What Ever Happened to Blockbuster?

I was stopping off to get a sandwich on the way to the office today, and I couldn’t help noticing that the storefront that used to house our local Blockbuster Video was being remodeled into two or three smaller spaces. Most of the other locations near us have also closed down, and things aren’t looking good for the company’s long-term survival. And yet, I can remember a time only a few years ago when Blockbuster was dominating the industry; driving most of the local, independent video rental stores out of the market in a way that even Wal-Mart can only dream about and refusing to carry any content that did not conform to some of their right-wing ownership group’s ideas about morality. Since I’m still a student of institutional failure (no matter what becomes of my academic career) I thought there might be a lesson here, and I went looking for supporting data…

First off, it’s important to remember that the business model Blockbuster was using depended on both technological and business conditions remaining a constant – and that none of these things are as commonplace as people seem to think. Pay-per-view services came online nearly twenty years ago in major cities, and while they were initially limited in menu choices and more expensive than renting video tape or DVDs they were also much more convenient. The evolution of video-on-demand services (with their much wider selection of programming) went a long way toward eroding Blockbuster’s product advantage, but the arrival of Netflix and then of streaming video services effectively eliminated the company’s product advantages, as well. However, what happened to them in terms of business model and pricing policy was even worse…

As a story that popped up this week on C-News pointed out, Blockbuster had based their business model on getting special deals direct from the movie studios, which allowed them to undercut the prices offered by their smaller competitors and corner the market, whereupon they raised prices to increase their profit percentage. This policy alienated a lot of consumers, and angered entire communities, but from a strategy standpoint, the really unfortunate part was that it also assumed that these business conditions would never change. As it turned out, competitors operating without brick-and-mortar stores of any kind have an ever lower overhead than Blockbuster did with their special deals – and Blockbuster’s very aggressive policies (notably high prices and relatively high late fees) had left them with no customer loyalty to fall back on. So far, at least, attempts to compete with Netflix on either the return-by-mail or the streaming video platforms have not proven successful, and the company is being driven into the same strategy (catering to niche markets with obscure or vintage content) that failed when the independent video stores tried it in the face of Blockbuster’s original expansion…

So how could the company have avoided this situation? I would suggest that while some of the specifics were unforeseeable, the general principles were not; some things are always a bad idea, and some business practices are predictably so. Poor customer relations, for example – and constantly trying to screw more money out of people with hidden or confusing fee structures is one of the worst – will always be a poor strategic choice; so will strategy based on either economics or technology remaining static. Streaming video may eventually do Blockbuster in, but the original Netflix model was based on just mailing DVDs back and forth (made possible by lower costs for the DVDs) and that already cut deeply into the company’s profits. Blockbuster could easily have launched their own mail-based service earlier, and if they had been willing to make the investment in the changing technology they could probably have started a streaming video service before Netflix did. Certainly, they were already entrenched in the industry, connected to the movie studios, and bringing in massive cash flow at the time…

Now, I’m not saying that avoiding the situation – or turning it around once it started – would have been easy, or that preparing to do so should have been obvious. I am saying that the company’s strategy was clearly flawed in at least three respects, and those flaws (if not their eventual consequences) were obvious. Changes in technology and in the overall business environment may be hard to predict, but a business model based on neither one EVER changing is obviously unwise – and a business model based on practices that actively annoy your customers has very rarely produced anything other than bankruptcy proceedings…