Adapt or Die: How Netflix Took Down Blockbuster

Adapt or Die: How Netflix Took Down Blockbuster

Warwick Fairfax

September 23, 2019

One of the most cautionary tales in recent corporate history is how Netflix embraced change and Blockbuster didn’t. As of 2018, Netflix, barely 20 years old, had a stock market value of nearly $165B, with 130 million subscribers in 200 countries. Blockbuster was out of business by then, having filed for bankruptcy in 2010 after incurring more than $1B in losses the previous year.

How did this happen — Netflix’s stunning success and Blockbuster’s equally stunning fall? Netflix embraced change. Blockbuster didn’t.

When Netflix launched in 1997, Blockbuster had for years been the undisputed champion of the video rental industry.  Between 1985 and 1992, Blockbuster grew from one location in Dallas to more than 2,800 rental stores worldwide. Netflix competing against Blockbuster seemed like a David vs. Goliath scenario. Hopeless.

But through a series of disruptions and changes to the video/home entertainment industry, the tables turned. In 1997, when VHS video was the industry standard, Reed Hastings, the CEO and founder of Netflix, saw an opportunity to introduce a monthly DVD subscription service by mail. Unlike Blockbuster, there would be no late fees. When customers were finished with their DVD, they would simply return it to Netflix and get another one. Blockbuster initially did not embrace the subscription service model, charging customers per video rental, including late fees. Blockbuster was wedded to its brick-and-mortar retail outlet business model.

In 2007, Netflix transitioned from DVD shipments to online programming. Faster bandwidth and greater download speeds made this new service feasible. But Netflix didn’t stop there. It continued to innovate, creating its own programming, including the highly successful House of Cards TV series. In 2018, Netflix spent $8B annually on new programing to keep its customers bingeing online. In 2019, Netflix received 14 Oscar nominations, winning four. This put Netflix on par with the other major studios for Academy Award wins. Netflix was now a significant player in movie and TV production.

The legacy of Blockbuster, on the other hand, is one of stubbornness and missed opportunities. In 2000, Hastings, head of the still small Netflix, came to Blockbuster, proposing a partnership. Netflix would run Blockbuster’s brand online, while Blockbuster would promote Netflix in its stores. Blockbuster, then the king of the video rental industry, turned Netflix down. Eventually, Blockbuster saw Netflix as a threat. But it was too little, too late. In 2004, John Antioco, then CEO of Blockbuster, proposed eliminating late fees and launching Blockbuster Online. These two initiatives would cost a proposed $200M each. But the Board lost confidence in Antioco. Eliminating late fees would damage profitability.  Antioco was fired in 2005. His successor as Blockbuster’s CEO dropped Antioco’s initiatives, which were designed to help Blockbuster compete with Netflix. Five years later in 2010, Blockbuster filed for bankruptcy.

What are the key lessons we can learn from the Blockbuster vs. Netflix saga?

1. Embrace Change

Netflix saw a technological and marketing opportunity to compete with Blockbuster with a subscription by mail DVD service. The company — each step of the way from a DVD subscription service to online video streaming, to online streaming content creation — was continually willing to innovate. Blockbuster saw itself as the video rental king, with locations all over the world. They fell in love with their business model more than they did with satisfying customer needs. Their business model of charging their customers with late fees, while very profitable, was in part based on causing their customers pain.

2. Don’t be Afraid to Fail

Netflix has constantly been willing to try new things. Many have worked out — such as their DVD subscription rental service, online streaming, and online streaming content creation. But some initiatives have not worked out, at least not initially. Netflix made an unsuccessful attempt in the mid-2000s to enter the film-making business, long before it had a large enough audience to make this a financially viable strategy. In 2011, critics ridiculed Netflix for its plans to split steaming and DVD rentals into two services. Hundreds of thousands of customers cancelled their subscriptions in the following months. Blockbuster, on the other hand, was unwilling to take risks. When Blockbuster did decide in 2004 to enter the online video rental business and eliminate late fees, not only was it late to do this, but ownership soon reversed these moves.

3. Be Willing to Disrupt Yourself

While Blockbuster clung to its business model of being a video rental company, Netflix constantly disrupted itself. Netflix went from being a DVD subscription rental service, to a streaming of movies and TV series model, to being a creator of content. Netflix would always try to stay on the cutting edge of innovation, even if it meant disrupting its existing businesses.

4. Corporate Culture is the Key to Being able to Innovate

The key to embracing change, being able to innovate, and seeing disruption as an opportunity is corporate culture. In 2009, Reed Hastings delivered a PowerPoint presentation internally within Netflix about the company’s culture and HR policies. This presentation has been downloaded more than 18 million times.  Sheryl Sandberg, the COO of Facebook, says this document might be the most important one ever to come out of Silicon Valley (where Netflix’s headquarters is located). The title of Reed Hastings’ presentation was “Freedom and Responsibility.” In short, Netflix finds brilliant people, pays them well, and gives them freedom to take responsibility for their own work. Hastings said, “Responsible people thrive on freedom and are worthy of freedom.”

It is easy to say, who would want to be Blockbuster over Netflix? But the path Netflix took requires courage and clarity. Know what business you are in (home entertainment, not brick and mortar video rental locations). Be willing to fail, which means hiring great people and encouraging them to take risks. Be willing to hurt your profitability in the short term to stay ahead of the technology and innovation curve. Reward your team, give them a clear mission, and then get out of their way. Very few leaders and companies are willing to do the above. Fear, caution, and pride usually take over.