Seven Surprising Lessons From How Blockbuster Failed To Handled Disruption

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A cautionary tale of a business that failed to identify that they were being disrupted

“Success is a lousy teacher. It makes smart people think they can’t lose.” –Bill Gates

Falling off a perch is not a pleasant feeling for an individual or a company. However, falling is a trait among warriors, and rising after a fall is a champion’s hobby.

For this to happen, an individual or a company needs to be sitting right up to the pile of all other competitors for several years to lose track and fall so hard that the company usually ends up in a bankruptcy file.

In 2004, Blockbuster’s video rental company owned 9,094 stores and employed approximately 84,300 people. No one matched the size and magnitude of their video collection. So they survived when the world went from VHS to the shiny round discs.

In 2000, Blockbuster was approached by Netflix, a small company renting movies with a home delivery USP, with a price tag of $50 million.

However, Blockbuster thought that the new strategy was beneath them, and they felt they were far too big to be taken down due to the number of stores/employees they had under their belt.

The exact number of stores and employees became a liability when customers found it easier to rent a movie with a phone call, and later, just stream any content.

Blockbuster failed to see a market shift in consumer behavior right before their eyes and eventually filed for bankruptcy in 2010.

The iconic video store had reached the end of its rope, powerless to compete with subscription services like Netflix or emerging digital platforms. As a result, Blockbuster was unable to switch its strategy, whereas Netflix went from home delivery to online streaming.

“It’s a natural progression,”The business has just declined that rapidly.” former CEO of Blockbuster Jim Keyes said in an interview at the time.

By the end of 2021, Netflix had over 221 million users. As of January 2022, it had grown a market value of $170,64 billion, continuing the impressive year-on-year growth enjoyed over the last decade.

So, where is the nuance in all this?

Here are seven lessons we can learn from the downfall of a company that missed disruptive innovation.

1. Failing to recognize the customer’s job to be done

Photo from freepik

Blockbuster failed to have a clear idea of what its customers really wanted.

Instead, in the late 1990s, Blockbuster believed that the experience of going into a store, selecting a movie, and maybe grabbing some popcorn was all customers wanted.

They didn’t recognize that their users were buying the experience of seeing a film, ‘the entertainment experience.’

The availability of many movies to pick from was essential, but not as much as going into a store.

On another side, Netflix began as a mail-order movie rental service, with a monthly subscription for whatever films you desired (from a considerably more extensive collection than in-store) and significantly lower distribution expenses than Blockbuster.

2. Not focusing on customers’ value

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As Blockbuster had a considerable store footprint, their profit had to be high enough to support their stores and staff levels.

Yet, their earnings were influenced by something that customers despise — late fees.

Late fees were one of Blockbuster’s most important income sources. You were charged a dollar a day if you didn’t return your movie rental on time.

The costs associated with the service fees were $800 million in 2000, or 16% of Blockbuster’s income. On the other hand, Netflix did not charge any late payments and offered a single flat price.

Hastings founded Netflix because he was upset about a $40 late payment for renting out Apollo 13 from Blockbuster.

Anytime bad profits are your primary source of profits, you are due for a hard knock.

That knock came from Netflix. Their original ad campaign, “The end of late fees,” was pretty much all they needed to say. However, their business model was designed very differently.

Word of mouth achieved the rest after Netflix announced the end of late payments.

But the most important lessons come from looking at how Blockbuster contributed to its downfall. First, their business had issues — including a substantial physical presence that made it tough to adapt to a new model and see-through customers’ trends.

3. Not being able to keep up with technology trends

Photo by cottonbro from Pexels

Of course, Blockbuster’s executives were well-versed in the movie rental industry.

What they didn’t see was the disruptive and transformative power of technology.

If they understood the impact of the internet and its possibilities, they might have prevented Netflix from emerging.

Blockbuster missed the significance of online streaming’s on its business model, and Netflix developed what was considered a niche market at that time due to its boldness in making significant changes when required.

While Blockbuster finally tried to catch up, including an ill-fated attempt to purchase Netflix, it ultimately failed to compete with the startup’s growing customer base and ability to adapt to new technologies.

4. Being complacent

Photo from freepik

It’s challenging to compare Blockbuster’s standing in the 1990s to its subsequent downfall without wondering if complacency had anything to do with it.

While there is no one method to guarantee that you are not succumbing to the same type of thinking, viewing any potential adversary as risk is an excellent place to start.

In the years leading up to its bankruptcy, Blockbuster failed to make substantial changes or improvements to its business model.

Blockbuster attempted new approaches to attract clients, such as an online streaming service and special offers. But nothing was ever enough because the company’s problems were still holding it back.

And figuring out what customers like about that emerging competitor can be a good starting point for overhauling your business model to ensure it doesn’t become obsolete.

5. Getting caught sleeping at the wheel

Photo by Enrico Carcasci on Unsplash

Blockbuster missed out on several opportunities to purchase and compete with Netflix because it didn’t want to spend the money.

In 2000, Netflix offered to sell its firm to Blockbuster for $50 million.

Netflix was still a young startup back then; it had only begun operating three years earlier. If the agreement had gone through, Netflix would have handled Blockbuster’s Online Business.

Blockbuster may have been able to afford the purchase price. However, they refused the offer, stating that it was too high.

When asked about what occurred, Netflix’s former CFO, Barry McCarthy, stated that Blockbuster “laughingly escorted us out of their office.”

6. Ignoring value chain disruption

Netflix resisted pressure to sell to its online retail competitor Amazon and eventually defeated Blockbuster. Photograph: Geoff Moore/REX

In the early 2000s, Blockbuster attempted to expand their physical locations — selling books, toys, and other goods.

They were so dedicated to the store-led strategy that they even considered buying bankrupt electronics chain Circuit City for $1 billion in 2008 (which later closed in 2009).

The problem was that Blockbuster was attempting to manage its business by burying its head in the sand and looking back into history rather than defining a strategy towards a full disruption of its value chain.

They couldn’t separate themselves from their store footprint.

Photo by Kammeran Gonzalez-Keola from Pexels

Blockbuster attempted (late) to provide movie rentals by mail — they even tried (much later) to offer movie streaming. The problem was that they were too reliant on their old ways of doing things.

Blockbuster had thrived based on its past success, but it was now a liability. Their physical outlets and staffing levels were reliant on their store-based revenue — and they weren’t courageous enough to alter.

Netflix had a completely different approach. First, they actively disrupted their mail-order revenue by introducing online streaming.

They weren’t concerned with preserving existing revenue; instead, they were focused on rapid expansion and seizing the market. In addition, their smaller size and business model allowed them to operate at a much lower cost, with less legacy to clear away — allowing them to embrace change far more easily.

Blockbuster had a solid brand and enough cash on hand, but they needed to stay ahead of the curve. Unfortunately, it was too late when they discovered that the market had been disrupted.

Unsettled Disruption

Blockbuster is a cautionary tale of a business that failed to identify that they were being disrupted — and didn’t act in time as a result.

Blockbuster was stuck in its ways and became increasingly oblivious to its changing world. As a result, they became dinosaurs, unable to keep up because of their size or lack of speed.

Keeping up with Netflix would have required some difficult decisions; they would have reduced expenses by shutting stores and letting employees go in favor of less expensive distribution methods.

While Blockbuster had a significant physical presence and employed tens of thousands of people, they could not keep up with changing customer demands, new technologies, and breaking into a new business model that changed their value chain.

Any business and entrepreneur can learn from these mistakes and avoid falling into the same trap as Blockbuster.

👉 This blog is part of the new disruption series inspired by my book Unsettled Disruption: Step-by-Step Guide for Harnessing the Evolving Path of Purpose-Driven Innovation.

👉 You can also join the waiting list to get the Unsettled Disruption Companion Course and get the FREE Innovation Level Up Guide ‘7 tools to kick-off your Innovation Project’

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