How Business Owners Can Avoid BLOCKBUSTER's Biggest Mistakes!
Posted on March 19th, 2019
3 min read
“How could Blockbuster be stupid enough to think video stores could compete with Netflix? If I’d been in charge of Blockbuster, I would have been smart enough to embrace new technology. Netflix wouldn’t have stood a chance!”

Admit it, you’ve had this thought before. I know I have.

We all like to think of Blockbuster as a stubborn old man who wouldn’t recognize the future even if it showed up at his front door and poured a bucket of ice over his head.

But as is often the case, the more information you have about a person (or a business), the more you realize your preconceived notions about them are inaccurate.

Blockbuster Knew Streaming Video Was The Future
Let’s go back to the early 2000s, when the transition between dial-up and high-speed internet started.

If you ever tried to watch streaming video over a dial-up connection, try to remember what that was like. For those of you who weren’t around or blocked out the memory, here’s a quick refresher: you would watch choppy, blurry videos that were roughly half the size of a thumbnail on an Instagram page, and they would still buffer or freeze every five seconds or so.

You know how 240p videos on YouTube look really bad? Those of us who used dial-up would have been blown away if our web connections had been able to handle video quality that high!

Why is all of this important to understand?  

Back then, the internet was so slow, it was hard for most people to imagine that streaming entire movies online would soon be a feasible option.

But do you know who did have the foresight to recognize that streaming video was the future? Blockbuster.

As early as 2000, Blockbuster was working on a video-on-demand platform that it hoped would function similarly to Hulu or Netflix’s streaming service today. Blockbuster knew that if they didn’t embrace streaming video as soon as possible, some tech company would steamroll them out of existence.  

By the way, this was before Netflix starting exploring streaming video technology—at the time, Netflix was exclusively a DVD delivery service.

Unfortunately for Blockbuster, the major film studios were unwilling to give them the streaming rights to enough films for the proposed service to be commercially viable. As a result, Blockbuster’s partner company in creating the VOD service backed out of a 20-year contract with them.

This actually turned out to be a good thing in a lot of ways, given that Blockbuster’s partner was a little telecom corporation known as Enron. (Google “Enron Scandal” if you want to understand why remaining in a partnership with them would have been a disaster for any company.)

Blockbuster seemed to be out of immediate options when it came to streaming video, but they were confident they would be able to survive the transition into the age of high-speed internet.  

“We believe video-on-demand will become a commercial reality, just not right now,” a senior Blockbuster executive told CNET in 2002. She was right.

Netflix: The Alternative That Changed The Future
Streaming video on demand would have solved some inherent problems with Blockbuster’s business model. At the time, Blockbuster customers couldn’t rent their favorite movies if those movies were out of stock, and customers had to pay late fees if they didn’t have time to drive to their local video store and return their movies on schedule.

But Netflix found a way to solve those problems without streaming video technology. For a monthly fee, customers could simply order rental DVDs online, keep them as long as they wanted, and mail them back when they were ready to rent a new movie.

There was just one problem with Netflix’s model: people had to wait a couple of days before their new DVDs arrived in the mail.

Essentially, Netflix offered the following trade-off to potential customers: “We’ll get rid of some things you don’t like about renting movies from Blockbuster, but you won’t be able to get your movies right away.”

For many people, that was a worthwhile tradeoff, but others preferred the convenience of having a video store nearby.  

Some of you might already know that in 2000, when Netflix was still a relatively new startup company, they offered Blockbuster the opportunity to buy them out for $50 million. Blockbuster’s CEO, John Antioco, infamously laughed Netflix’s executives out of the room. He was willing to buy Netflix, but the price they offered seemed absurd.

We all know who had the last laugh.  

This is the part where the “I would have been smart enough to do things differently” monologue kicks in.

But let’s slow down for a second.

If you really think about it, what Netflix was doing in the early 2000s was primitive. Someone could have offered a similar video rental service in the 1980s with a catalog and a telephone. If sending people movie rentals by mail was such an obvious threat to Blockbuster, why didn’t anyone do it sooner?

Blockbuster was worried about future competition from streaming video services, not DVD-by-mail services.

Blockbuster's Only Two Choices
Some people have suggested that Blockbuster was foolish to think of DVD-by-mail services as a “fad.” But they actually turned out to be right about that. While Netflix’s DVD service still has customers, it’s slowly dying.  

Let’s say that in 2000, the CEO of Blockbuster understood the threat of DVD-by mail services.

Blockbuster would have had two options in order to stay relevant as a company.

The first option would have been to adapt--that is, to overhaul their entire business model. That would be a tall order for any business, especially a corporation as large as Blockbuster.

The same year Blockbuster’s CEO laughed Netflix’s executives out of the room, his company made $800 million, or 16% of that year’s revenue, from late fees. Netflix, unencumbered by the cost of running physical stores, had no late-fees.

Imagine it’s 2000, and you’re John Antioco. You’re trying to convince Blockbuster’s board of directors to get rid of lucrative late fees, close every single brick and mortar store, and switch to an online delivery service. How do you think that would go?

The second option would have been to buy out the competition--that is, take over DVD-by-mail companies, including Netflix, before they could pose a threat in the first place. That would have been a lot like playing the world’s most expensive game of Whack-A-Mole, but in hindsight, it may have been their best bet. This, of course, assumes advance knowledge that a huge company like Amazon wouldn’t decide to get involved in the DVD rental business.

By the Time Netflix Gained Major Traction, It Was Already Too Late
As you might recall, there were plenty of people who continued renting movies at Blockbuster after Netflix became a household name. I was one of those people. I liked Netflix, but I preferred having the ability to rent a movie at the last minute.

But we all know that the remaining group of loyal customers wasn’t large enough to keep Blockbuster in business. Competition from Netflix caused Blockbuster to lose a lot of money, which forced them to shut down their store locations at a rapid rate.  

And when people like me no longer had a local Blockbuster to go to, we signed up for Netflix subscriptions.

Finally, because Netflix was making so much money, they were in a better position to invest in a streaming video service, successfully executing an idea that Blockbuster had attempted much earlier.
What Business Owners Can Learn From Blockbuster's Mistake
As early as 2000, Blockbuster understood that the Internet posed a threat to its longstanding business model. They accurately predicted that streaming video would eventually render traditional video stores obsolete, and made plans to create a streaming service once it would become technologically viable.

What Blockbuster didn’t anticipate was that another company would be able to find a way to make them obsolete without cutting edge technology. By looking for problems with Blockbuster’s existing business model, and developing clever ways to solve those problems with tools that existed at the time, Netflix was able to hit Blockbuster’s weak points in ways most people, but most importantly, Blockbuster, didn’t realize was possible.

Netflix made enormous profits with this strategy, and eventually invested some of those profits into the development of the kind of streaming video service that Blockbuster originally wanted to offer.

What can we learn from this?

First, an essential component of good marketing is molding your business to fit the customer’s needs and preferences. If there’s something about your business model that customers don’t like, you need to find a way to fix that, or someone else will. Putting off fixing this kind of problem until later can put your business in a position like Blockbuster’s in the late 2000s.

In the case of Blockbuster, one of the most actively despised aspects of their business model, late fees, initially made them a lot of money. But those fees also ended up being a major factor in the demise of the company, and by the time they finally got rid of them, the damage had already been done.  

Entrepreneurs need to be vigilant about constantly improving the experience of their customers, so other companies can’t draw their customers away.

Second, and perhaps most importantly, business owners need to avoid narrow, linear thinking, and embrace more creative thinking.

Contrary to popular belief, Blockbuster’s problem wasn’t that their management was stuck in the pre-Internet Age. It’s was that they had a very rigid idea of what the transition to the Internet Age would look like.  

As far as Blockbuster was concerned, there was only one threat to their existing business model: streaming video. As long as streaming video wasn’t available, they thought traditional video stores, with late fees and limited films in stock, would be the best way to distribute rental films.  

Netflix beat Blockbuster because they took a business model that no one had questioned for two decades, tore it apart piece by piece, and found a clever way to compete against it. Unlike Blockbuster, Netflix wasn’t glued to the idea that streaming would be the thing that put video stores out of business. They thought outside the box and found a way to make video stores obsolete ahead of schedule.

The future belongs to creative entrepreneurs who like to constantly tinker with things and make them better, not people who are comfortable running everything on autopilot. But no entrepreneur, no matter how creative, comes up with every single idea on their own.

Here at I Want Digital Marketing, we take a hard look at every business we work with, identifying strengths to emphasize in your advertising, and offering solutions to improve your business’ weak points. We do this because we understand that our 6 Pillar Digital Marketing System will only work if customers know you have a business that meets their needs.

Are you ready to make your business the best it can possibly be? Get in touch with us by requesting a FREE digital marketing audit, and we’ll kick things off by sending you a list of strategies you can use to help grow your business. We’ll even include a FREE logo design to help you with your branding.

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