The Video Rental Industry was a six billion dollar industry. It was created in 1978 by Video Station in Los Angeles, California. Like other advancing industries, Mom and Pop video rental stores gave way to major chains, such as Major Video Corporation, Palmer Video, and Blockbuster. These chains boasted gigantic tape selection, sometimes in the tens of thousands. The independent stores could only stock one to two thousand copies on the shelves. Blockbuster could afford to charge less and have more copies of the hits. As of 1988 the company brought in $70,000 monthly and 26% of that was profit. The New York Times claimed that it was “bent on becoming the McDonald’s of video stores”. It was reported that the company was so strong that it feared antitrust law when it attempted to buy Hollywood Entertainment Corporation, back in 2004-2005. The company was so big that it was almost considered a monopoly, and the consumer’s protection needed to be considered. In the end, these fears were never realized. The company declared bankruptcy and collapsed. So how did this giant monopoly-like corporation go from 9,000 locations to less than 300? Disruption.
Disruption is the displacement of established technology which, often times, creates a new industry. Blockbuster and the entire video rental industry became one of the biggest victims of disruption in the past two decades. In the beginning, with its unique rental policy, the company solved the problem of rental VHS theft and led the industry for years. Viacom bought Blockbuster for $8.4 billion dollars in 1994, the equivalent of $24.26 billion dollars in 2015, and then Blockbuster successfully goes public in 1999, raising over $465 million in its IPO.
Two years earlier, entrepreneur Reed Hastings, is frustrated after getting fined $40 in late fees. This became part of the inspiration in his next decision, the founding of Netflix. As Blockbuster was making over $700 million in late fees in 2000, Netflix had just started mailing out DVD’s to customers. Of all the mistakes the video rental store made, the biggest was declining to purchase Netflix. Multiple offers were made in 2000, but Blockbuster declined to pay $50 million for the upstart. Netflix, not discouraged, would go public in 2002 and continue to be a creative force.
The creative destruction was no longer on the side of the Blockbuster, and the company had to play catch up. There were several attempts by the video rental store to react to Netflix’s newfound success. In an attempt to compete with Netflix, the company launched its own DVD mailing service in 2004. Netflix would sue for patent infringement, forcing Blockbuster to pay $4.1 million. To make the company look more attractive, Blockbuster began to give a week grace period for rentals in 2005. This led to a flatter operating income for the year, and so to compensate the company decreased its marketing budget. The company would create its own streaming service, Blockbuster on Demand, and one-dollar DVD rental machines to compete with Redbox, but it was too little too late. The company was de-listed from the stock exchange in 2010 and filed for chapter 11 bankruptcy. DISH Network purchased the company in 2011 and closed the last of the distribution centers.
The problem was that Netflix disrupted the industry. As technology advanced, that company led the charge towards customer-oriented, convenience oriented movie renting. As this history shows, the company kept trying to fight the tide, but not on their own terms. Blockbuster went from the greatest to gone in less than a decade, peaking in power in the mid 2000’s and then bankrupt by 2011. So what can be learned from the Blockbuster story? Never settle. Innovation is always around the corner and one company policy can give away to a whole new set of consumer demands. Netflix now carries the torch in the media world. While Blockbuster was falling, Netflix would continue to disrupt the industry. The next post will discuss the rise of streaming further, elaborating on how streaming services established their footing in the industry and how disruption persisted.