A cautionary tale: How Blockbuster didn’t embrace their customer
The Blockbuster sign is instantly recognizable and a guaranteed reminiscence trigger for any child of the 90’s (including myself). But as recognizable as the sign is for nostalgia, it is also for the fact of its startling speed of ascent that is matched by that of its demise.
Put simply, Blockbuster started from nothing, became a way of life for most Americans, and then it was gone. Blockbuster relied too much on its assumption of what was important to their customers and the assumption that it was too big to fail and therefore did not need to embrace change (or their customer).
Assumption #1: Blockbuster couldn’t see the friction it was causing from not understanding their customer
Initially, Blockbuster was successful because it was different than other video rental stores — it offered customers a huge selection of videos and a modern, computerized check-out process.
But for everything customers loved about Blockbuster, the one thing they hated, and I mean hate-hate -hated, was late fees. The problem was Blockbuster banked on them. Blockbuster said it made 16% of its revenue from late fees. Thus, their very way of doing business caused friction because what the customer valued (no late fees) was what Blockbuster saw as key to their revenue.
It is this friction that initially compelled Reed Hastings to launch Netflix. In 1997, in part after being frustrated with a $40 late fee from Blockbuster, Hastings saw an opportunity to introduce a monthly DVD subscription service by mail. Unlike Blockbuster, there would be no late fees.
When Netflix first launched, Blockbuster may have well underestimated the threat because they thought the relevance of whether a customer got a movie the day it came out was stronger than it might have been. What Netflix understood was that the consumer didn’t have time to make multiple trips to the video store (once to pick out the movie and again to return it), and the hatred of late fees when failing to return it on time.
Assumption #2: Complacency — A company that started out as a disruptor couldn’t see the next one coming
When Blockbuster started, it was something special, disruptive and different. The thing that really set Blockbuster apart from other small video rental stores at the time was their huge range of titles. Other independent video stores could only keep track of 100 or so movies. Blockbuster had an innovative new barcode system, which meant that they could offer customers a selection of up to 10,000 videos. Once at the top, however, Blockbuster seemed to become complacent and quickly fell behind competitors.
Netflix’s mail-order rental model directly challenged the market dominance of the brick-and-mortar giant, but not right away. When Netflix launched, Blockbuster didn’t see the service as appealing to most of its customers who rented movies on impulse. Initially, Blockbuster chose to ignore the competition and then failed to keep up. In fact, it wasn’t until 2004 that the company launched Blockbuster Online, its video-by-mail scheme, but it was already years behind Netflix.
In 2007, Netflix began to shift to streaming video. It is then that it started appealing to Blockbuster’s core customers, offering a wider selection of content with an all-you-can-watch, on-demand, low-price, high-quality, highly convenient approach that resonated with consumers, particularly millennials who grew up in a world without hard-copy media like DVDs.
While former Blockbuster CEO, John Antioco, had plans to build out Blockbuster’s online business, it’s foray into video-on-demand came too late. Because Netflix’s disruption took time, Blockbuster overlooked them which turned out to be a major strategic blunder.
In conclusion
Blockbuster, which at its peak owned over 9,000 video-rental stores, filed for bankruptcy because it stop innovating and wouldn’t listen to their customers’ pain points. Ultimately, it failed to keep up with their customers and the competitors that did.
