Fast Company

Blockbusted: A Netflix Knock-Out, Bad Metaphors on the Path to the Movie Monster's Bankruptcy

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The Blockbuster age is fading, and at last the company is preparing for bankruptcy. In the past two years, the shrinking video-rental store has struggled to stay afloat with $920 million in debt, drowning all the while in revenue losses of $1.1 billion. The LA Times reports that Blockbuster executives and senior debt holders have entered discussions with major movie studios for a "pre-planned" bankruptcy mid-September.

But for everyone other than Blockbuster's sunny faced spin masters, bankruptcy was about as surprising as another Rocky comeback. Blockbuster's brick-and-mortar business was unviable in the digital world, and competitors Netflix and Redbox took every advantage to pick apart the dinosaur's carcass. The company's numbers have signaled extinction, too, with value withering from $8.4 billion when Viacom purchased it in 1994 to total market value of $24 million today. Continuing the Mesozoic metaphor, here's why bankruptcy hit Blockbuster like a surprise asteroid.

Netflix Who?

Netflix continues to dominate. Its by-mail and streaming service has revolutionized the video-rental business. But according Blockbuster, Netflix had nothing to do with its troubles.

In our May interview with Blockbuster CEO Jim Keyes, I asked, Do you ever see a way that Netflix could overtake Blockbuster as the global market leader? "I don’t even--we have such different business models," Keyes answered. "There is a wonderful role for Netflix service in the market place, but it’s very different from ours. I think we co-exist quite well with Netflix."

But isn't Blockbuster's financial troubles due in part to Netflix's success? "No, I don't know where that comes from," Keyes said.

Netflix had nothing to do with Blockbuster's demise? That blindfolded answer demonstrates how unaware the company may have been (willfully or otherwise) to its competitors.

Delusional Optimism

When a company is limping along with shares trading at 11 cents, how optimistic can executives be? How can they sell the company to investors?

Just last week, Blockbuster's head of digital strategy Kevin Lewis told Fast Company that he's confident, despite all the money woes. "To be clear, we have a long way to go, but I'm really proud of what we've accomplished, and at the end of the day, we're strategically better positioned than almost anybody out there," Lewis explained. "Could things have gone faster or better? You can always say I wish I did X and not Y. But if you asked me in 2009 whether we'd be the only one in the mobile space selling movies other than Apple and whether we'd have Blockbuster On Demand--never in my wildest dreams would I have aimed this high."

Perhaps the company should've aimed a bit higher. Lewis also said that he's not sure in "what form" the company will be in the future, suggesting Blockbuster will look dramatically different after bankruptcy.

This is a Marathon! We're Rebuilding! And Other Odd Metaphors

"We do not look at this as a sprint, we look at this as a marathon," argued Keyes, of the company's aim to transform its business in the long-term. However, there was always the nagging possibility that the company wouldn't survive long enough to complete that marathon. "We are going to move at the fastest pace possible," he promised. "It takes time and resources, but we believe the outcome will be better."

Lewis also spoke in the long-term. "Blockbuster has a slightly challenged financial picture," he said. "But Blockbuster has a long and attractive future."

And what exactly was Blockbuster racing toward? Rebuilding. Will it work?

"How does it not work?" Keyes told me a few months ago. "Look, we are completely rebuilding house from scratch, and we’re living in the house! You might think, This looks terrible! Well, yes, no kidding! We’re in the middle of remodeling. But what we’re modeling is a house with a garden, and a studio, and a media room--and I’m out there saying, Listen, wait until we finish, but this is going to be really unique. It’s different than the other house--why wouldn’t you want to live here?"

Maybe it needed a yoga studio.

Technology? How About a Samsung Blu-ray Player?

The biggest cause of Blockbuster's demise was the company's failure to adapt to the digital age. Lewis, who heads up the team's digital strategy, said he was determined to be "everywhere that you would imagine there should be movies. Our mantra is: No channel left behind, no title left behind."

While that bold goal and mantra may have impressed investors, unfortunately, due to conflicts with Blockbuster's business model, the company left myriad channels behind. Unlike Netflix, Blockbuster isn't available on the Nintendo Wii, Sony PS3, Microsoft's Xbox 360, the iPhone, iPod Touch, or iPad. And that's not to mention the Mac. In response to whether Blockbuster's business model was interfering with its digital strategy, Lewis waffled, saying, "Look, it's not that our business model is challenged--again, I'm amazed at how little [our competitors] do for their consumers and how for-granted they take their consumer relationships."

Of course, not being on the Nintendo Wii wasn't too much of a problem for Blockbuster's CEO. "I don't have to figure out how to get [movies] from my Nintendo machine to the screen," he said. "I know I can do it, but I don't want to--it makes my head hurt to think about it!" Compared to Netflix, Keyes believed the Blockbuster experience was "a lot easier than trying to route movies through my Xbox or Nintendo."

Even Lewis echoed Keyes's hardships. "Our job is to simplify the process," he said, of Keyes's confusion over the Wii. "You shouldn't have to learn all this crazy stuff."

And the best technology Blockbuster touts? Samsung Blu-ray players.

During any given interview with a Blockbuster executive, you'll hear about Samsung Blu-ray players, which are connected to Blockbuster On Demand, the company's pay-per-view service. "Do you have Samsung connected Blu-ray player?" Lewis eagerly asked me, within the first minutes of our interview. Keyes too would bring up the Samsung player as if it were some magical solution to the company's frail digital offerings--it was the "ultimate convenience," as Keyes said. On more than one occasion, he urged me to buy the device so I could experience Blockbuster in all its glory. "I wish you'd try it," he said. "You've got to try us."

Deny Deny Deny

I've asked Blockbuster CEO Keyes at least five times point-blank about the company's potential bankruptcy. To get this straight, Blockbuster will not go bankrupt? "It is not our intention," Keyes answered in May. "We’re doing a lot of things at the same time, and we have to spend a lot of money to build our future. What we couldn’t have anticipated was a complete financial meltdown in 2009. If you had to refinance a home last year, imagine what would’ve happened to you? The bank might’ve said that they’ll give you a mortgage, but the bad news is that you have to pay it back in five years instead of 20 years. Ouch."

Again, is Blockbuser going bankrupt? "We've had two successful refinancings in the last 18 months, and we continue to work on finding the right capital structure to facilitate the business itself," he said in June.

So Blockbuster is not going to file for bankruptcy protection? "As I've said, we're looking at all of the various options to refinance and recapitalize the company. I've said repeatedly that the company's objective is to seek out-of-court solutions with strategic investors to recapitalize, and we've been exploring a number of those alternatives," he said.

So much for that.

If Steve Jobs Did It, We Can Too!

Blockbuster is the next Apple, right? Keyes believes so. "We're in the process of transformation," he once told Fast Company. "Think about Apple 10 years ago. Steve Jobs came back and did a masterful job. But it wasn't an overnight success. It took him a number of years to reengineer Apple and turn the company from what it was--basically a PC provider--into what it is today. I don't know if you recall, but there were questions about the long-term viability of that company, and look at the success that they have today. But it took many years."

He even called Blockbuster On Demand the equivalent of the iMac.

"This is a pattern we see over and over," he said, of the many parallels he could draw to Blockbuster's financial troubles. "If a company is not able to keep up with the changing needs of its customer, it will become irrelevant," he said.

Ultimately, it was these words which may have saved the company. Blockbuster was not able to keep up with the changing needs of its customers.

Blockbuster has become irrelevant.

Give your say on the topic in our open thread: Why is Blockbuster going bankrupt?

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6 Comments

  • Wilson Usman

    I've never heard a more uninformed VP speak. I mean seriously how are you going to say "That netflix has nothing to do with their situation"? Aren't they in the same business? RENTING MOVIES

    Blockbuster here's a message: There use to be VHS, then DVD's and now there's STREAM, and in the future there will be something else. If you can stay on top of the latest technology I think you'll rule.

  • Kim Mears

    If there is a final nail in the coffin, the new Netflix iPhone app should do it. Between streaming video directly to your TV, getting 1-day turnaround time on new releases and watching unlimited streaming movies and tv shows on your phone - why would anyone want to go into a Blockbuster again? I think they should just turn off the life support, they are so behind the curve that I don't foresee any way for them to catch up or have any type of competitive edge.

  • Alex McAulay

    This is my favourite quote "I'm amazed at how little [our competitors] do for their consumers and how for-granted they take their consumer relationships."

    And what does Blockbuster do for consumer relationships? I'm pressed to figure that out. I'm always amazed at what company execs think their consumer relationship is versus reality. I've rented movies from there and have never felt any connection or relationship. They probably have a fancy chart at the executive that details the relationship, but at the end of the day there is no real emotional connection to consumer, no real relationship.

    The second part to that is misunderstanding of the current definition of the relationship. For example, Netflix has more of relationship with customers because they make recommendations based on what you've watched in the past. The relationship doesn't have to be human or physical for it to be meaningful.

    I blogged about how I think the only way Blockbuster can save its butt at http://www.beatthebigbox.com/a...

  • Daniel Karpantschof

    Well... As VP of Blockbuster Europe once phrased it: "Blockbuster is a candystore - which happens to sell and rent out movies".

    With that much confidence in the core business of the company it is hard not to have been able to see the foreclosure.

    That said; Blockbuster seemed to, rather than have been battling all, been battling none. At some point they started renting out movies on USB-flash drives to "enter the digital age". The rest of the world was at that point downloading HD movies from iTunes et al.

    One great problem the company and global brand faced was (but whether it was the straw that broke etc. etc. I have no idea!) not having a identifiable core strategy. They didn't exactly spread out too thin, but rather sealed themselves off and shut themselves in.

  • Jacqueline Holloway

    Blockbuster may have observed what was going on in the marketplace but may not have comprehended its importance to the average consumer. Sometimes companies believe that their niche can only be served by them to later find that niche has disappeared. A niche is a niche as long as consumer behavior does not influence the actions of other consumers.