Blockbuster
From Invertopedia, the encyclopedia of how things fail
Blockbuster was the video rental chain that peaked at 9,100 stores in 2004[1]. In 2000 it turned down a chance to buy Netflix for $50 million[2]. That same year it collected nearly $800 million in late fees, about 16 percent of its revenue[1][2], the very charge Netflix's flat-fee model did away with. It filed for Chapter 11 bankruptcy on September 23, 2010, with nearly $1 billion of debt[1].
Contents
The bet
Stores were the moat. People would keep driving to a shop for new releases, and a late fee of about a dollar a day[2] was simply part of renting. When Netflix's founders offered to sell, Blockbuster, as former Netflix chief financial officer Barry McCarthy put it, "laughed us out of their office"[2]. Even after Netflix went public in 2002, then-CEO John Antioco dismissed it as a niche service[1].
What happened
| 1985 | Blockbuster is founded in Dallas.[1] |
|---|---|
| 2000 | Netflix founders Marc Randolph and Reed Hastings offer to sell the company to Blockbuster for $50 million. Blockbuster says no. It collects nearly $800 million in late fees that year.[1][2] |
| 2004 | Viacom spins Blockbuster off as its own public company, carrying roughly $1 billion of debt. Blockbuster launches Blockbuster Online. The chain peaks at 9,100 stores.[1][2] |
| Jan 1, 2005 | Blockbuster drops late fees. It estimates they would have added $250 million to $300 million to 2005 operating income.[5] |
| 2005 | Activist investor Carl Icahn takes a nearly 10 percent stake and three board seats, and fights Antioco over the online push and the end of late fees.[2] |
| 2006 | Blockbuster Total Access lets online subscribers swap discs in stores. Blockbuster Online reaches 2 million subscribers by year end.[2] |
| Mar 2007 | After a fight over his bonus, Antioco leaves. James Keyes, formerly of 7-Eleven, takes over and turns the focus back to stores.[2] |
| Sep 23, 2010 | Blockbuster files for Chapter 11 with nearly $1 billion of debt and 3,300 US stores. Late fees had been brought back that year.[1][2] |
| Apr 2011 | Dish Network wins the bankruptcy auction, paying $233 million in cash and taking on $87 million in liabilities.[6] |
| Nov 2013 | Dish says it will close the remaining 300 or so company-owned stores by early January 2014 and end DVDs by mail.[7] |
The kill shot
Blockbuster's profits leaned on the thing customers hated most. By the time it gave up late fees and paid for an online business, it carried a billion dollars of debt and a board that wanted the money back.
Late fees brought in nearly $800 million in 2000, about 16 percent of revenue[1][2]. Netflix's early growth came from customers tired of paying them, and Hastings has said he started Netflix after paying $40 in Blockbuster late fees[2]. Matching Netflix meant giving up a profit stream Blockbuster itself put at $250 million to $300 million of operating income for 2005[5].
It nearly worked. In one quarter of 2007 Netflix lost 55,000 subscribers while Blockbuster's online base kept growing[2]. But Blockbuster lost about $2 every time a Total Access customer swapped a disc in a store, it carried the debt from its Viacom spin-off, and Icahn's board opposed the online plan[2]. After Antioco left, the new management went back to the stores and reinstated late fees in 2010[2]. "If it hadn't been for their debt, they could have killed us," Hastings said in 2009[2].
Red flags ignored
- Profits from penalties. About 16 percent of revenue in 2000 came from charging customers for returning movies late.[1]
- Calling the upstart a niche. Antioco dismissed Netflix as a niche service even after it went public in 2002.[1]
- A balance sheet built for someone else. The Viacom spin-off left Blockbuster with roughly $1 billion of debt just as it needed to spend on the online business.[2]
- A board fighting the strategy. Icahn and the directors he installed opposed the online build-out and the end of late fees.[2]
- Walking back the fix. Late fees came back in 2010, the year Blockbuster went bankrupt.[1][2]
The cost
Blockbuster lost more than $4 billion in total from 2002 to its 2010 filing, and its market value fell from $4 billion to $12 million in eight years[1]. It had 25,500 employees, 7,500 of them full-time, when it filed, and its shares would be worthless if the reorganization plan was approved[1].
Dish bought what was left in 2011 for $233 million in cash plus $87 million of liabilities, by which time the chain was down to 1,751 stores[6]. In 2010 Netflix had 15 million subscribers and a market value of $8 billion[1].
The inversion
If a competitor's best feature would kill your profits, that is exactly where to look. Find out how much of your income comes from what customers resent, and build the business that works without it before someone else does.
What survived
The name and one store. Dish kept using the Blockbuster brand for its streaming and on-demand services after closing the company-owned stores[7]. A franchised store in Bend, Oregon, became the last Blockbuster on the planet in 2019[3][4].
References
- ^ “Hubris, and late fees, doomed Blockbuster”. AP (Mae Anderson, Michael Liedtke) via NBC News, September 23, 2010. Late fees of nearly $800 million, about 16% of revenue, in 2000; the Chapter 11 filing, 3,300 stores, nearly $1 billion of debt, $4 billion of losses since 2002, market value, 25,500 employees, worthless shares; the 9,100-store peak in 2004; founding in Dallas; Antioco calling Netflix a niche; Netflix's 15 million subscribers and $8 billion value.
- ^ “How Netflix almost lost the movie rental wars to Blockbuster”. CNBC Make It (Tom Huddleston Jr.), September 22, 2020. The $50 million offer in 2000 and McCarthy's quote, $800 million in 2000 late fees, a dollar a day and Hastings' $40, Blockbuster Online (2004) and Total Access (2006), 2 million online subscribers, Netflix's lost quarter in 2007, the Viacom spin-off debt, $2 lost per in-store swap, Icahn's stake and board fight, Antioco's exit and Keyes, late fees reinstated in 2010, and the Hastings quote.
- ^ “There's only one Blockbuster left on the planet”. CNN, March 6, 2019. The store in Bend, Oregon, becomes the last Blockbuster on the planet.
- ^ “Blockbuster LLC”. Wikipedia. Bend, Oregon store as the one remaining franchised location (cross-check).
- ^ “Blockbuster to end late fees in 2005”. AP via NBC News, December 14, 2004. Late fees end January 1, 2005, and Blockbuster's estimate that they would have contributed $250 million to $300 million to 2005 operating income.
- ^ “Dish Network wins bidding for assets of bankrupt Blockbuster”. Los Angeles Times, April 7, 2011. Dish pays $233 million in cash and assumes $87 million in liabilities; Blockbuster down to 1,751 stores.
- ^ “Blockbuster throws in the towel”. Scientific American, November 6, 2013. Dish closes the remaining 300 or so company-owned stores by early January 2014, ends Blockbuster By Mail, and keeps the brand for Blockbuster On Demand and Blockbuster @Home.