A Business Fairy Tale of Tapes, DVDs, and Streaming

Blockbuster had 9000 stores in its heyday

As I was relishing the almost limitless content on Netflix, Amazon Prime, and other online content providers, I was struck by how far we have come from Blockbuster’s days of renting out tapes… Here is my take on this business tale of tapes, DVDs, and streaming.

Once upon a time, there existed a corporate kingdom known as Blockbuster video. It competed with another kingdom known as Hollywood Videos. Things were great in the tape rental land ruled by the Blockbuster and Hollywood kingdoms — at least for the corporate leadership. For people served by these kingdoms’ services, it was a mixed bag — they were not happy with the atrocious late fees policy. Legend has it that Blockbuster made $500 million every year by the late fees in the mid-90s’— a huge amount back then when Fed was not printing dollar bills as liberally as it is doing now. The tech companies’ market cap was in the low hundreds of billions (unlike the trillion we see now).

When Netflix and Chill entailed waiting for your DVD first

Many unhappy customers were frustrated with the late fees. Much more frustrated and helpless than when (say) they came back to their car in the Blockbuster parking lot and found a snowflake sized ding on their shiny new sports car. Unfortunately for Blockbuster, an ill-timed $40 late fees ding on Reed Hastings’ wallet made him sore. Really sore. Reed was motivated to found Netflix in 1997 to teach Blockbuster a lesson in the disruptive thinking of Silicon Valley. Reed’s customer service commandment would have made Moses proud: Thou shalt not impose late fees on forgetful customers.

The timing was also perfect for Netflix as content moved from tapes to DVDs, and shipping anywhere was economically feasible. The whole business model of Netflix was built on the inevitable delay of the US Postal Service that ensured that the (promised) unlimited DVDs in the mail were actually limited (you had to have some math background to know this of course). The shipping latencies ensured a customer was in a state of delayed gratification and portrayed Netflix as a company that honest to goodness cares for customer service (unlike the evil Blockbuster).

In the epic battle fought over many years, Blockbuster and Hollywood Videos Kingdoms wound down like the famed Roman Empire. To Netflix’s credit, their leadership is an active bunch, unlike many of their customers who sit and do nothing until the movie credits roll. Netflix willfully disrupted its DVD business and started streaming as a separate business unit. I am sure the Netflix leadership team read Clayton Christensen’s Innovators Dilemma hypothesis published in the late 90s. Luckily, they not only figured out how to apply it but fought the strong headwinds that come with any radical change to a corporate strategy. Fortune favors the brave it is said. Netflix was certainly brave to buck the trend of DVDs in the mail — a trend that was threatening to become as pervasive as humble bragging on social media now. Of course, the disruptive Netflix strategy spawned a slew of fast-follower strategies from Amazon Prime, Hulu, and others.
Fast forward to 2020 and Blockbuster, and Hollywood Rentals are nowhere in our neighborhoods. Netflix effectively directed the hit movie ‘Honey, I shrunk the Blockbuster business.’

Tourism and trinkets for sale at the last Blockbuster store in Bend, OR; We call this business adaptation a pivot in Silicon Valley

The skeptical person that I am, I refused to believe Blockbuster is dead. By a simple Google search, I found one last Blockbuster video that is still holding out at Bend, Oregon. I think what is keeping this store alive is a combination of satisfied customers, tourism (this store is a relic now much like the Egyptian pyramids), and probably the fact that Bend is in an internet shadow zone. I will surely check this store out when I am next in Bend, OR — it might even bring me warm memories of all the late fees I paid. Also, if you are living in Bend, OR, or any other Internet shadow zone you can still get Netflix DVDs by email. There are still 2.2 million subscribers for this Netflix service and generating $200M in revenue. I guess for some folks there is nothing like waiting for DVDs in the mail — this must be the delayed gratification customer segment that I never thought existed in the Instagram era.

This tale illustrates how technology markets are always in ferment and highly entertaining to observers (not to those who are closing stores or paying late fees). It is incredible to see how technology can disrupt market leaders within a short period. Somehow Silicon Valley gets to play a leading role in most if not all disruptive technologies. I am excited and thankful to be in this location where I get a ring-side view of the action.

If you are in a large company and want a strategy on how to avoid the fate of Blockbuster you will do well in reading Lead and Disrupt by the Stanford and Business B school duo Charles O’Reilly and Michael Tushman: https://www.amazon.com/Lead-Disrupt-Innovators-Dilemma-Second/dp/150362952X. ← You can think of this as the long-due leader’s companion book of Innovator’s Dilemma (by Clayton Christensen another Harvard legend).



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Krishna S

Krishna S

Changing the world.. one blog at a time :-)