What happened to Blockbuster?

Blockbuster was an American home movie and video game rental service founded in 1985 by David Cook. By the 1990s the company reached its peak, with thousand of stores in the US. And yet by the 2000s Less than a decade later, Blockbuster filed for bankruptcy with almost $1 billion in debt. Today, a single store remains in Bend, Oregon. Many attribute the failure of Blockbuster to Netflix, however, the failure was a lack of adaptation of its business model to the rising of streaming as a service.

Background

Blockbuster was an American home movie and video game rental service founded in 1985 by David Cook.

The rise and fall of Blockbuster has been well documented in popular culture. At one point in the late 1990s, the company owned over 9,000 stores in the United States alone and employed 84,000 people globally.

Less than a decade later, Blockbuster filed for bankruptcy with almost $1 billion in debt. Today, a single store remains in Bend, Oregon.

How did it come to this? We’ll discuss some of the main reasons below.

Over-reliance on late fees

During its peak, Blockbuster earned around $800 million annually from late fees alone.

This reliance on late fees, though profitable initially, would cause the company to lose significant market share to Netflix. At the time, Netflix was a fledgling company offering a mail-order movie rental service that did not charge late fees.

It took Blockbuster more than five years to offer a similar service and even longer to cut late fees. During these years, Netflix built an unassailable competitive advantage.

Failure to acquire Netflix

Then Blockbuster CEO John Antioco is famous for passing on an opportunity to buy Netflix for $50 million in early 2000.

This decision was compounded by Blockbuster’s decision to develop a video-on-demand streaming service with Enron. The partnership ultimately failed, with Enron doing most of the work of building and testing the service and going bankrupt soon after. 

Blockbuster, on the other hand, remained myopically focused on its lucrative video store franchise and was generally disinterested in the technology. It was an opportunity missed.

Failure to adapt

A failure to adapt to innovation and changing consumer preferences have been the cause of many business demises over the years. 

Blockbuster was no different. Company annual reports show it was well aware of the rising popularity of streaming services and other threats. Despite this knowledge, it continued to open new stores and experiment with a variety of new services. 

These included Blockbuster total access – a mail-order rental service similar to that offered by Netflix. But it was more expensive and less convenient than the Netflix offering. 

They also offered a subscription service called Blockbuster movie paths which was also unsuccessful. Without late fees, there was no incentive for consumers to return movies on time.

Ultimately, Blockbuster filed for bankruptcy because they underestimated how quickly their core business became irrelevant. The somewhat scattergun approach to maintaining some semblance of relevancy was a case of too little too late.

Key takeaways:

  • Blockbuster was an American movie and video game rental chain. The company went from industry leader to filing for bankruptcy with $1 billion in debt in less than a decade.
  • Blockbuster relied on late fees to drive a high proportion of revenue. This strategy proved uncompetitive after Netflix offered fee-free movie rentals by mail. Blockbuster lost significant market share to Netflix in the ensuing years and experienced a decline in profit after abolishing late fees in an attempt to remain competitive.
  • Blockbuster’s demise is mostly due to an inability to innovate. Although passing on the offer to purchase Netflix is noteworthy, the company failed because of a myopic focus on its outdated rental franchise model.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"