It’s the ultimate example of technology disrupting a marketplace…
Or is it really the story of a leadership shakeup that toppled an empire?
Or is it a story about the extreme hatred people have for late fees?
The Netflix vs. Blockbuster saga has been told a dozen different ways, with a dozen different lenses applied.
And what I’ve come to realize (and this likely won’t come as a huge surprise)is that there’s no single explanation for why Netflix succeeded where Blockbuster failed.
As is the case with most things in life, it was a nuanced situation. There was a perfect storm of poor decisions and technological advances and other contributing factors that led to Netflix’s staggering growth…and Blockbuster’s equally staggering decline.
My goal with this post is to distill everything I’ve learned about these two companies down into a few actionable takeaways for marketers — sort of like what I did with my post about selling like IKEA.
But first, for those who aren’t familiar with how the Blockbuster vs. Netflix story unfolded, here’s a short summary:
The Rise of Netflix (And the Fall of Blockbuster)
When Netflix launched in 1997, Blockbuster was the undisputed champion of the video rental industry.
Between 1985 and 1992, the brick-and-mortar rental chain grew from its first location (in Dallas, Texas) to more than 2,800 locations around the world.
Two years later, Viacom paid $8.4 billion to acquire Blockbuster.
So by the time Netflix showed up on the scene with its video rental-by-mail service, it appeared to be a classic case of David vs. Goliath.
In fact, in the year 2000 –perhaps realizing that it’d be easier to fight alongside Blockbuster than against them — Netflix co-founder and CEO Reed Hastings approached Blockbuster’s then CEO, John Antioco, with a merger proposal:
Hastings wanted $50 million for Netflix. And as part of the deal, the Netflix team would run Blockbuster’s online brand.
Of course, that deal never materialized.
At the time, Antioco considered Netflix to be small potatoes, and would come to realize only too late that having an online platform would be the way of the future.
In 2004, Blockbuster did launch a Netflix-like online DVD rental platform, and even abandoned their unpopular (but lucrative) late fees for overdue rentals.
By 2006, subscribers for Blockbuster’s online services had grown to more than 2 million. (Meanwhile, in that same year, the number of Netflix subscribers reached 6.3 million.)
Then in 2007, Antioco left Blockbuster, late fees were reinstated, and Blockbuster’s online efforts were put on the back burner.
The company’s fate was sealed.
Flash forward to 2010, and Blockbuster was filing for bankruptcy, having incurred more than $1 billion in losses on the year.
Their valuation at the time?
For comparison, today, Netflix is valued at around 65 billion — a 1,300x increase from their valuation back in 2000.
3 Takeaways From the Netflix vs. Blockbuster Battle
1. Never forget what you’re really selling.
This is something our director of marketing Dave tells me all the time:
“Erik, stop focusing so much on the fact that Drift uses messaging/live chat. Yes, that’s the main technology we use now, but what’s more important is the problem we’re solving and the experience we’re delivering. Someday the underlying technology could change, but our core principles won’t.”
For years, Blockbuster dominated the video rental space. But at some point, they lost sight of what business they were really in.
Instead of focusing on delivering incredible (and affordable) entertainment to their customers — something Netflix definitely has down — Blockbuster put more stock in the model they were comfortable using.
And hey, who can blame them? Back before the internet became integrated into nearly every facet of our lives, it was hard to imagine brick-and-mortar Blockbuster stores disappearing.
Blockbuster initially succeeded because they did one core job better than anyone else: delivering entertainment to people’s homes.
But as we all know, technologies change. And instead of investing all of their efforts into finding a new way to deliver on their true purpose (more on that in the next section), Blockbuster’s innovation stagnated.
To quote leadership coach Dain Dunston:
When a once successful company loses touch with the purpose that made it great, disaster follows.
2. You need to be willing to adapt. (And half measures won’t cut it.)
When you dig into the Netflix vs. Blockbuster story, it becomes clear that Blockbuster did (eventually) realize that the Netflix model was the future. And they did make changes to address it.
But in the end, it was too little, too late.
Blockbuster could never fully evolve into the modern business it needed to be in order to compete with Netflix.
As Forbes reported:
The irony is that Blockbuster failed because its leadership had built a well-oiled operational machine. It was a very tight network that could execute with extreme efficiency, but poorly suited to let in new information.
Technologies improve. Industries change. In order to grow, you need to keep a pulse on the ever-evolving needs and preferences of your customers so you can make changes to your model accordingly.
This applies to products and services as well as to marketing strategies.
As we learned at our recent Drift meetup, which featured a panel of 5 marketing experts, marketing channels have a shelf life.
So even if you learn how to dominate a specific channel, you need to remember that all channels, no matter how popular they are today, could someday fade into oblivion…just like brick-and-mortar Blockbuster locations did.
The key to surviving, and thriving?
To quote the Siam Tek blog:
Blockbuster lost their customers from the greatest form of executive negligence there is: Fear of change. Their fear of change spilled over into every business decision they made, preventing them from acting early and competently.
3. The customer-driven approach always wins.
Our co-founder and CTO Elias Torres just wrote about this topic: customer-driven marketing.
By putting the customer at the center of your process, and optimizing for their happiness, you can safeguard against having a Blockbuster-like meltdown.
As we’ve already established, there were several factors that contributed to the company’s downfall, including not understanding what business they were really in — entertainment, not retail — and not being flexible enough to adapt.
But another key piece of the puzzle was Blockbuster’s unwillingness to put their customers first.
Whereas Netflix developed a business model that simplified the video-renting process, making it more enjoyable for customers, Blockbuster only thought about maximizing their own returns.
Late fees were the clearest example of Blockbuster’s company-centric approach.
As Forbes reported:
The ugly truth—and the company’s achilles heel—was that the company’s profits were highly dependent on penalizing its patrons.
When Blockbuster did finally address the issue, the cost of dropping late fees from their model amounted to a loss of $200 million. Meanwhile, building out their online platform cost another $200 million.
In essence, they paid $400 million in an effort to modernize and remain competitive with Netflix.
However, we’ll never know if this plan would have succeeded, because the leader of this modernization effort, Blockbuster CEO Antioco, was ousted by the board shortly after the changes were made.
Blockbuster then returned to their company-driven ways…and went bankrupt a few years later.
Final Thought: Change Is Inevitable
When I was a kid, Blockbuster was an institution.
Anytime a snowstorm was predicted, we’d hop in the family station wagon, drive down to Blockbuster, and load up on movies.
But these days, the idea of going to a brick-and-mortar store to rent a video seems crazy.
With the rise of Netflix, home entertainment became just a few clicks away.
Now when it snows, families can leave their (hybrid) station wagons in their driveways and access movies from the comfort of their couches.
Today, there are approximately 10 Blockbuster locations left — down from 9,000 when they were in their prime.
(Meanwhile, the once fledgling video rental startup Netflix now boasts nearly 90 million paying members.)
So the next time you think to yourself, “The way we do things now will never change,” remember the Netflix vs. Blockbuster saga and how an entire industry can become upended in just a few years.