The Fall of Blockbuster

This is a continuation of How Blockbuster became a video rental giant…

Digital Video Disc

At the time of Viacom’s acquisition of Blockbuster, DVD was 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 [played] a major role in pushing [it] even further into the mainstream.” [3]

In Hayden Quinn’s documentary, Blockbusted, they go into how much cheaper DVD was when compared with VHS. DVD would cost Blockbuster around a fourth of what tapes had. VHS tapes were $50 bills sitting on the shelves – if something happened to them, that’s a clean loss for the company. Blockbuster was initially interested in buying only new movies in the DVD format and continuing to order previous titles on VHS. [7] At first, they weren’t interested in the medium, but after the wholesale price dropped significantly and chains like Walmart got involved, Blockbuster finally caught up. Discount would hurt them in the long run. [9]

The $40 Late Fee and The New Millennium

Let’s talk about a man named Reed Hastings. 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, Hastings made a stop by his local Blockbuster to return a copy of Apollo 13 to find that his late fee totaled a whopping $40. It’s said 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 Netflix co-founder Marc Randolph had admitted to the idea hitting them earlier – the concept of shipping via the internet would speed up the mailing process considerably, and, after a few trials with some CDs it showed to be a functioning business model.

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 on Blockbuster’s behalf. Now, before we put all the blame on John Antioco, the man who replaced Wayne Huizenga’s successor Bill Fields as CEO, we have to put our minds back to 2000. Netflix was just still a young company that by this point had yet to turn a profit. They knew that the DVD-By-Mail concept could be replicated, and attempted to do so in a deal with Enron, however, they couldn’t match the appeal of the lump-sum Netflix 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. Moreover, it was Carl Icahn, everybody’s favorite corporate raider, whose choices as board member would result in his watching Blockbuster burn.

John Antioco came to Blockbuster from Taco Bell and Circle K before that, where he orchestrated an impressive company turnaround each time. While Antioco was an impressive candidate, his tenure at Blockbuster saw a continued drop in growth for the company. Let’s keep in mind that Blockbuster was at one time opening a new store every 17 hours, which set a standard that Fields could not keep up. However, Blockbuster was still a new subsidiary of Viacom and was experimenting with chains like Blockbuster Music, DEJ Productions (their own movie production company), and several other investments, so, Antioco wasn’t just taking over a video rental chain, he was taking over a multimedia empire. I think it was too much too soon. (“Too little and now you’re going bankrupt…”)

The beginning of the next century would mark Blockbuster’s peak in 2004, employing 84,300 people worldwide and the expanse of 9,094 stores in total. During that year, Viacom would split with Blockbuster after the previous periods being characterized by less than exceptional returns for the company. 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. [4]

Blockbuster realized the On-Demand industry of course, but, under the leadership of Antioco, the company viewed the concept of online streaming as a pipedream 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 store and receive a free rental in return. This was remarkably successful, even though the company was losing $2 per free movie offered.

How Total Access Totally Failed Blockbuster

Total Access was a pretty big threat to Netflix, leading Hastings to approach Antioco again, but with the concept of buying the service outright and allowing Netflix customers to return their movies to the stores instead. Icahn was against this, as the company had lost enough money through Total Access. Everything 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.” [8] They thought that customers would continue to go to Blockbuster simply because of who they were; all the warm memories and the vast selection and services they provided. They were dead wrong. In reality, once there were better options (i.e. Discount: Walmart, Kmart, etc; On-Demand: Netflix, Amazon, etc.) there was no need for a Blockbuster in the eyes of consumers, and video rental was dying.

This was the point where Blockbuster made a turn for the worst. That same year, Netflix would introduce online content streaming. Again, Blockbuster had the upper hand because where Netflix had many titles available for rent, they didn’t have much available to stream. It wouldn’t be until later on that they would get studio deals with companies like Viacom and Disney for more appealing titles on their streaming service. Keyes would lower the promotion of the leech that Total Access had become in favor of their own online streaming service to rival Netflix. Hollywood loved Blockbuster, so, they could have really gone big, but it still wouldn’t have been enough – with movies needing to be downloaded entirely before they could even be watched, while Keyes focused on Walmart and Apple, kind of ignoring Netflix and the emergence of Redbox.

At this point, Blockbuster began to spread itself too thin and took on a lot of debt. It just happened to be that the Great Recession began soon after this, assisting the company in digging a hole that they would be incapable of escaping.

The Beginning of The End

They attempted to turn the ship around with a big move to online services and the removal of late fees. That’s right, “the removal of late fees.” Or so they said. Blockbuster did remove late fees, but only until the end of a one-week grace period, after that came the catch: If you kept it until the eighth day, they charged you the full retail price of the rental, which you could then keep or return it for a refund. If you returned it, you were then charged a “restocking fee.” This was a cheap, seedy, and legally confusing version of what was essentially just a late fee in disguise. This got them sued and fined under consumer fraud and lost them a lot of customers. The company store count around this time was at 6,500.

Over the next few years, Blockbuster would continue to spread itself thinner and thinner with the purchases of several chains and services, and eventually, their debt peaked at around $1 Billion. In March 2010, the company’s stock was completely removed from the New York Stock Exchange and they filed for Chapter 11 bankruptcy protection. 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. 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, who started a proxy war for control of the company. Blockbuster announced that they would attempt to keep 3,000 stores open. 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, which its last decade had been aimed for and closed all remaining 300-corporate locations, with only 51 remaining franchisee locations left over. And now there’s only one left.

After a solid foundation made by David and Sandy Cook, through the immense contributions by Wayne Huizenga and his team of business experts, and the purchase by Viacom to top it all off, Blockbuster Entertainment had become a gigantic media powerhouse that was something Antioco’s administration couldn’t handle. So, it all fell apart. “For one brief shining moment that was known as Camelot…”

It was not only the negligence of Blockbuster’s board members and executives that caused its demise, but the plain ignorance, self-inflating opinions, toxic egos, and stubbornness they exhibited that sent the company to an undeserved early grave. The problem is that Blockbuster thought it was infallible, and that was their first mistake.

Final Words

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.” [6]

Citations

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

[2] 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.  

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

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

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

[6] 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.

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

[8] 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

[9] Epstein, Edward Jay (January 9, 2006). “Hollywood’s New Zombie: The last days of Blockbuster”Slate. Retrieved March 27, 2018.

Alex Nuelle, 2020


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APA: Nuelle, A. (2020, September 8). The Fall of Blockbuster. Post-Mortar. https://postmortar.org/2020/09/08/fall-blockbuster/

MLA: Nuelle, Alex. “The Fall of Blockbuster.” Post-Mortar, 8 September 2020, postmortar.org/2020/09/08/fall-blockbuster/

Chicago: Alex Nuelle, “The Fall of Blockbuster,” Post-Mortar, September 8, 2020, https://postmortar.org/2020/09/08/fall-blockbuster/.

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