Blockbuster VS Netflix: This was a story of suicide, not murder

One of the greatest business case studies of modern times has to be the battle between Blockbuster and Netflix. It is widely accepted that this was a story of transition where the old is replaced by the new. A simple story of technology and digitalisation disrupting the marketplace. The truth is that it wasn’t this simple and if Blockbuster hadn’t turned the gun on themselves, it would have been Netflix receiving the killer bullet.

From 1985 to 2004 Blockbuster was enjoying the role of a market leader in video rentals. Although of course, by 2004 we are really talking about DVDs and games. Many observers had diagnosed Blockbuster with a condition called active inertia, in the end, this diagnosis may seem fair. They were happy riding the waves made by their success. However, they were willing to change and adapt to a new age. Unfortunately, before recognising this new age, Netflix already had 2 million online subscribers and by 2006, this number would rise to over 6 million. As Netflix subscribers climbed, Blockbuster revenue was falling. These trajectories were not linear nor were they as simple as some have led us to believe. The truth is, Blockbuster had created their own online service, had crashed Netflix’s share price and was exploring streaming services. The outlook for Netflix was bleak and their end seemed certain. In desperation the Netflix CEO, Reed Hastings, proposed a $50 million merger with Blockbuster. Knowing they had the upper hand, the then Blockbuster CEO, John Antioco, who had no interest of throwing Netflix a lifeline, recommended that the board reject the deal, which they did.

So what really happened in story between Blockbuster and Netflix?

Blockbuster was happy enjoying the success of their business model which was to offer families a video collection service from one or their thousands of stores worldwide. Anyone past their mid to late 20s should have fond memories of this experience, apart from the late fees! Blockbuster was not aware of a new online trend but in the early 2000s, there wasn’t one. This trend would not happen until Reed Hastings, a computer programmer and co-founder of Netflix decided to start one. The Netflix model offered consumers the service of mail order DVDs with no late fees as part of a subscription model. Between 2004 and 2006 Netflix went from 2 million subscribers to 6.3 million.

Blockbuster had grown into the juggernaut it had become through innovation and market disruption. Their purpose was to provide quality and easily accessible entertainment. Over the years they had moved into gaming, music and even live entertainment. They were not as stubborn and stagnated as many believe and the creation of Blockbuster Online and Blockbuster Total Access were testament to this. It is true that Blockbuster was struggling financially, with Netflix being a big part of the reason. In fact, at the time they had debts of over $1 billion and their Total Access plan was making a loss of $2 on every transaction. But Netflix were struggling too. In 2007 both companies were on the verge of collapse with Netflix looking the most likely to fall. Netflix were losing subscribers in the 10s of thousands and Blockbuster subscribers were growing.

Truth be told, Netflix, despite their advanced algorithms and superior technology, their greatest advantage was the then CEO of Blockbuster, James Keyes.

It is well documented that James Keyes ultimately found himself as CEO of Blockbuster as the result of a long standing feud between Carl Icahn and Blockbuster CEO John Antioco. Carl Icahn was a billionaire investor and 10% Blockbuster share holder who wanted to extract as much money from Blockbuster as he could. John Antioco was responsible for making ground on Netflix but he did so at a cost. The Blockbuster online project was costing $200 million and had not yet started to make money. After a number of hostile years between Antioca and Icahn, Antioca negotiated a severance package with Blockbuster and moved on. James Keyes, a long time critic of Antioca, was then named CEO of Blockbuster.

James Keyes was a former exec of 7-Eleven and believed in the value of bricks and mortar stores. Despite protests from some board members, he pulled funding from the online program and turned his focus on their stores. He was urged to reconsider and was shown plans of how the online business could move into streaming services, but his mind would not be changed. He would not even consider selling the online business to Netflix and instead, he let it fade out. Over the next 3 years Netflix, free from the competition offered by Blockbuster, grew to unprecedented heights. During that same period of Netflix growth, Blockbuster sank deep into decline, eventually filling for chapter 11 bankruptcy in September 2010.

Years later Reed Hastings admitted that, if Blockbuster had continued with their online business, Netflix would have been the ones filing for bankruptcy. That same year Netflix hit 20 million subscribers. Speaking back in 2018 Antioca reiterated his belief that Blockbusters online business would not only have saved Blockbuster, but would also still be playing rival to Netflix today. Both James Keyes and Carl Icahn blame the failures of Blockbuster on its massive debt and not its decision to turn its back on their digital platform.

There are many lessons from this epic battle but the biggest take away has to be this, focus on what you do, not what you have done. If you are an organisation made to make entertainment easily accessible you should focus on doing that. The bricks and mortar stores that made Blockbuster famous should have been one of many steps on their evolutionary journey, not their defining chapter.