One of my brother’s best friends as a child was Willy (or, Will, as he now prefers to be called; follow him on Twitter). Willy had a unique situation growing up in that he was a true blue mallrat – his parents owned the jewellery store in the local mall, so he spent hours there finding new and enterprising ways of killing time. Lucky for him, another store owner had a son about his age, so they bummed around the mall together, grabbing Orange Juliuses or drinking chocolate milk at the Sandwich Tree.
It was a experience that I think most of us will never appreciate; being youngsters clowning around in an adult’s playground. Willy had a kinded spirit who understood what it was to sacrifice a parent to full-time bread winning, and having friend who shared that unique loneliness must’ve been invaluable.
But, a new store opened up across the street from the mall, and it put intense pressure on his friend’s family business, as well as other family-run businesses in the area. They couldn’t match the pricing, selection, or convenience of the new business, and the invader showed no remorse in gobbling up territory like a virus. While some people (like our family) tried to support the local businesses, it wasn’t enough, and soon they had to close up shop. Some of us lost a good local business that day, but Will lost a friend and confidant.
The business that moved into the area? Rogers Video, soon to be joined by Blockbuster video and other chain video stores. Family video stores like our old stomping ground Classic Video just couldn’t compete; their pockets weren’t deep enough. And the chains were unrelenting in the pressure they put on the Mom & Pops.
But, unless you’re living in cave, you’ve heard by now that Blockbuster is bankrupt, and Rogers is closing stores left and right. Their nemesis? Netflix, and other on-demand media services. The days of the chain video store are rapidly coming to a close, and in a twist of irony they’re being hung out to dry because they don’t know how to compete against a business that is cheaper, has more selection, and is more convenient.
So today’s blog is heavy in schadenfreude, as we simultaneously dance on the grave of Blockbuster (soon to be joined by Rogers), and we also try to learn from their mistakes. We’re going to learn how Blockbuster sowed the seeds of their own demise, and how you can avoid doing the same thing.
(I should note, my research was greatly helped by Fast Company’s run down of the history of Netflix and Blockbuster – I highly recommend you check it out)
Lesson #1: Don’t Get Cocky
The origin story of Netflix is fascinating; a Blockbuster customer gets fed up with late fees, and thinks “there must be a better way!”. And so he decides to found a DVD-by-mail service in 1998, and by 2003 they are posting profits in 7 figures.
In 2004 Blockbuster finally decides to attack Netflix head on, and begins an online DVD rental program. In a conference call with investors, Netflix CEO and Founder Reed Hastings comments that “in the last six months, Blockbuster has thrown everything but the kitchen sink at us.” The following day, a package arrives at Netflix HQ from Blockbuster. What was inside? You guessed it – a kitchen sink.
Now, its entirely possible that this was just a joke made in the spirit of friendly competition. But, you have to consider that in 2002 Blockbuster had posted a loss in the billions, and their first stab at online, on-demand movies fizzled when their partner in the venture went out of business; incidentally that partner was accounting-challenged energy firm Enron.
Simply put, Blockbuster was deep in the red, and their response came off like they weren’t taking Netflix seriously.
Avoiding the Mistake
Your business is going to face challenges as you grow, and the appropriate response to these difficult times is not to take them lightly, or to stand on your laurels; you need to recognize you’re getting your ass kicked, and act accordingly. There are times when jokes are appropriate, but coming off like a cocky jackass rarely works in your favor, especially when it’s more bluster than substance.
Lesson #2: Don’t Put your Head in the Sand
Even worse than responding with false bravado is pretending like the problem doesn’t exist.
By 2006, Netflix and it’s 6.5 millions subscribers were becoming a very significant thorn in Blockbuster’s side, who boasted only 2 million subscribers to their online service. In ’07, Blockbuster’s new CEO decides to scale back their online rental service, costing them 500,000 subscribers.
So, what response does the management team give to NetFlix’s gains versus their losses?
“I’ve been frankly confused by this fascination that everybody has with Netflix…Netflix doesn’t really have or do anything that we can’t or don’t already do ourselves.” – CEO Jim Keyes, expressing doubt about Netflix
“No, I don’t know where that comes from” – CEO Jim Keyes, after he was asked if Netflix was behind Blockbuster’s financial troubles
“We’re strategically better positioned than almost anybody out there. Never in my wildest dreams would I have aimed this high” – Blockbusters Head of Digital Strategy explaining their position in Aug. 2010
For the record, Blockbuster entered bankruptcy protection in Sept. 2010.
Avoiding the Mistake
It’s one thing to put on a brave face, but it’s another to delude yourself into thinking everything is okay when it’s clearly not. A problem is not going to wish itself away, you need to be prepared to take decisive action. As you’ll see in the next section, Blockbuster was doing almost nothing to counter the triple headed threat of Netflix; they clung to their existing model even when everyone could tell it was on life support. Don’t make the same mistake; be aware of the realities, and act accordingly.
Lesson #3: Don’t Abandon your Principles When Things Get Tough
In 2005 Blockbuster attempted a Hail Mary pass, to try and kick start their business back into profitability. Did they launch an online portal? Offer a cheap subscription model? Nope, they went with this:
Now, in and of itself the idea of scrapping Late Fees is not a bad one; it was one of their customers’ more vociferous complaints. But, Blockbuster forgot to mention one tiny detail when they rolled out the program: users who were 7 days late returning their movies would actually be on the hook for the entire cost of the movie. And if they returned it after 7 days, they’d be refunded the cost of the film, minus a $1.25 restocking fee.
Now, I never went to no fancy accounting school or nothin’, but that sounds like a late fee to me.
Consumers were outraged, and complained to their state legislatures. 48 states sued Blockbuster, forcing the chain to modify and clarify their late policy, so there were no misleading practices.
Oh yeah, and 5 years later in 2010, Blockbuster reintroduced late fees, trying to recoup the $300 million in revenue they were losing each year from the “No Late Fees” policy.
Avoiding the Mistake
If Blockbuster’s customers weren’t already tempted by Netflix, the company’s blatantly misleading campaign certainly gave them reason to shop elsewhere. As a business owner at the end of the day, all you really have to stand on is your reputation. Shady promotions and misleading promotions might give you a short term boost, but it will only cost you goodwill in the end, and that’s worth far more than whatever revenue you might bring in.
The Cost of Doing Business (Poorly)
I feel bad for the Blockbuster and Rogers employees out of work; they’re the ones who are paying the real price, not the executives with their golden parachutes. They’re the ones paying for mistakes made well above their pay grade. Unfortunately, it was probably a fait accompli. As soon as on demand media hit its tipping point, their days were numbered, doomed to join the ranks of record stores and book stores – dinosaurs in this digital age.
But, don’t leave my blog filled with doom and gloom. Because this story isn’t just a cautionary tale for business owners, but a celebration of entrepreneurship. Reed Hastings did what we all dream of – he stuck it to the man, and simultaneously changed the world at the same time. Not only should you learn from the mistakes of Blockbuster, but you should also be inspired by the success of Netflix – score one for the little guy.