Context
In the mid-2000s Blockbuster had about 9,000 video rental stores. A significant share of its income came from late fees. In 2000 the company declined to buy Netflix for $50 million.
Symptom
Customers were moving to subscriptions and rental by mail without late fees. The stores still made money, but the chain's revenue stopped growing.
Cause
The company's economics rested on the stores and the fees. The new model required giving up part of that income and investing in an online service that would lose money for a long time.
The fork
Protect the stores' income, or sacrifice it for a model that could become the main one.
Decision
At first the company chose the transition. In 2004 it launched Blockbuster Online, in 2005 it abolished late fees, and in 2006 it launched Total Access: online subscribers could return discs in a store and take new ones right away. By the end of 2006 the online service had 2 million subscribers. The head of Netflix later admitted that Total Access frightened him.
Execution
The transition was expensive: according to published reports, each disc exchange in a store under Total Access cost the company about $2. According to published reports, after a conflict with a major shareholder over these costs, chief executive John Antioco left in 2007. The new management cut online investment and bet on the stores again.
Outcome
On September 23, 2010 Blockbuster filed for Chapter 11 bankruptcy. In April 2011 the company's assets were bought at auction by Dish Network: according to Dish's filings, for $226 million in cash and $12 million in assumed liabilities.
What it means for you
Blockbuster had a transition strategy, and it was working. It was stopped because the owners did not agree on how much money and how many years they were prepared to lose on the transition. A transformation needs a loss budget agreed in advance.
- How much are you prepared to lose on the move to a new model, and over what period?
- Do all the owners and major investors agree with that?
- By which metrics will you know the transition is working while it is still losing money?
We would start by calculating the cost of the transition year by year and agreeing it with the owners before it begins, so the decision is not reversed at the first loss-making quarter.
Key dates
| Year | Event |
|---|---|
| 2000 | Declines to buy Netflix for $50 million |
| 2004 | Blockbuster Online launches |
| 2005 | Late fees abolished |
| 2006 | Total Access launches; 2 million online subscribers by year end |
| 2007 | The chief executive leaves; course changes back to the stores |
| 2010, September 23 | Chapter 11 bankruptcy |
| 2011, April | Dish Network buys the assets |
Sources
- CNBC. *Netflix didn't kill Blockbuster — how Netflix almost lost the movie rental wars*, September 22, 2020: Source
- DISH Network Corp. Form 8-K, 2011 (purchase of Blockbuster assets): Source
- DISH Network Corp. Form 10-K for 2011: Source
- TechCrunch. *DISH Wins Bankruptcy Auction, Buys Blockbuster Assets For $228M In Cash*, April 6, 2011: Source
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