Open Thread: Why Is Blockbuster Going Bankrupt?

How can the company remake itself to rival Netflix?

Blockbuster Netflix

Today news surfaced that Blockbuster was preparing for a mid-September "pre-planned" bankruptcy. To many of us, this may have been predictable. To others, like Blockbuster CEO Jim Keyes and chief digital strategist Kevin Lewis, the move may have come as more of a surprise.

What happened to the company, which was once the dominant player in video rental? In 1994, it was acquired for $8.4 billion; now, it's valued at a mere $24 million. Where did it go wrong?

Many believe the company's brick-and-mortar business hobbled its success. Others point out that its late-to-the-game by-mail and kiosk services lost out to Netflix and Redbox. And some theorize that its slim digital offerings, focused on pay-per-view rather than subscription streaming, sealed the company's fate.

Ultimately, the company was simply doing too much. As I once phrased it to Jim Keyes, it almost felt like Blockbuster was boxing an octopus: battling Netflix for subscribers, Redbox for kiosks, and Apple and Comcast for on-demand service. How could they ever hope to win?

What do you think? Why is Blockbuster going bankrupt?

Moreover, when the company files for Chapter 11, how should it restructure? Should Blockbuster become an all-digital service? Should it focus on kiosks? Should it close down all of its physical stores?

As Blockbuster's head of digital strategy Kevin Lewis explained, Blockbuster has a "long and attractive future," but in "what form"?

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  • Allyson Stewart-Allen

    What Blockbuster didn’t accomplish in achieving a “transformation” is leveraging its customer base before they jumped ship. Now even YouTube is getting in on the movie rental market and may eat Netflix’s lunch given the marketing muscle (and budgets) that its owner Google has. Google is also muscling in on the TV set-top box market imminently, so it’s well-played by linking in YouTube’s vast and ever-expanding content base.

    With the announcement of Apple TV, their partnership with Netflix, as well as offering YouTube as part of the package, we’re seeing the convergence of devices as computer and TV become integrated.

    Convergence was predicted many years ago – BUT – the ultimate question is:

    * does this improve the quality of life for the consumer?
    * does it make life easier, happier or cheaper? If I can’t tick at least two of those boxes, this trend won’t catch on
    * We always need to keep focused on the consumer – or is this product just for Apple geeks?

    The messages we need to hear should be:

    * what about for non-Apple users?
    * does it work with Windows platforms? Or are those users (the vast majority of the population) excluded from “The Club?”
    * Is Apple ‘narrow casting’ and not ‘broad casting’?


  • Paul Sweeting

    I covered Blockbuster closely for nearly 15 years as a reporter and columnist for Billboard, Video Business magazine and Variety, so I was able to observe them up close through much of their history. While Blockbuster made a number of strategic and tactical mistakes over the years, ultimately I don't think it ever really had a chance after the spin-off from Viacom.

    Viacom grossly overpaid for Blockbuster because it was in a dog fight for Paramount and needed the cash flow Blockbuster was then generating to finance its winning bid for the studio. But Viacom was never really able to make the video rental chain pay off. When it finally spun Blockbuster off to shareholders, it dumped nearly $1 billion in debt from its own balance sheet onto Blockbuster's. It also loaded the video chain with the excessive goodwill Viacom had been carrying due to having overpaid from Blockbuster in the beginning.

    The crippled balance sheet it inherited from Viacom basically forced Blockbuster management to focus on generating cash at all costs. That meant hewing to the old formula of transactional (i.e. non-subscription) rentals backed by late fees just at the time when Netflix was introducing people to the joys of renting without late fees. Blockbuster's initial efforts to respond in kind merely cannibalized transactional rentals, undercutting cash flow, without increasing its user base. By the time management decided to go all in on subscriptions, and started a price war with Netflix, it was already too far behind and the price war simply undercut top-line revenue. Plus, Netflix had no choice but to win the price war or die trying because that was its whole business. Blockbuster was always going to lose the price war because it was harming a core business it needed to protect.

    Mail order subscriptions, even more than digital delivery of movies, also trapped Blockbuster with it huge investment in brick and mortar. Like battleships at the dawn of the aircraft carrier era, Blockbuster's huge retail footprint suddenly became a vulnerable liability. In retrospect, management should have bit the bullet much sooner and started shuttering stores rapidly, longterm leases notwithstanding. But that would have hurt near-term cash flow, which remained problematic due to the balance sheet overhang.

    Management also lost a crucial 18 months at a critical time fighting off a raid by Carl Icahn--a raid that ultimately did nothing to benefit any shareholder other than Icahn.

    That's not to excuse management's failures. There were things Blockbuster could have done but didn't that might have helped. It's approach to digital has largely been a matter of flailing with no clear strategy (though even there, it has been constrained by the studios' own failure to come up with a coherent digital strategy or even correctly to identify their own strategic interests). But even if BLockbuster had gotten the big things right I'm not sure it ever could have gotten out from under the balance sheet burden Viacom left it with.

  • Tom Weaver

    Focussing less on why it failed and more on how it could restructure, my full (long) answer is here, along with four other organisations or organisational types heading the same direction:

    My short answer is that If your competition is increasingly online, but you have significant physical assets, to compete you need to look to the things a physical presence can bring that technology cannot, as yet, achieve. My thoughts for Blockbuster are about creating a new experience that is not home cinema, not cinema chain, but the movie going equivalent of the Japanese karaoke pods. Full explanation in my article.

    Tom Weaver

  • Michael LaRue

    As long as fifteen years ago, Blockbuster (and it's key national competitors) recognized that technology components that would enable delivery of video-on-demand to housholds were in development, and that the necessary infrastructure for that delivery was likely to be in place within ten or fifteen years -- particularly in metro areas were density would make it economically feasible. Blockbuster had developed (and was continuing to develop) a network leasehold control of extremely well-located stores in the 5,500 to 6,500 square foot range and it was assumed that the company's management was brainstorming how the company could metamorphosize their network of great real estate leases into other profitable uses as in-store delivery of movies began to wane. Somehow (and sadly) they never found that follow-on use. It's as if the key question "where do we go from here?" was never answered.

  • Daniel Anderson

    Well whatever form they go forward in, It had better include the current shareholders, even if it is diluted.

  • talkingdigital

    Blockbuster is dying because the company has over estimated the value of spending two hours watching a movie at home. There was a time when Americans compared the value of rental to the cost of going to a movie in the theater. Today, American compare the value of seeing a movie in the theater to the value of seeing the movie at home.
    Blockbuster's edge in the market is selection - or at least it should be. Brick and mortar shops may want to consider restructuring their price and selection models. Rarely does anyone want to pay $4 to rent a movie for a week from a store across town when they could rent it from a RedBox two blocks away for $1. The only reason that people pay more to Blockbuster is because they know that they may not be back in that part of town for several days and the week gives them time to return it - a consideration that does not need to be taken into account with RedBox.
    RedBox and NetFlix can't compete with the immediacy of Blockbuster's stores though. If a person has a craving to watch True Grit, Pretty in Pink or Young Doctors In Love, chances are the movie will not be on NetFlix streaming nor will it among the selection at RedBox. Blockbuster's selection of older movies fills a niche in the market, but meeting this niche means stocking hundreds or thousands of movies that may only be rented once a year by someone with a craving to see Stealing Beauty or a grandfather's desire to show his kids Support Your Local Sheriff.
    In other words Blockbuster cannot win. As streaming technology and selection improves, the day will come when millions of movies are available instantly with a $10 monthly subscription. The DMCA and MPAA may eventually place hurdles in the way for NetFlix and RedBox but Americans have demonstrated that $8-$15 per month is the price they are willing to pay for viewing dozens of movies per month. That's 2-3 rentals from Blockbuster.
    Blockbuster would likely make more money from selling used movies at a $1 or $2 markup over their buyback price than they do from renting videos at $4+ each or selling used videos at 25-50 percent markup over buyback price.

  • heinrich

    couldnt agree more, people focus to much on technical aspect when simply put it cost too much in comaprison to other media's. I personally will not download a movie, ever ! I value brick and mortar stores.

  • Chris Deardorff

    I think Blockbuster was just late to the game in so many respects. When competitors were beginning to ramp up their mail delivery and digital services, Blockbuster was trying to compete on their new" no-late fee" policy, which was kind of a joke in of itself. Granted, they eventually saw the writing on the wall and began their own mail delivery service but by that time they had just become a "me-too" player to Netflix, offering a mail-order service that was vastly inferior in both service and interface.

  • izeondesign

    Blockbuster is yet another company failing to take advantage of the "creatives" that are out there ready and waiting to bring some fresh ideas to the table. Every company, especially large ones, has a responsibility to the public and especially to their employees, to satisfy. And you can not do that doing thngs the way you have always done them. You have to be in a perpetual state of evolution. You have to stay ahead of the game and be able to not only PREDICT what's next but go a step beyond and be the spearheader yourself. They were complacent, got left in the dust, and now thousands will be without a job. Very sad.

  • GH 23

    As someone who worked in marketing under Huizenga's leadership (1990 - 1997), and then subcontracted my services through 2004 for the Viacom-owned management, the difference was night and day. And the author of this article nails it on the head -- complete and utter denial, even now when they are ready to get shot by the firing squad. In the early 90's, I remember hearing Blockbuster (and video) would kill the theater, but it just didn't make any sense, for the simple reason that watching a movie on an 30 foot screen with 200 other people on a date night was significantly different than watching on TV at home. Huizenga understood this experience was very different, and he also saw the future, while Viacom and the leaders they put in charge had zero clue about (and obviously still don't). So fast forward about 10 years to when I was in a meeting and asked about this small start up called Netflix. "Oh, they're nothing to worry about," was all I heard. Blockbuster had turned into the slow-moving behemoth, and in this industry, you can't be slow-moving. How is the 'experience' different whether you rent a movie at a retail store, get it in the mail or download it? It's not, but post-Huizenga Blockbuster management never got that. Still to this day, it is mind-boggling that they didn't understand it. And kudo's to Netflix, that understands this, because if someone can download or stream a movie, then why wait for it in the mail? Maybe Blockbuster and the Post Office can get together to discuss the good ole days at some point.

  • Monty Daniels

    Blockbuster is deserving of whatever they get, because they nickel-and-dimed what chance they had out of moving into the next wave out of existence. They tried a Netflix-style mail program with one advantage Netflix didn't have, couldn't have--the ability to use the mail program WITH their brick & mortar stores (turn in a mail-received disc and get a store movie right away).

    I cut my Netflix down to 1-at-a-time (kept it at all because each co. had titles the other didn't) and joined Blockbuster's plan because of the convenience of that. It was great--until Blockbuster started waiting until the store-rented disk was turned in before mailing the next one out, and then imposing limits on how often you could exchange at a store (and no grandfather clause for existing customers).

    They had a guaranteed revenue stream--my $15 a month plus all the other customers--if they just kept up the plan they sold us. It may not have been enough to completely sustain their business--but it was more than they had after we all dropped because of their niggling BS. Meanwhile Netflix is going gangbusters, and improving their service (the "instant" catalog is growing, as are the delivery outlets--XBox, PS3, Wii, iPhone). Hmmm--I wonder why Blockbuster is circling the drain...?

    This is the same kind of crap American Airlines pulled on their AAdvantage (frequent-flyer program) customers. Started imposing limits and cutting the usefulness of the plan TO THEIR BEST CUSTOMERS. My father was one of their first million milers--and remains one of the few "permanent Platinum" folks left--and doesn't fly American unless absolutely necessary, now, because what he can get with the miles doesn't make up for the hassle and cost of all the extra fees, etc. of dealing with AA. This is why Southwest is making money and AA has been trying to die for years--all while Southwest's service has gotten better!

  • Doug Green

    My experience: they were openly hostile towards their customers and had poor inventory control (so that customers were often blamed for internal theft of product), plus a model based on maximizing late fees. All of which created a huge opportunity for never-a-late-fee model such as Netflix offered. The ill will they engendered from the store experience pretty much doomed their efforts in the by-mail market.

  • Stacey L Spencer

    That was my experience as well. I received poor customer service at several locations. Many of my friends complained of the same. I think that is Blockbuster's downfall.