained a giant with 9,000 physical stores and annual revenues of $5 billion in 2004.

Blockbuster's real mistake was its lack of innovation. It wasn't until 2004 that Blockbuster launched its online rental system, which didn't offer streaming but instead copied Netflix's DVD delivery model.

The investment cost $200 million, and between 2003 and 2005, Blockbuster lost 75% of its market value and accumulated a debt of $1 billion.

Netflix Innovation and the Decline of Blockbuster

Even though Blockbuster and Netflix had similar capital at the time, it was innovation and adaptation that changed the course of the industry. Netflix used its capital to launch the “Netflix Prize,” an open competition to develop an algorithm that would predict user ratings for movies.

This algorithm became the basis for the Netflix streaming service, which launched in 2007.

Blockbuster, on the other hand, took desperate measures, such as waiving all late delivery charges, resulting in a further loss of $200 million. They bought Movielink, an online platform for downloading movies, but did not give it the necessary importance.

In 2010, Blockbuster was purchased by Dish for $320 million in an attempt to keep a few brick-and-mortar stores open. However, three years later, in 2013, there was only one Blockbuster store left open in Oregon, United States.

Lessons from History

The story of Blockbuster and Netflix offers valuable lessons for entrepreneurs and businesses in general:

1. Rapid Innovation

The ability to adapt and evolve quickly is key in any business. Blockbuster had the resources, but failed to recognize that its business model was changing. Netflix, on the other hand, embraced innovation and became a leader in online streaming.

2. Franchises and Risks

Franchising can be a path to success, but it can also lead to failure. Entrepreneurs should do thorough research before investing in a franchise and carefully consider the risks involved.

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3. Business Value

Blockbuster founders David and Sandy Cook sold their business early, and this may have been a mistake in retrospect. Entrepreneurs need to understand the true value of their business and evaluate buyout offers carefully.

In conclusion, the story of how Netflix crushed Blockbuster is a reminder of how innovation and adaptation are essential in the business world. Blockbuster, at its peak, failed to see the need to evolve and became a victim of its own complacency.

On the other hand, Netflix knew how to take advantage of emerging technology and changed the way we consume entertainment. This story reminds us that in the business world, the only constant is change, and those who cannot adapt, risk becoming obsolete.

Written by Moises Hamui Abadi : I am an entrepreneur, founding partner of Viceversa and SoyMacho. After leading several digital businesses and advising several other businesses, I decided to form MHA Consulting, a digital marketing consultancy dedicated to growing and empowering digital businesses in more than 7 countries and generating more than 1,500 million pesos.