I have to admit, I had a nostalgic moment reading this article. There was something special as a kid going to Blockbuster to rent the latest Sega Genesis or Nintendo 64 game – browsing the shelves and finding something interesting to play.
From a consumer perspective, I actually loved Blockbuster when they had the rent unlimited online and exchange in-store program. My (now) wife and I feasted off that in college. I even accepted when they hiked my rates to keep that program. The day I quit was when they limited that program to 5 in-store exchanges per month.
John Antioco, who presided over Blockbuster from 1997 to 2007 wrote a fascinating article about what happened behind the scenes with Carl Icahn when he invested in the company. I don’t think he still realizes, but things like eliminating late fees had nothing to do with the death of the company – it was the core business model that failed combined with a worse product than what Netflix offered.
Blockbuster’s biggest problem stemmed from its business model. Movie studios sold VHS cassettes to rental companies for about $65 apiece, so a store had to rent out each tape about 30 times to make back the money. That’s a big up-front investment for a product that most people want just during the few weeks after it first comes out. The whole industry was hurt by stores’ never having enough copies of new releases.
We asked the movie studios to shift to a revenue-sharing system. We proposed that instead of buying the cassettes for $65 each, we would pay $1 a copy up front but give the studios 40% of rental revenues on their titles. Eventually they agreed. That allowed us to stock many more copies of hot titles and to advertise their availability. We rolled out an ad campaign about guaranteed availability that featured animated Blockbuster boxes singing the classic tune “I’ll Be There.” Comp store sales and market share grew strongly.
Even with this success, people continued to worry that video on demand was going to torpedo the rental business. It’s ironic that we were hurt by a different technology shift: the advent of the DVD. Whereas VHS cassettes were mostly rented, DVDs were introduced by the studios as a retail product, and mass merchants like Walmart and Best Buy priced them below $20. The adoption rate soared.
DVDs also allowed Netflix to take hold, because they could easily be sent through the mail. Previously the video business had been driven by spontaneity: You didn’t have any plans for the evening, so you decided to stay in and rent a movie. We weren’t sure whether a model in which you managed your selections by means of a queue and got a movie in the mail a few days later would catch on. But in August 2004 we jumped into the online business in a big way. A few months later we made a dramatic change by eliminating late fees, which had always been a major customer irritant. Those moves put Blockbuster back into growth mode.
Carl took the time to write a rebuttal:
Blockbuster turned out to be the worst investment I ever made. It failed because of too much debt and changes in the industry. It had too many stores, Netflix created a better business model, and then Redbox kiosks and the whole digital phenomenon eliminated the need for consumers to go to a separate DVD store. Maybe the board did make a mistake in picking Jim Keyes as Antioco’s successor—Keyes knows retailing and did an excellent job with the stores, but he isn’t a digital guy. I also think Antioco did a good job in executing on Blockbuster’s Total Access program, which allowed customers to rent unlimited movies online and in stores. Over time it might have helped Blockbuster fend off Netflix. But Keyes felt the company couldn’t afford to keep losing so much money, so we pulled the plug. To this day I don’t know what would have happened if we’d avoided the big blowup over Antioco’s bonus and he’d continued growing Total Access. Things might have turned out differently.