Blockbuster Video Bankruptcy, Lessons Learned

Back in 1998, Blockbuster went through a dramatic turnaround, led by John Antioco who did something incredibly simple but profound: he provided more of what the customer wanted and less of what the customer didn’t want.

Unfortunately, good strategies come a little too late and sometimes technology-savvy competitors will beat incumbents, which is what has happened with Blockbuster’s filing for Bankruptcy last week. Nevertheless, it’s instructive we go through the problem Blockbuster had in 1998 and what they did to turn the business around from earnings that had sagged 20% to an increase of 13.3% in 1998 ¹.

Blockbuster and the Customer Problem

In the late 1990′s, Sumner Redstone bought Blockbuster for $8 billion, thinking that it would be a great channel for his Viacom empire suite of media products. Soon, he realized a big problem with Blockbuster, with the help of John Antioco, the person he hired to turn Blockbuster around:

The dynamic of going to a video store expecting not to get what I wanted was finally enough for me to stop making the trip,” [Antioco] recalls. What other business treats you like that?

According to Antioco, customers got so used to the abuse that it became easy not to give them what they wanted and they labeled this way of treating the customer as “Managed dissatisfaction”.

Not finding the video the customer wanted became so bad that,

The average Blockbuster customer had to visit a store five consecutive weekends in order to get the movie he wanted.

Indeed, what other business treats the customer like that? That pattern, would soon prove to be one aspect that would accelerate Blockbuster’s decline a decade later.

Blockbuster and the Customer Solution

As a countermeasure to the Blockbuster customer problem, John Antioco’s strategy was to stock more of the new releases that customers want. To do this, Blockbuster Video had to overhaul its business model.

Blockbuster had to overhaul its business model. In the past the company bought tapes from the studios for about $65 apiece. Because each store has 10,000 tapes, the inventory got expensive, thus limiting the company’s willingness to invest in too many copies of one film. Now Blockbuster has revenue-sharing deals with all but a couple of major studios. The deals dramatically lower Blockbuster’s up-front costs to about $6 a tape.

This strategy worked for a while, leading to an increase in memberships of 7% and an increase in earnings of 13.3%, proving that providing more of what the customers want and less of what customers don’t want is sound business strategy, not to mention good ‘ol common sense².

Blockbuster and Bankruptcy

Fast forward 10 years, Blockbuster Video filed for bankruptcy last week. It’s unfortunate since the moves they’ve made really did make sense, but the fast moving technology-savvy companies such as Netflix, RedBox, and Amazon Video on Demand or video stream players, such as Roku, which allows you to stream movies instantly into your TV from Netflix, Amazon, or from the internet, were too much for Blockbuster to compete with.

Blockbuster and Lessons Learned

Based on my limited knowledge, here’s what I see as the critical – yes, common sense – lessons for every business.

Focus on the Customer – Immediately: If we put off listening to and responding to the customer, then soon we won’t have customers to listen to or respond to.
Focus on the Customer, but also Be Aware of Competitors: It’s likely that Blockbuster was not aware the impact Netflix and Redbox would have, until it was too late.

What else do you see as the critical lessons learned from the example of Blockbuster Video and its downfall?