Blockbuster video was a staple in American neighborhoods and a key part of Friday and Saturday night entertainment for about two decades. Now this giant is reduced to a single location. Here’s what happened to Blockbuster and why Blockbuster failed.
Blockbuster was a benefactor of a disruptive technology. However, like the icons it displaced, Blockbuster itself got disrupted by two upstarts that it had the opportunity to buy early on, declined, and then had to replicate at higher cost.
Home video and Blockbuster’s rise
Blockbuster benefited from the disruptive technology of home video. First, it was VHS tapes, and later, DVDs. Blockbuster didn’t invent the business model of renting out VHS tapes, DVDs, or video games. At first, it was a cottage industry, run by independent entrepreneurs, usually as a family business. But the cost of entry was rather high. The high cost of the tapes made it inevitable that the business would become corporatized.
The thing about independent businesses is that it takes a certain type of person to forgo the relative stability and predictability of working for someone else and risk it all on their own small business. Usually, a person willing to do that has to be more than brave. They also have to love what they are doing. So that means the independent video rental stores tended to have a more interesting selection then the corporate stores, which just carry the hits. The independent stores were more likely to carry offbeat titles that scared large corporations. The corporateization of video rental brought mediocrity. But having a mediocre corporate video rental store in your neighborhood was better than having to drive a long way just to rent a movie.
Sure, it was better to rent a movie and order a pizza from local neighborhood family-owned businesses rather than chains. But for the millions of Americans who didn’t have that option, renting a big hit mainstream movie from Blockbuster and ordering pizza from a chain was better than nothing.
Expanding into music
In the mid 1990s, Blockbuster decided to try to push its way into another field, opening a chain of music stores called Blockbuster Music. Their idea was to buy larger format storefronts so they could carry a much larger selection of music than the mall chain stores or the consumer electronics stores.
The idea was that if you wanted the kind of mainstream music that you hear on the right hand side of the FM radio dial, like mainstream rock music, R&B, country, or classic rock, they would have all that just like the mall stores and consumer electronics stores did. But if you wanted something a bit more obscure, they would carry that as well.
They hoped that offering a larger selection would allow them to get by with charging retail prices or close to it, rather than using CDs as a loss leader like the big box consumer electronics stores did.
It wasn’t a bad idea, but it didn’t work out as well for them as video rental did. Of course, this business model had and expiration date, because of the rise of digital distribution, but Blockbuster Music didn’t survive long enough for that to be a problem.
It was Blockbuster’s first failure, but it wasn’t the failure that did the company in.
Disruptor number one: Redbox
Redbox isn’t the usual disrupter that comes to mind when discussing Blockbuster’s failure, but it was an underrated factor. Redbox is a kiosk that rents a limited selection of DVDs for a dollar a night using a vending machine model. Since the kiosk is the size of a vending machine, it fits anywhere. And the overhead is exceptionally low. The machines need occasional maintenance, and someone has to come around and change the selection occasionally, but there’s no need for a staff of employees to run a retail location, and no overhead of having to clean up the store.
The selection was even more limited than a Blockbuster location, but if they had something that interested you, you could. Rent a movie for a dollar. And even though the nearest Blockbuster was probably pretty close, the nearest Redbox was probably even closer.
Blockbuster turned down the opportunity to buy out Redbox, and ended up having to open their own kiosks. They had name recognition, so that was an advantage, but being second to market meant they got the second best locations.
It’s rarely one thing that brings an empire down. And that was the case with Blockbuster. Redbox undercut Blockbuster and caught them off guard, but another disruptive technology came along and disrupted Blockbuster the same way Blockbuster disrupted drive-in theaters and other traditional ways of watching movies.
Today we think of Netflix as a streaming service. But before it was a streaming service, it was a new way to rent movies. Rather than driving to a store and paying several dollars to rent a movie for a set period of time and pay late fees if you got distracted and didn’t return it on time, Netflix let you subscribe to their service, and it acted more like a lending library. For a monthly rate, they would mail you DVDs. And when you were done watching them, you mailed them back, and you could pick which DVDs you wanted them to send next.
It eliminated unpopular late fees, and it was convenient. If you rented a movie a week, Netflix was cheaper, had a better selection, and all you needed was internet access and a mailbox.
As efficient as that was, Netflix thought ahead and disrupted their own disruptive service, using the internet as a delivery mechanism, not just an ordering mechanism. This was so successful that it might be news to some people reading this that Netflix got it start by mailing DVDs to subscribers.
Just like Redbox, Blockbuster had the opportunity to buy Netflix early on and declined. And just like Redbox, Blockbuster head limited success cloning Netflix.
Other streaming services have successfully challenged Netflix, but one of the reasons they were successful when Blockbuster wasn’t was because they either owned popular content or they were backed by owners of popular content. So they could offer something Netflix could not, and had a cost advantage in doing so. Blockbuster had to negotiate content rights, and was at a disadvantage in not having first choice.
How Blockbuster could have succeeded
It’s a pretty easy question what Blockbuster should have done. If Blockbuster had bought Netflix early on, and had the foresight to launch a streaming service once Internet connections were fast enough and reliable enough, Blockbuster would still exist today.
But I don’t think they would be Netflix with a different name. I think their business model would be a little bit different. For example, while they might have reduced the number of storefronts they had, I don’t think they would have closed the retail side of their business. Or at least they wouldn’t have had to close the retail side.
For one, they could have continued the video rental side of the business. They just would have needed to change it up a bit. Rather than dedicating 75% of their retail space to renting movies, they could have replaced that with a couple of jumbo sized kiosks. Rather than just offering the standard selection they were offering at gas stations, they could offer two or three times the selection to people who happened to live near one of the retail locations, or was willing to drive a little further.
They also could have taken the movies by mail line of the business a stop further. You could mail the movie back to a distribution center, or exchange it in person at the retail location.
How Blockbuster could have handled the obsolete retail space
Blockbuster would have had a glut of obsolete retail space. I argue they already knew what to do with that. In their waning years, Blockbuster sold video game consoles and accessories. They could have started offering set top streaming devices, like Roku and Apple TV. Potentially they wouldn’t have needed to discount the devices as heavily as other retailers. They could have sold the devices at retail and bundled a month or two of their streaming service with purchase of the device as incentive, capitalizing on the cord cutting trend.
They also could have sold tablets and phones. And in their stores that had more room, they could have even offered repair services on those devices. It’s way too easy to drop your tablet or your phone one too many times and break the screen. I wouldn’t say we’ve all done it, but we all know someone who has if we haven’t done it ourselves.
But wouldn’t the result just be a marriage of two struggling companies?
If Blockbuster had eliminated the right disruptor early enough, I think the company would have survived. I even think some of the storefronts could have survived, just with a slightly different business model. But I do think the retail business could have continued as an additional revenue stream, and a mashup of Blockbuster and Netflix wouldn’t necessarily have to be a combination of two struggling companies right now.
If anything, the storefronts could provide a way to distribute content that they can’t license for streaming. For someone who doesn’t want to subscribe to four or five streaming services, being able to subscribe to one streaming service and still rent physical media on occasion might be an appealing option. Nobody has tried it because nobody is in the position Blockbuster would have been. It’s not worth building from scratch, but it might have been worth transitioning something they already had.
I think it’s an interesting what-if, but that’s all it is. It’s hard for a market leader to transition to a new business model, and Blockbuster is a great example.
2 thoughts on “What happened to Blockbuster”
I miss the days of the whole process of going to rent a VHS or NES Cartridge. There was something almost magical about it. Great article and it is too bad that the age of rental stores are gone.
Thanks, this one was a fairly fun one to write and a bit of a nostalgic trip for me. I agree, going to a rental store to find a movie or video game was like a treasure hunt. The indie stores were cool too because the staff would tell you about upcoming games. And I’d be remiss if I didn’t mention my second date with my wife included a trip to Blockbuster to rent A Mighty Wind, probably on DVD. VHS wasn’t dead yet but was on its way out by then. My kids find the idea of movie and game rental kind of fascinating but also kind of weird.