The Life, Death and Rebirth of Blockbuster

Written by on November 10, 2012 in Money - No comments | Print this page

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Blockbuster has been around in some form since 1985. Its story is one of early radical innovation leading to nearly complete dominance of the video rental industry, followed by decline and collapse along with the implosion of that industry under pressure from DVD-by-mail services like Netflix, video-on-demand, and internet streaming. Improbably, however, that is not the final chapter in Blockbuster’s history. Unlike other former industry stalwarts like Circuit City, Blockbuster’s story has not (yet) ended in liquidation.

Blockbuster’s Rise

Blockbuster began as a franchise of brick-and-mortar stores that rose to dominance by outmaneuvering its competition due to an ability to tailor each store’s appearance and holdings to the demographics of its location. As one early investor put it “it was like IBM and McDonald’s had opened a video store.”

By no means was Blockbuster the first company to try to bring video rental out of the red light district and into the light of day, but it was by far the most successful. It rode the crest of the burgeoning VCR rental market to industry dominance. It also scored another big win by securing the rights to rent video games in 1987 during the height of the Nintendo-fueled second wave of that industry’s history.

Blockbuster spent the late 80’s and most of the 90’s consolidating its position by gobbling up video rental chains all over the U.S. and Europe, including Major Video, Erol’s, Sound Warehouse, Music Plus, Ritz, and xtra vision. During this period Blockbuster itself was acquired, and then sold, by media giant Viacom.

Netflix and the Online DVD Subscription Challenge

At the end of the 90’s, Blockbuster confronted the rival to its business model that would eventually bring it nearly into eclipse, Netflix. After starting as an online video rental business adhering to the traditional one-video-at-a-time-plus-late-fees model, Netflix switched to its famous subscription model in the fall of 1999 and its business quickly exploded. It was a classic internet success story that radically transformed the consumer video market. Until recently, Netflix even successfully managed the subsequent shift in the market that began in the second half of the 2000’s towards online streaming as the dominant way to deliver entertainment and movies.

Blockbuster launched a subscription service in an attempt to rival Netflix in August 2004, but it was not as successful. Netflix continued to dominate, and Blockbuster struggled. In spite of some success negotiating competitively favorable terms with film companies, such as earlier access to physical media than Netflix, eventually, in 2010, Blockbuster could no longer compete well enough to manage its obligations and was forced to file for Chapter 11 bankruptcy protection.

Between December 2010 and the spring of 2011, Blockbuster closed many of its brick-and-mortar stores, but this failed to stabilize its finances. By early 2011 it seemed nearly certain that Blockbuster would follow Circuit City (which it had attempted to acquire during that company’s free-fall in 2009) into liquidation.

Acquisition by DISH, Liquidation Averted

On April 6th, 2011, direct broadcast satellite provider DISH Network acquired Blockbuster as part of its bid to expand into new markets and compete with DirecTV and cable providers. (It is also pursuing an acquisition deal with Hulu, and its parent company, Echostar, recently acquired satellite internet provider HughesNet and is marketing high-speed internet under the name dishNET.)

The new Blockbuster did not have long to wait for Netflix to stumble, and open a breach what previously looked like impenetrable market superiority. Netflix’s reputation as a remarkably agile and forward-thinking company took a serious hit, as it committed some spectacular missteps in its attempt to navigate the changing market.

Netflix’s Woes, Blockbuster’s Opportunity

Much like online subscription services severely challenged the brick-and-mortar video store model, online streaming progressively whittled away at the profitability of the distribution of discs by mail during the second half of the 2000’s. Netflix’s mistake was the opposite of the usual ones, however. In an effort to not be left behind, it too-aggressively anticipated the shift in the market, announcing in September 2011 that it would divide its disc-distribution service and its online streaming service into two separate companies. It did not come out and say it, but gave the strong impression that it was downgrading its disc subscription business to focus on streaming.

Subscribers balked, perhaps in part because the name of the proposed new service, “Quikster”, was an astonishingly bad attempt at corporate branding. In any case, Netflix quickly relented under a barrage of criticism and canceled subscriptions and abandoned the separation of services idea, quietly burying the “Quikster” name less than a month after announcing it.

But the damage was done. Netflix’s previously untarnished reputation for anticipating the market was in shambles, subscribers fled, and its stock tumbled. Trading at $211 on September 14, 2011, it fell to $68 by November and has not since recovered: as of September 2012 Netflix stock strains to reach a mere $60 a share.

Netflix has attempted to rebuild and rebrand, but its stumble opened up a space in the market that gave companies like Blockbuster—previously considered all but out of the race—an entry to again compete seriously. As a new DISH subsidiary, Blockbuster is aggressively pursuing these options by bundling a free trial of its online-streaming and disc subscription service with new DISH activations, leveraging the existence of Blockbuster’s remaining brick-and-mortar stores by allowing subscribers to exchange movies in-store as well as by mail, and by continuing to include video games in its rental offerings.

This is a guest post.  Preston Barryknoll writes about the video rental and satellite tv industries.

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