The Fall of Blockbuster

This is a continuation of The Rise of Blockbuster Video

Blockbuster store in mid-Liquidation – South Durham, North Carolina
By angelo Yap

Digital Video Disc

At the time of Viacom’s acquisition of Blockbuster, DVD was well on its way into popularity, and, over the last two years, had lost the emerging market to Hollywood Video, their closest competitor. In 1999, they made a full move to the new platform, with 200 films available for DVD rental and more being added in the following months. At this time, “… nearly 60% of U.S. households [lived] within a three-mile drive of a Blockbuster store. By carrying DVD, it could play a major role in pushing [it] even further into the mainstream.” [5]

In Hayden Quinn’s documentary, Blockbusted, they go into how much cheaper DVD was when compared to VHS. DVD would cost Blockbuster around a fourth of what tapes had. Blockbuster’s decline may have had a lot to do with their interest in buying only new movies in the DVD format and continuing to order previous titles on VHS. [9] They did a similar model when first incorporating Blue Ray, years later. VHS tapes were 50-dollar bills sitting on the shelves – if something happened to them, that’s a clean loss for the company.

Since its inception, Blockbuster had an intense late fee policy for customers who returned a movie past the time they were meant to. Now, with that said, let’s talk about a man named Reed Hastings. Hastings made a stop by a local Blockbuster to return a copy of Apollo 13 he had rented earlier, to find that his late fee totaled a whopping $40. This made Hastings so angry that he got the idea for online video rental, with no late fees – and thus, Netflix was born – or so the story goes. Hastings and his co-founder, Marc Randolph had admitted to the idea having hit them earlier – the concept of shipping parcels over the internet would speed up the mailing process and, after a few trials with some CDs, it showed to be a functioning business model.

The 21st Century

The beginning of the next century would mark Blockbuster’s peak in 2004, employing 84,300 people worldwide and the expanse 9,094 stores in total, with more than 4,500 of them in the United States. However, during this year, Viacom would split with Blockbuster after the previous periods being characterized by less than exceptional returns for the company.

Now, currently, Amazon was selling movies online and Netflix was making a pretty penny in the business of renting movies online, with both Netflix and Blockbuster preparing to compete with On-Demand entertainment as an emerging industry. Hastings said in a 2005 Inc. interview, “Movies over the internet are coming, and at some point, it will become big business.” He went on to explain how the company was investing around 1 to 2 percent of its income into downloading. [6]

The Beginning of The End

Blockbuster realized the On-Demand industry of course, but, under the leadership of John Antioco, the CEO at the time, the company viewed the concept of online streaming as a pipe-dream, and began a billion-dollar campaign called Total Access, which would allow Blockbuster’s customers to have an exclusive DVD-by-mail service, and would allow them to return their movies to any Blockbuster, and receive a free rental in return. This was remarkably successful, even though the company was losing 2 dollars per free movie offered.

This is the time when the famous meeting took place, where Hastings and his team pitched Netflix to the company and were supposedly “laughed out of the room.” Now, I don’t know how this all went down, so I won’t make any assumptions, but it was a bold choice, either way. Now, before we put all the blame on Antioco, we have to put our minds back to 2000. Netflix was just still a young company. They knew that the DVD-By-Mail concept could be replicated, but they just couldn’t match the appeal of Netflix’s lump-sum membership fee. For less than it cost to rent a few movies from Blockbuster, you could have access to Netflix for a whole month – and have the movies sent directly to you. Blockbuster attempted to turn the ship around, with the removal of late fees and a big move to online services. Moreover, it was board-member Carl Icahn, who’s choices after Antioco would result in his watching Blockbuster burn.

Total Access was a pretty big threat to Netflix, leading Hastings to approach Antioco yet again, this time with the concept of buying the service outright and allowing Netflix customers to return their movies to the stores instead, which, of course, Icahn was against, as the company had lost enough money through Total Access. Some locations still hadn’t incorporated the service into their stores. It all came to a head, when board member and former president and CEO of 7-11, James Keyes stepped up to replace John Antioco. Keyes denied Hastings’ offer and, on top of that, raised the price of rentals and did away with the free movie offer. This would cripple the service. Keyes believed that Antioco’s leadership choices and bonuses were lowering company value.

Icahn would later write, “Keyes felt the company couldn’t afford to keep losing so much money, so we pulled the plug. To this day I don’t know what would have happened if we’d avoided the big blowup over Antioco’s bonus and he’d continued growing Total Access. Things might have turned out differently.” [10]

This was the point where Blockbuster made a turn for the worst. That same year, Netflix would introduce online content streaming. Keyes would lower the promotion of the leech that was Total Access in favor of a new online streaming service to rival Netflix, but it still wouldn’t be enough – with movies needing to be downloaded entirely before they could be even be watched, while Keyes focused on Walmart and Apple, ignoring Netflix and the emergence of Redbox kiosks. The company’s store count around this time was at 6,500, and 4,000 were in the U.S. Blockbuster would announce the closure of between 810 to 960 of these stores and launch around 10,000 Blockbuster Express kiosks by the middle of 2010. [7]

Over the next few years, Blockbuster would continue to spread itself thinner and thinner, with the purchases of several other chains and services, eventually racking up a debt of $1 Billion dollars. In March 2010, the company’s stock was completely removed from the New York Stock Exchange. Bondholders gave the company until later that year to meet its debt in interest payouts, and when the time came, they couldn’t make it and filed for Chapter 11 bankruptcy protection. The Department of Justice revealed that Blockbuster had insufficient funds for reorganization and was forced to liquidate. At this time, the company had bids from the Dish Network, SK Telecom (a South Korean company), as well as former board member Carl Icahn. Blockbuster announced that they would attempt to keep 3,000 stores open. At this time, James Keyes stepped down as CEO, and Dish would win the bid for the company and revised their statement to keep around 600 stores open, with some being closed on a case-by-case basis. Dish ultimately scrapped the idea of reforming Blockbuster into some sort of a Netflix competitor and closed all remaining 300-corporate locations, with only 51 remaining franchisee locations left over. And now there’s only one left.

Johnathan Salem Baskin, who led several marketing campaigns for Blockbuster in the past put it like this, and I think it speaks volumes about what went wrong. “Blockbuster thought it was in the entertainment distribution business, but it was really all about retail customer experience. Second, make sure you’re looking at the truly big Big Picture. When Hollywood box office receipts faltered, it didn’t change consumers’ need for something to do with the time they would have spent watching hit flicks (i.e. it was an opportunity, not a problem). Digital would have changed Blockbuster’s business, for sure, but it wasn’t its killer. That credit belongs to Blockbuster itself.” [8]

Final Words

            This article, as well as part one, used Gail DeGeorge’s The Making of a Blockbuster as the main source. It’s a great novel-length, journalistic piece analyzing Wayne Huizenga and his contribution to Blockbuster’s Golden-Age, through the ’90s.

Citations

[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, www.businessinsider.com/the-rise-and-fall-of-blockbuster-video-streaming-2020-1.  

[5] Graser, M. (1999). Blockbuster goes wide with DVD push. Variety.

[6] Hastings, R. (2005, December 1). How I Did It: Reed Hastings, Netflix. Inc.

[7] Talley, Karen (October 1, 2009). “Blockbuster Plans Expansion To Counter Raft Of Competition”. The Wall Street Journal.

[8] Baskin, Jonathan Salem. “The Internet Didn’t Kill Blockbuster, The Company Did It To Itself.” Forbes, Forbes Magazine, 8 Nov. 2013, www.forbes.com/sites/jonathansalembaskin/2013/11/08/the-internet-didnt-kill-blockbuster-the-company-did-it-to-itself/#392623086488.

[9] Quinn, Hayden, director. Blockbusted | Video Store Documentary. YouTube, 15 Sept. 2018, https://www.youtube.com/watch?v=-qCw4iTowF0.

[10] Satell, G. (2014, September 21). A Look Back At Why Blockbuster Really Failed And Why It Didn’t Have To. Retrieved from https://www.forbes.com/sites/gregsatell/2014/09/05/a-look-back-at-why-blockbuster-really-failed-and-why-it-didnt-have-to/#471391611d64

Alex Nuelle, 2020

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