Netflix was founded in 1997 as a DVD rental service. At the time, Blockbuster Video was a multi-billion dollar video rental behemoth, growing to over 9000 stores as recently as 2004. In 2000, Netflix offered to sell to Blockbuster for $50 million — Blockbuster declined. By 2011, Blockbuster was bankrupt and down to 2400 stores while Netflix had gone public and their streaming business was exploding. Today, Netflix has a market cap of $223 billion, is a member of the S&P 100, and will soon start showing The Last Blockbuster, a documentary about the very last Blockbuster video rental store in the world. Absolutely savage victory lap.
The problem — in Blockbuster’s case, at least — was that the very features that people thought were strengths turned out to be weaknesses. Blockbuster’s huge investment, both literally and psychologically, in traditional stores made it slow to recognize the Web’s importance: in 2002, it was still calling the Net a “niche” market. And it wasn’t just the Net. Blockbuster was late on everything — online rentals, Redbox-style kiosks, streaming video. There was a time when customers had few alternatives, so they tolerated the chain’s limited stock, exorbitant late fees (Blockbuster collected about half a billion dollars a year in late fees), and absence of good advice about what to watch. But, once Netflix came along, it became clear that you could have tremendous variety, keep movies as long as you liked, and, thanks to the Netflix recommendation engine, actually get some serviceable advice. (Places like Netflix and Amazon have demonstrated the great irony that computer algorithms can provide a more personalized and engaging customer experience than many physical stores.) Then Redbox delivered the coup de grace, offering new Hollywood releases for just a dollar.
Edward Jay Epstein examines where it all went wrong for Blockbuster Video. Blockbuster had an opportunity to have rental pricing for DVDs like they did with video, but they turned the deal down and the studios priced DVDs for retail instead and have been minting money with that scheme ever since.
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