The Rise of Blockbuster Video

Today I’m talking about Blockbuster Video, the store most people immediately think of when the topic of video rental comes to mind. However, the story of Blockbuster begins in an industry far from rental or film as a whole.

The Oil Crisis of 1979

Let’s go back to 1985; gas prices have been raised dramatically by the energy crisis that started six years earlier. OPEC slashed oil without warning, and big and small companies are suffering alike.

“In late 1985, there were nearly 2,300 rigs drilling oil wells; a year later, there were barely 1,000.” [1] From 1978 to 1980, the national average of gas was raised from around 63 cents a gallon to around $1.19. [2] For everyday Americans, travel seemed to be dropping from everyday expenditures and entering the realms of luxury. A little over a dollar doesn’t seem like much now but turn your mind to the American economy in 1980. The average yearly wage was a little over $10,500. Gas prices were the last thing that needed to be raised.

David Cook

The oil prices affected many companies, including one by the name of David P. Cook & Associates, founded by David Cook in 1978. Cook’s company supplied software services to Texas oil & gas companies. They rode the oil boom until 1983, by which point they had five offices, 85 employees, and hundreds of oil company clients. Cook hired on Kenneth W. Anderson who had experience as a chief financial officer with several large, publicly traded companies. They renamed to Cook Data Services, and then – the unthinkable happened when OPEC cut oil. The impact on the industry rippled to the company and devastated their grasp on the market. “Overnight, clients couldn’t pay their bills and wouldn’t return phone calls.” [3]

A lot of people who were pushed out of oil took a severe financial hit, but this wasn’t the case with Cook – he had money. He and Anderson slowly invested $500,000 into a new bar code technology called Amtech, short for “Animal-Tech” which was originally created to track animals and showed promise for other applications. While looking for a new industry to pursue, David’s ex-wife, Sandy – an avid moviegoer – suggested opening a video store. With gas prices soaring, no time would be better for home video. People didn’t want to spend hundreds of dollars expanding their movie collection when they could just rent them, and they knew this meant a larger selection was key to success. She knew that a small video store chain would do well, but a superstore concept would do even better. So, Cook found an out-parcel building in the Northeast side of Dallas – at the intersection of Skillman Street and the Northwest Highway, in the Medallion Shopping Center. This busy intersection offered great visibility and strong demographics. Now they just had to find an existing video chain to test it out with.

“By 1985, the videocassette recorder was well on its way to becoming a standard entertainment appliance for the average American household. Prices for VCR’s had been dropping since their introduction a decade earlier, making them no longer a plaything for the wealthy. By then, 28 percent of U.S. “television households” had a VCR and that number was expected to more than double in five years.” [3]

Video Works

A man named Sam Wade had a similar outlook. Wade convinced a Dallas video chain, called Video Works, which had around three company stores at the time, to allow him to handle their first franchise, which opened in June of 1984. Being an oil veteran himself, Wade was able to ride out the surge longer than Cook, but when the industry hit rock bottom, Wade was fired. This unfortunate situation pushed Wade to become a full-time franchisee and helped him to really get to know the tastes of Dallas in a personable manner that locals would come to expect from him. He would go on to own a larger, spiritual successor called Premiere Video.

Sam Wade with his massive selection of titles.
from dmagazine.com

Cook also approached Video Works and wanted his own franchise to test out the idea of a superstore at the new location. He wanted the franchise fee to be waived because of the additional investment in the company, but they wouldn’t budge. So, he offered to buy the company for $2 Million, but the owner asked for double that, which Cook refused to pay. They would have to start from scratch. And thus, Cook Data Services began a metamorphosis into a video store rental chain. Sandy researched around 30,000 tapes prior to this and developed a basic inventory of 10,000 tapes organized into 25 categories. Meanwhile, David secured the location in June 1985. The next month, the company sold its only subsidiary off to investors, so that they could be completely devoted to this new concept.

Sandy designed the store’s interior with bold blue and yellow colors, floor to ceiling windows, oak trim, and bright lighting. She even created the torn-ticket logo and the name, Blockbuster. “I didn’t like it at first…” Cook said, but he continues, “The more I said it, the better it sounded.” The company’s original slogan, “The Reel Superstore” was coined as well.

Blockbuster Videos

An original “Blockbuster Videos” store in Irving, Texas
from The City of Irving

Construction delays and the rigors of organizing that many tapes for the first time pushed the opening date past August. Finally, the first ‘Blockbuster Videos’ store was opened on October 19, 1985, and, as Cook recounts, was a major success from the getgo. You see, America’s view of the video store format was mostly only through smaller mom-and-pop video stores, which, by design, could only have a few hundred titles stocked at a time. But what was so ingenious about Blockbuster was that they had thousands! Cook brought in the revolutionary bar-code system, which could track all rentals at a time – per-store! “Returned tapes were run through the scanner and any rewind or late charges were added to the customer’s account, which would be recalled and settled on the next purchase.” Making checkouts a breeze. [3]

Blockbuster’s opening night, in fact, was so highly anticipated that they had to lock the doors because of overcrowding. [4] Unknowingly, the store’s functionality pioneered several innovations, like displaying the actual tapes on the shelves rather than just empty boxes. It just wouldn’t be feasible to service a store with customers bringing that many boxes to the counter, and it was better to just spread it throughout the store.

Unlike the competition, Blockbuster didn’t charge a membership fee. Cook didn’t want people to avoid the store because they felt too invested in other chains. To set themselves even more apart, Blockbuster had a firm policy against renting adult films, with the industry shifting to a more family market. The people of Dallas felt safe letting their kids roam the isles without the worry of them seeing any inappropriate content like Debbie Does Dallas. They changed the company name in 1986, to Blockbuster Entertainment Corporation. At this same time, Cook and Anderson were planning the chain to top as many as 1,000 nationwide.

The company then spend $3 million on a distribution center designed by Cook. The center took tapes from the distributors, repackaged them in plastic cases, coded them, and sorted them by category. With this new system, they could stock these stores quicker and easier, allowing new stores to be prepared in eight hours (with everything from the movies themselves, toilet paper, signage, and everything else.) At this rate, three stores could be loaded in 24 hours. This would become the key to Blockbuster’s growth.

The video rental industry is a text-book definition of a business having a bottom-line hinging on demographics. For example, let’s create a fictional town called “Andover” and say you open a video store there. Andover has a demographic that’s largely male and between the ages of 25-44. The most popular genre among that group is Action, so, you could be potentially alienating the major demographic simply by stocking more of Against All Odds rather than Return of the Jedi. While Sam Wade took a more organic approach to this issue, Cook had a background in data and focused on the information that the stores generated, which jump-started the company.

The only problem was that they could deliver a store a day easily, but they couldn’t finance that many. They realized that Blockbuster’s ‘superstore’ format wasn’t exclusive, so they needed to move fast.

Nintendo and Video Game Rental

Soon, they realized that not only movies could be rented but other rising mediums, including video games, which at the time had confusing legality. Video games, like tapes, were legal to rent, however, music wasn’t; considering how easy it is to reproduce. The courts weren’t convinced that video games had the same market of reproduction that computer software and similar products did and, therefore, had no cause to be illegalization.

In fact, “big blue” and Nintendo of America, arguably the most well-known video game company at the time, duked it out in court when they found out that Blockbuster managers were printing copies of their game manuals. Nintendo sent them a lengthy legal notice asking them firmly to stop printing them, calling it an “illegal process.” Blockbuster ignored their request, with the idea that when a customer rents a manual it rarely returns in the same condition, so printing copies would allow them to have replacements. This went on for a while before the two giant companies settled their debate outside of court for an undisclosed amount of money, and Nintendo was not included in the Computer Software Rentals Amendment Act, the following year. [5]

Wayne Huizenga

A group of investors took interest in Blockbuster; among them, H. Wayne Huizenga – you know him as the founder of the biggest waste disposal company in the world, Waste Management. With neither him nor his wife being big users of home video, he initially saw Blockbuster as a completely unappealing investment – and for good reason. Video stores had a bad connotation in those days, just the thought of video rental gave the image of sleazy, hole-in-the-wall type atmospheres: with limited selections and a more than stunted personality among staff when you could find them. When Wayne first visited Blockbuster, his thoughts changed quickly.

Wayne Huizenga
credit: Michael Laughlin / Sun Sentinel

“Wow! What a difference!”

Those words would become the company’s slogan.

The group took partial control of Blockbuster Entertainment, now operating around 19 stores across America. David Cook would leave Blockbuster that same year, and Huizenga would take his place. He would start a seven-year game of divide and conquer; breaking up smaller stores and other existing chains and converting them into Blockbusters – a method inspired by Ray Kroc when he first franchised McDonald’s. This method proved to be successful right-off-the-bat, and by the next year, Blockbuster was the leading chain of video stores in America, with over 400 stores nationwide.

With McDonald’s real-estate veteran, Luigi Salvaneschi at the helm of Blockbuster’s expansion and site-selection, the company grew quickly grew from 133 stores by the end of 1987 to 1,079 stores by year-end 1989. The comparison between Kroc and Huizenga became uncanny. “Soon there was a store opening every 48 hours, then 24 hours, then 17 hours, along with new stores from acquisitions.” In the book The Making of a Blockbuster, Gail DeGeorge gives a detailed look into these seven years. By 1994, Huizenga and his team had built Blockbuster into something best described as, “a video rental giant with over 3,700 stores in 11 countries and 50 million card-carrying customers – more than American Express.” [3]

Growing Blockbuster at this speed was not without pain and suffering. People were divorced, separated and one executive even died of a heart attack on his first day of vacation. Huizenga would be in at 6 am and wouldn’t leave until after 9:30 in the evening, at the least; this set an example that other execs pushed themselves to mirror. Hoping that some of his magic would rub off on them, and for some it did – but for most, it didn’t matter. For the wisdom and knowledge they received from working closely with Wayne so much, they would’ve done it all for free. His people didn’t only win with Blockbuster, they won after they left – and this was something he was adamant about.

Viacom

In the preceding years, there was an on-going war over the acquisition of Paramount Communications by Viacom, the giant media conglomerate known for brands at the time that included MTV, Nickelodeon, and The Movie Channel: three of the biggest names in Television media to this day, just to name a few. Blockbuster helped fuel Viacom’s place against other bidders, and when they emerged victorious, they, in turn, acquired Blockbuster the same year for $8.4 billion dollars. They then began expanding into the United Kingdom and Europe with their purchase of Ritz Video, which operated 875 stores at the time. This acquisition would be the next biggest step for the company, but the last for Wayne.

In Making of a Blockbuster, Gail writes that Huizenga pitched the merger as a can’t-lose scenario. With Viacom’s acquisition of Paramount, they gained control over large television and entertainment holdings. “We’ll be able to make a movie, put it in our theaters, rent it in our video stores, sell it on our pay-per-view channels, show it on our cable networks, and play it on our television stations. And while we’re doing that, we’ll publish the book, release the soundtrack, and make the video game, and sell it in all of our stores.” At this time, “Blockbuster was larger than its next 375 competitors combined.”

“Wow! What a Difference!”

Amid rumors, Wayne expressed that he had nothing to gain, and, that he would be cutting all ties with the company and stepping down as CEO. What everyone says that was so great about Wayne Huizenga was that he always got the deal, but he cared about the people making it. I believe, this is something that Blockbuster lacked since his departure, and it was one of the contributing factors to their later demise. And over the next 10 years, Blockbuster would see a large drop in its growth.

Citations

[1] Harnett, E. (2015, March 18). The Oil Bust Replay from the 80s. Retrieved from https://www.apeonline.org/2015/03/17/the-oil-bust-replay-from-the-80s/

[2] Fact #915: March 7, 2016 Average Historical Annual Gasoline Pump Price, 1929-2015. (n.d.). Retrieved from https://www.energy.gov/eere/vehicles/fact-915-march-7-2016-average-historical-annual-gasoline-pump-price-1929-2015

[3] DeGeorge, G. (1999). The Making of a Blockbuster: How Wayne Huizenga Built a Sports and Entertainment Empire from Trash, Grit and Videotape.

[4] Ash, Andy. “The Rise and Fall of Blockbuster.” Business Insider, 16 Jan. 2020, http://www.businessinsider.com/the-rise-and-fall-of-blockbuster-video-streaming-2020-1.

[5] Video rental firms win round in struggle with Nintendo. (1990, September 19). The Baltimore Sun.

Alex Nuelle, 2020

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