INSIGHT: Top 4 lessons from Blockbuster failure

“Blockbuster is a great example of a business that failed to identify that they were being disrupted - and failed to act in time as a result.”

The failure of Blockbuster is really interesting to me - because so much information is available, it's great to learn from.

Blockbuster is a great example of a business that failed to identify that they were being disrupted - and failed to act in time as a result.

The rise of Netflix and fall of Blockbuster

NetFlix is often held up as the poster-child of disruption; a scrappy young fighter who used technology to topple a Goliath of the industry.

Netflix took a significant portion of Blockbuster's customer base - but looking a little deeper, there's more to the story - and some great lessons to learn.

My four main lessons from Blockbuster’s demise…

There are many lessons to learn from Blockbuster and the way the business was mismanaged to bankruptcy.

But the four below are the ones I found most interesting.

1. There is a big difference between product and distribution

The main mistake I think that Blockbuster made was thinking that what their customers were buying was the experience of walking into a store, picking up a movie and maybe some popcorn.

What they missed is that their customers were buying the experience of watching a movie - maybe with some popcorn.

Having a large selection of movies to choose from was important, but not the act of walking into a store.

Blockbuster had setup a massive distribution network (9,000 stores, 60,000 employees) for the movie studio's product. This meant a significant risk if customers started wanting to get the product in different ways.

Netflix started life as a mail-order movie rental business; with a monthly subscription for whatever movies you wanted (from a much bigger library than in-store) - and significantly cheaper distribution costs than Blockbuster.

But Netflix always knew that online streaming was the ultimate distribution method for video content.

That was the eventuality they were planning for; and they were happy to be flexible with the distribution of the product.

Now, of course, Netflix is more than just a distributor; it is making it's own product, with the likes of House Of Cards, Orange Is the New Black and Lillyhammer.

2. Your profit needs to be tied to what your customers value

Blockbuster's profit had to be sufficient to sustain their worldwide stores and staffing levels. As well as their pricing structure reflecting this, their profit also relied on something their customers hated - late fees.

A significant portion of the revenue that Blockbuster needed to stay in business was a revenue stream that Netflix didn't even charge for, as you could keep their movies as long as you wanted.

Blockbuster couldn't outright charge customers for their buildings and associated costs - so their profitability was reliant on something that they couldn't get money for.

Netflix invested in a warehousing and distribution model that negated the need for late fees and also in creating the future customer experience - online.

Even as a mail-order video rental service, Netflix was a pioneer in providing recommendations based on how other customers rated a movie; and not just random customers, but ones who shared your likes and dislikes.

These social media recommendations are common now; but Netflix was the first to offer it for video content. They even offered a $1 million prize to anyone able to improve the rating system; realising that it would make their service a much better experience than going into a video store.

3. Ignoring disruption doesn't make it go away

Blockbuster had multiple opportunities to purchase Netflix in 2010 for $50m - and turned it down because they didn't want to disrupt their traditional revenue (and they didn't see the writing on the wall).

Instead they tried to add more to their physical stores - by selling books, toys and other merchandise. So determined in their store-led approach, they even looked to purchase struggling electronics chain Circuit City for $1 billion in 2008 (later bankrupted in 2009).

Blockbuster was managing their business by a combination of burying their head in the sand and looking into the past while defining their business strategy.

In contrast, Netflix had a clear focus on the future - their vision that streaming video would take over. After starting to stream movies in 2007, Netflix then offered unlimited streaming flat monthly fee in 2008; the model so popular today.

Netflix had already invested in creating a fantastic customer experience and started to reap the benefits; gaining 16 million subscribers by 2010.

Netflix led the charge of disruption; speeding it up and exciting customers with the future. By harnessing the disruption instead of ignoring it, Netflix stole the revenue that Blockbuster was so desperately trying to protect.

4. Disruption can be too fast to catch up to

Blockbuster tried (late) to introduce mail-order movie rentals - they even tried (even later) to introduce movie streaming.

The problem was they were too slow and too focussed on the way they had always done things.

What had made Blockbuster a success in the past was now a liability. Their physical stores and staffing levels were reliant on their store based revenue - and they didn't have the courage to change.

Netflix had a completely different approach. They actively - and happily - cannibalised their mail-order revenue by introducing online streaming.

They weren't focussed on protecting existing revenue - instead on rapid growth and capturing the market.

Their smaller size and business model meant their costs were significantly lower, they had less legacy to shake off - so their ability to change was far greater.

Blockbuster needed the vision that Netflix had, when Netflix had it. They had a very strong brand and money in the bank; but they needed to stay ahead of the disruption.

By the time they realised what was happening, it was far too late to catch up.

Conclusion

Blockbuster was stuck in the past and increasingly ignorant of the way the world was changing around it.

They became a dinosaur, with size and lack of speed stopping them from keeping up.

Keeping up with Netflix would have meant some hard choices; they would have had to reduce their costs by closing stores and letting staff go, in favour lower cost distribution methods.

But if they had done this themselves, they wouldn't have been forced to through bankruptcy.

By David Reiss - Business technology specialist, Spark Digital

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