This post originally appeared on startupnation.com/start-your-business
The following is adapted from the book “Built to Fail: The Inside Story of Blockbuster’s Inevitable Bust.”
Blockbuster was built by one of the most successful entrepreneurs in history, Wayne Huizenga. Before turning it into one of the most powerful brands in the entertainment world, he started Waste Management with a $5,000 loan and one truck. After Blockbuster, he founded AutoNation, the largest chain of auto dealerships in the country. Waste Management and AutoNation still dominate their respective industries, but Blockbuster, arguably the most iconic of the three, is gone.
Under Huizenga’s leadership, Blockbuster brought the new home entertainment industry mainstream and turned an $18.5 million investment into a retail behemoth that he sold to Viacom for $8.4 billion just eight years later. During those years, its stock grew faster than Microsoft’s, which was founded about the same time. Blockbuster made thousands rich, but it was never worth more than when Huizenga sold it — in 1994.
Instead of building on its early success, Blockbuster has become synonymous with failure. When business pundits ponder if a company will become the “next Blockbuster,” everyone knows exactly what that means.
The history of Blockbuster provides a classic example of a company that seized opportunity on a grand scale but never transitioned to operational excellence. Its impact on the entertainment business in the 1990s cannot be overstated. For years, it was Hollywood’s largest customer. And with over 5,000 stores in the U.S. alone, there was a Blockbuster store within minutes of almost every American home. Its dominance of home entertainment dwarfed the streaming companies of today — even Netflix.
Most believe Blockbuster was just another innocent victim of technological progress. But the truth is, Blockbuster was a shell of its original self and in deep financial difficulty more than a decade before Netflix or anyone else streamed a single movie. How did that happen?
I was there for the entire ride: a Blockbuster franchisee for 25 years who profitably ran my stores for eight more years after the company filed bankruptcy in 2010. My stores were the last to close — except for the now legendary one in Bend, Oregon, which ironically, is the subject of one of the most popular films on Netflix called “The Last Blockbuster.” My new book, “Built to Fail: The Inside Story of Blockbuster’s Inevitable Bust,” tells the rest of the story of a seemingly invincible company can fail — long before its time.
The genesis of virtually all Blockbuster’s problems came from its lack of intellectual curiosity, the ultimate example of which was the inept mismanagement of its massive movie viewing database. The company had almost as much information on its customers as bankers, with extensive demographic data to cross correlate with every movie they had ever rented. The result was the richest movie viewing database in history, more so than anything the Hollywood studios possessed at the time.
But despite its dominance of home entertainment, Blockbuster’s financial difficulties began as early as 1996, a year before Netflix began mailing DVDs to its subscribers, and more than a decade before its new streaming service would begin to impact the business. When Blockbuster returned to the public financial market in 1999, Wall Street greeted it with a valuation that was 65% less than when Huizenga sold the company just five years prior.
The Blockbuster story is littered with examples of ignoring its competitors until it was too late. It famously passed on Netflix founder Reed Hastings’ offer to sell the company for $50 million in 2000. But it also ignored opportunities to partner with the early pioneers of the DVD rental kiosk business, beginning with Greg Meyer, who installed the nation’s first machines in 2001, and later Redbox, which would come to dominate the business with over 40,000 kiosks across the U.S.
Instead of engaging the progressive thinkers of the day, Blockbuster continued to do the only thing at which it excelled — opening more stores than anyone else. Its relentless growth-at-all-cost strategy produced a bloated, high-cost company that had little chance of survival as the business transitioned from brick-and-mortar.
John Antioco, Blockbuster’s chairman and CEO from 1997 to 2007, led the company in its most transitional years. During his 10-year reign, DVD replaced the old VHS video cassette as the format of choice. Netflix began mailing them to its subscribers, and Redbox began dispensing them in vending machines. All the while, Blockbuster’s standard response was to open more stores. When that did not work, it launched a series of failed strategies and promotions that were more intended to temporarily placate Wall Street than address the real issues of the day. The most notorious example of such strategies was Antioco’s decision to eliminate late fees in 2005. Although the message played well to those who did not understand the business, it broke the company’s supply chain and delivered a devastating blow from which it never recovered. Under pressure from disgruntled shareholders, Antioco left the company two years later but continues to blame Blockbuster’s failure on his successors.
Instead of relentlessly pursuing fact-based solutions, Blockbuster’s history is dominated by complacency. The result was a wanton ignorance that left it defenseless against anyone who better understood why people watched movies. Reed Hastings could not have known at the time, but when he offered to sell Netflix to Blockbuster, his company already had a doctorate degree in movie knowledge as compared to Blockbuster — which never got past the first grade. The financially challenged Netflix of the day could not beat Blockbuster with money, but it easily did it with a deeper understanding of consumer behavior. Redbox did the same.
Business psychologists have various terms for the behavior Blockbuster demonstrated throughout its brief 25-year history. But perhaps Bill Gates’ simple observation best describes it: “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” Blockbuster was the embodiment of this characterization. Overwhelming success in its early years created unwarranted contentment that became permanently embedded in its culture. This led to repeated attempts to solve complicated problems with superficial solutions.
Now, more than a decade after Blockbuster filed bankruptcy, the story still resonates. It was the ultimate example of a brilliant entrepreneur seizing an opportunity that was misjudged by everyone else. But Blockbuster never made the leap from an ultra-successful startup to a company that could build on its early success. Today, all that remains is the ultimate example of a company that was built to fail.
“Built to Fail” is available now and can be purchased via StartupNation.com.
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