Abandoned Blockbuster, location unknown. For nearly two decades, Blockbuster was the favored destination for families worldwide on Friday nights. With around 9,000 stores at its peak, it seemed unstoppable. However, by 2010, Blockbuster had gone bankrupt. So, what led to the downfall of this video rental giant?
In 1997, Reed Hastings, who would later found Netflix, experienced a pivotal moment. He visited a movie store to return “Apollo 13” and was slapped with a hefty $40 late fee. This frustrating incident partly sparked the idea for Netflix. By 2000, when Netflix was still in its infancy, Hastings approached Blockbuster’s CEO, John Antioco, proposing a partnership. The concept was simple: Netflix would manage Blockbuster’s brand online, while Blockbuster would promote Netflix in its physical stores.
However, this proposal was met with laughter in the boardroom. Fast forward a decade, and Blockbuster was gone while Netflix had grown into a behemoth worth over $200 billion. It’s tempting to question Antioco’s decision, but the situation was more complex than it appears. Antioco had been a highly competent executive, doubling Blockbuster’s revenue during his tenure.
At the time of Hastings’ visit, Blockbuster boasted thousands of retail locations, millions of customers, substantial marketing budgets, and efficient operations, making it the dominant force in the industry. In contrast, Netflix was a minor player. Yet, a critical weakness in Blockbuster’s business model was lurking beneath the surface, one that wasn’t immediately apparent: late fees.
Blockbuster raked in substantial profits from late fees at its stores worldwide, but this practice would prove to be its Achilles’ heel. Netflix, on the other hand, could eliminate the need for retail locations, reduce costs, and offer a much broader selection. Customers could subscribe instead of renting, enjoying videos for as long as they wished without worrying about late fees or returns. By the time Antioco and Blockbuster realized this, it was too late to reverse their fortunes.