Blockbuster Bankruptcy, Yet Again, Highlights How It's Not Easy To Just Copy The Disruptive Innovation

from the and-there-we-go-again dept

Late last week, there were a ton of press reports about how Blockbuster was preparing to declare Chapter 11 bankruptcy in September. It’s not shutting down, but just trying to restructure its debt, get out from under a bunch of store leases and try, try again. That said, this is yet another example of the fallacy of the claim of many that if you have a good idea some big company will just come along, copy it, and be successful. It also demonstrates the huge difference between idea and execution.

Netflix had a good idea and executed well on it. But for years everyone thought it was only a matter of time until the company got destroyed, because all these bigger (at the time) companies were just going to copy Netflix and win. First it was Wal-Mart. The retail giant started a service that seemed almost identical to Netflix way back in 2002. Everyone thought there was no way an upstart like Netflix could compete with the likes of Wal-Mart. Fast forward two and a half years and Netflix took over Wal-Mart’s online DVD rental business, because Wal-Mart’s offering couldn’t compete.

In between those events, in late 2004, Amazon stepped into the market (oddly, Netflix itself broke the news), by starting a Netflix-clone in the UK, though everyone expected them to bring it to the US as well. Even those who thought Wal-Mart didn’t have the digital know-how to compete with Netflix figured that Amazon had a strong likelihood of success given its e-commerce success. Jump forward to 2008 and Amazon, which never brought the offering stateside, dumped the DVD rental business in Europe.

And, of course, there was Blockbuster. It came out with a Netflix-like offer around the same time that Wal-Mart did, and while it held on for much longer, it was just never able to build up the same sort of userbase that Netflix did, and now the company is going to declare bankruptcy and try to restructure once again.

It’s really a fascinating case study. If you just looked at the simplistic analysis of “oh no, big company will crush small innovative company,” you had to imagine that at least one of these firms would destroy Netflix along the way. Wal-Mart is a retailing giant, and even if it didn’t have the digital chops, it had more money and distribution process efficiencies than Netflix could ever dream about. Amazon similarly had cash and distribution scale, along with that digital knowhow. And then Blockbuster had the relationships with Hollywood and a massively powerful brand name when it came to rentals.

But none of them were able to execute in this market nearly as well as Netflix, which really did focus on making the consumer experience top notch from very early on. None of this means that the small company always beats the incumbent. Certainly some big companies are able to step in and crush upstarts. But it’s not nearly as easy as some people make it out to be.

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Companies: amazon, blockbuster, netflix, walmart

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Comments on “Blockbuster Bankruptcy, Yet Again, Highlights How It's Not Easy To Just Copy The Disruptive Innovation”

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ChurchHatesTucker (profile) says:

What goes around, comes around

Blockbuster found their niche early on by eating the mom-n-pop video stores’ lunch. The fact that the same lunch got handed to them by Netflix doesn’t disturb me at all.

There’s a thread here, that I can’t quite tease out, about how the people who rise to captain of industry are utterly incapable of seeing what sea their ship is sailing on.

bubba says:

Re: What goes around, comes around

Exactly, Blockbuster came upon a market run by small businesses and raped them to death, replacing them with mediocrity and obnoxiousness, and low wage jobs that sucked money out of communities instead of allowing it to be re-injected locally by the mom and pops. Ok some of these stores sucked, but some had really interesting selections. It was the same as what happened to hardware stores. At least you could get in and get your tool and some advice that was useful without having to deal with a whole city block of crap. They deserve to die. Its sad it took this long.

Free Capitalist (profile) says:

Re: Re: Re: What goes around, comes around

Seems the free market is working exactly as advertised to me.

You must be referring to U.S. product FreeMarket(TM) [Wall Street], not an imaginary “free market” somewhere in the world.

If so you are correct. Working as advertised.

Others are of the opinion that enabling homogenization of the markets is not unlike depending on a single strain of plant for year after year: sure its cheap, but makes us vulnerable to highly specialized predators, and creates nightmare circuses out of normal, cyclical, market contractions. That last part is mostly due to stupid, short-sighted investors, though, IMO.

OK I admit it, my opinion is driven by self-interest… why the hell should I have to go to a meat-boutique to get a steak that tastes remotely like beef?

tracker1 (profile) says:

Re: Re: Re: What goes around, comes around

I always preferred the mom & pop rentals. What’s funny is Blockbuster also has Redbox-style kiosks around as well. though it would be nice to see the kiosks have a separate interface for returns, from the main interface… it always seems that someone is browsing their selections, when I just want to return a disc.

I wish hardware stores were more competitive though, I admit, if I know exactly what I want then I tend to use Lowes or Home Depot… but will go to Ace, or a local shop when I need actual knowledge. Wish I could do that with electronics… It’s almost painful sometimes doing a bit of research, since the employees at the big box stores aren’t as informed as I am half the time. I wish that more online sites had reviews in line with newegg… though not sure I like the redesign (I really don’t care for it), they tend to have a better review base for their parts, than amazon does for PC stuff… but most sites are varied in terms of knowledgeable customers, so that’s where it is based on.

ChrisB (profile) says:

Re: Re: What goes around, comes around

> low wage jobs that sucked money out of communities

So-called “Mom and Pop” stores have a much better chance of treating their employees like crap. My wife worked retail (aesthetics salon and flower shop), and the owner would always try things like have staff meetings and not pay anyone for them (but hey look, I brought some cookies in!) Large companies like Wal-mart are much more likely to treat its employees fairly according to current legislation.

While companies like Wal-mart do take profits out of communities, they also have buying power which make items cost less. For example, a $20 “mom-and-pop” shovel would cost $10 at Wal-mart, with about the same margin. So while some money leaves the community, a bunch remains because the shovel cost less to begin with.

And to put an even finer point on it, you are dreaming if you think that “mom-and-pop” anything are not just buying the same Chinese-made crap that Wal-mart is buying.

Overall, the hate towards large corporations is stupid and longs for an imaginary past.

bubba says:

Re: Re: Re: What goes around, comes around

wow a simply moronic personal anecdote as an explanation for something. yeah and your wife didnt see it as a warm summer either. so there is no global warming. its easy, if your only employer is a global, the money goes mostly to to global, if its a mom and pop the money mostly goes back to the community.

ChrisB (profile) says:

Re: Re: Re:2 What goes around, comes around

> its easy, if your only employer is a global, the money goes
> mostly to to global, if its a mom and pop the money mostly
> goes back to the community.

MomNPop’s shovel: $30 ($15 wholesale + $8 overhead + $7 salary)
Walmart shovel: $20 ($10 wholesale + $4 overhead + $4 salary + $2 profit)

When the shovel is bought from Walmart, $12 leaves the community: $10 to wholesaler ie, China and $2 to shareholders. When the shovel is bought from MomNPop’s, $15 leaves the community IF the shovel is the same China made shovel sold at Walmart (which is mostly the case). If the shovel is locally made, you have a point. This is rarely the case, though.

The overhead and salaries paid by Walmart stay in the community just like MomNPop’s, because they buy local land and higher local people. Walmart helps because its purchasing power lowers the price of shovel in the first place.

Derek Kerton (profile) says:

Re: Re: Re:2 What goes around, comes around

Not a fair flame.

He mentioned an anecdotal reference, then made multiple coherent arguments, backed with a model financial scenario.

And the anecdote IS relevant. Small businesses have a very wide variation on how they treat staff. And often they even treat the owner poorly, as they sometimes work 14 hour days for a starving wage. Small businesses also have much less regulatory oversight on how they treat staff, and often have exemptions from regulations that affect large retailers.

His original point that the community benefits from much cheaper goods is a very significant argument. But you do nothing to refute that point.

I score your flame a -1.

fogbugzd (profile) says:

Cannibalizing your business

My son did a close comparison of Netflix and Blockbuster when Blockbuster first came out. He decided to go with Blockbuster because both services were nearly identical at that time, except that with Blockbuster you could return the DVD to any Blockbuster store and get immediate credit for the return. That was a big point in BB’s favor because they had shops all over town.

However, Blockbuster kept changing their policies. It looked to me like they were trying to avoid having their mail and online services from cannibalizing their brick and mortar operation. All this really did was to make the Blockbuster service less desirable, and my son changed over to Netflix.

So basically, instead of cannibalizing their own business, they fed it to Netflix. Newspapers and other services that are afraid of online offerings cannibalizing their traditional business are more than likely just creating a vacuum that some other business will be happy to fill. Deciding not to cannibalize your traditional business is often just a decision to fail.

Trevor Speirs (user link) says:

Re: Cannibalizing your business

You are “bang on” correct. Back in November 2008 I wrote a post called “Blockbuster: A Cautionary (but repeated) Tale” that examined Blockbuster’s response to the Netflix threat. No matter what it did, it couldn’t shake the “old business” thinking.
When they finally responded with a competitive service they converted a big portion of their customer base to the dvd-by-mail business model. Then, when they saw the cannibalizing effect on their B&M stores, they couldn’t help themselve but to make the internet service less attractive. This had the effect of pushing their customer’s to netflix. They actually accelerated Netflix’s success and their demise!

Benji (profile) says:

Re: Cannibalizing your business

Came here to say almost the exact same thing. I actually switched from Netflix to Blockbuster because of the in-store exchange. Then they said it doesn’t apply to new rentals…fine, no big deal. Then they said it’s only a $0.99 rental…okay, I lived a block from one with a healthy $0.99 rental section. The final straw came when they said I could only exchange one movie in store and that it would not cost $5 more than Netflix. Just when they sent me the e-mail about that Netflix let me know I could do instant streaming. Switched back to red 10 minutes later.

Blockbuster had a really good opportunity with the B&M exchange thing. Even if it was just a discount on the rental, it would have been worth it. Movies returned to the B&M registered as returned that day and you’d have your next mail-order movie either the next day or the day after. The turn-around was great, but not worth the extra money that Blockbuster wanted.

Jay (profile) says:

A few things on Netflix

There’s a few things I want to mention about Netflix:

1) Actual stock – Probably the most important thing about Netflix was their lack of overhead as compared to Blockbuster. With the large number of places to go, the late fees, and the ability to franchise, of course Blockbuster looked good for a while, but as the wave hit, Netflix could do things very quickly that other, more integrated establishments couldn’t do.

2) Physical attachments – I read a while back that the Netflix CEO steered clear of attachments being put into use by Netflix itself. There was a device, similar to TiVo coming out with Netflix on it, but the CEO nixed the idea. Pretty soon afterwards, Hollywood killed that innovation. Nowadays, they don’t make the hardware, merely put it on other devices such as the Wii. Something that Blockbuster has yet to really do. Even then, I believe a reason that Hollywood Video went out of business is the fact that Hollywood itself continues to overprice its licensing and kill other industries to hopefully prop themselves up from losses (rather than watch themselves slowly bleed out as Disney is currently showing)

3) Streaming – Through a loophole in law, this came to be without costing an arm and a leg. Now that Hollywood has gotten a taste of the money that Netflix provides, they may want more. I know that this battle has yet to be won, but the first salvo continues to go to Netflix that continuously innovates over Blockbuster, the stagnant Goliath.

Anonymous Coward says:

Was it really netflix that killed Blockbuster?

My father left Netflix for Blockbuster for the same reason mentioned above. He liked being able to return the movies to the store, and also rent a few from the store while new ones come in the mail. But then the Blockbuster near him closed so he switched back to Netflix.

I also think that Blockbuster’s woes were caused by more than just Netflix. Cable’s on-demand offerings (many of which are free if you’re already getting the premium channel) along with Redbox were also chipping away at their business. I think Netflix gets a lot of press from the tech blogs because geeks like Netflix and like the idea of the David and Goliath allegory. I think it’s actual impact on Blockbuster’s bottom line is smaller than what people think it is. Of course, Blockbuster obviously felt the same way as they thought they had to compete with a similar service. On the other hand, Netflix obviously knew it’s own market was being threatened by streaming video. They moved into that market as quickly as they could.

jilocasin (profile) says:

Surprised they've lasted this long...

I think that what fueled NetFlix’s success was;

Much lower prices than the competition
Much simpler process

I’m surprised that their bigger competition hasn’t *squashed* them already.

The established players (think Blockbuster) were far too addicted to their late fee bonanza to think about the customer. They also overestimated people’s desire to watch a movie right-now. Apparently lots of people were willing to wait a day or two, if it means that they don’t have to worry about late fees and rushing out to the store.

Their prices keep going up and up and up. Last time I checked it cost about half the price of buying a DVD to rent one.

RedBox has the ‘must watch it now crowd’ for recent movies. At $1 a night, you can forget to return it for over a week for less than it costs to rent it from BlockBuster. Netflix has the ‘I’m not in a rush, and I don’t want to have to worry about it crowd’. It doesn’t hurt that they have a much larger selection than any brick and mortar establishment could.

I think the problem with Amazon/Walmart/etc. is a combination of:

looking for the fast buck over long term profits
paying ‘lip service’ to customer value and convenience

and the time honored companion of most online ventures;

pleasing the wrong people (mostly other executives and entertainment moguls).

Hopefully NetFlix (and RedBox) doesn’t get bought out, or loose sight of what got them where they are.

tuna says:

I can’t blame this solely on their online division. BB has made a lot of enemies out of customers over the years with the late fee policies.

I stopped going when I was charged a late fee on three movies that were put into the drop box fifteen minutes before they were due only to be told that the box had been cleared out earlier in the day and, hence, I was late.

This is not the only time that things like this happened to me at BB but it was the straw that broke the caneml’s back. I signed up for Net Filx that afternoon.

I have heard hundreds of similiar stories from ex customers over the years and there is a large group of us that are not surprised at their diffculties and are actively cheering their demise.

bubba says:

Re: Re:

I went to BB one day and was told I owed a whole slew of charges for the same reasons. I tried to explain it and all i got was ‘we can’t do anything about it, pay or we ruin your credit history’. I went home and switched to the PirateBay and now my credit history is so good i could buy a house if i wanted to…imagine a crappy nazi video store messing up your credit to the point you would be added extra points on a mortgage years later! You would end up paying like $20,000 in the long run!

Theoden (profile) says:

Re: Re:

I have to agree here. There were 2 other chains in my area when BB opened a giant store, and they overshadowed these two. More selection, more room, more copies of popular movies, friendly and helpful staff – what was not to like (except the late fee BS)?

After the other two chains packed up and moved farther away, BB scaled back on the number of copies, then on the selections, and then cut the size of the store by 50%. Helpful friendly people were replaced by the “I don’t know what customer service is” type of cashiers, and the store went down the tubes.

The good news is that there are a couple of new video stores taking up residence near by, and neither one is BB!

drone says:

RE: a few things on netflix

Jay, your second point is largely false. There are numerous physical devices one can watch netflix on without having to get a DVD in the mail, one of them most notably _is_ the TiVo, but others include such devices as the PS3, XBox, Wii, and Roku player. And no, Hollywood did not kill the innovation of streaming video to a set-top box, although they have made it harder than it should be. Not only have Netflix been keen to the idea, they have whole-heartedly eaten it up with new devices appearing regularly, and lots of households, like mine, use streaming netflix for most of our netflix uses.

jilocasin (profile) says:

Re: RE: a few things on netflix

Actually I think you are both somewhat right.

When it comes to streaming, at least on the PS3/Wii, you still need a ‘disc delivered in the mail’. The good thing is that you only have to wait once (and you don’t have to return it when you’re done).

Perhaps more a matter of their exclusive XBox deal than any hardware phobia on NetFlix’ part.

JC says:

Re: RE: a few things on netflix

I think you mis-read his post. Netflix had begun planning a device which they would market and sell to stream Netflix but they nixed it internally in favor of allowing other device manufacturers (ex. Wii, most new DVD players, playstation) to access their system.

They wisely chose to stick with what they know (excellent movie delivery) and are allowing other companies who are much better at manufacturing to build the devices for them.

In truth, not only did this free Netflix from having to make a device but it has acted as a form of free advertisement as hundreds of thousands of devices are sold with the “Netflix ready” logo printed on the box.

Jay (profile) says:

Re: RE: a few things on netflix

“There are numerous physical devices one can watch netflix on without having to get a DVD in the mail, one of them most notably _is_ the TiVo, but others include such devices as the PS3, XBox, Wii, and Roku player. And no, Hollywood did not kill the innovation of streaming video to a set-top box, although they have made it harder than it should be.”

Yes, but Netflix considered a device to market themselves. The device was to compete with TiVo but the CEO (I forgot his name) said No. Very soon afterwards, a LOT of innovators lost money in this market as it dried up. This paved the way to keep them focused on innovating. In a way, it was a blessing because they continue to find ways to creep into newer markets and aren’t bogged down by trying to maximize profits through hardware.

“Hollywood did not kill the innovation of streaming video to a set-top box, although they have made it harder than it should be.”

Actually, they have. There’s so much litigation that it makes it nearly impossible to make a new device without stepping into a mine field.

Region locking
TV to PC litigation
Streaming video to PC
Decryption technology

I could name other things but the gist of it is that if something new comes out, the MPAA tries to destroy it if it doesn’t fit their aging business model.

drone says:

RE: a few things on netflix

Jilocasin, I’m not sure what you’re talking about? I need no physical disc coming in the mail with my roku, with my buddy’s TV, with my computer, ipad, etc. Why would the PS3 or Wii be so notably different than all of the others? If the disc is in the mail, that isn’t exactly streaming, now is it?

See: instant queue != rental queue. See: “Watch now” (not “watch in 3 days”). I haven’t heard of anyone actually having to have to the DVD in the mail to stream it. Would be pretty silly of netflix, now wouldn’t it, to waste money mailing a disc you’ve already seen?

Jess says:

Re: RE: a few things on netflix

You just need to get an Install CD for the PS3/Wii. So for those specific things, you sign up, they send you an install disc, and you’re all set after that…no more waiting.

For the xbox, you can just download the install online. Apparently Sony and Netflix were having issues working out a deal so Netflix just came out with it’s own install disc instead of waiting for Sony to give the thumbs up for a download. (Sony is worried Netflix will compete with their own online movie rental)


AAA says:

Netflix is just plain better

Netflix just got it right.

Their inventory is much more vast than of their competitors for the simple reason that they started it earlier. They have some stuff that you can’t find anywhere else.

They’ve had some missteps along the way, but they acted, in my opinion, appropriately. Example: they decided they were going to do away with profiles (multiple queues within a single account). The community uproar was tremendous. Thousands of complaints filed in and Netflix reversed course and kept the profiles.

Roll forward a few more years and we have the set-top boxes that support Netflix; Netflix on gaming consoles (at last but not least, on the Wii). Impressively, all streaming is free for anyone with a Netflix account !!!!

And lastly, This month Netflix (finally) comes out with their iPhone app.

I have been a Netflix customer for ~10 years. I have occasionally suspended my account (to help finances), but have ultimately been satisfied with the service. Have had an occasional unplayable DVD, and amazingly you report it online and NF sends you another copy immediately. You don’t have to wait until your bad copy gets back or anything (how about that for trusting their customers?).

I honestly would continue to pay my subscription to Netflix for the Streaming alone. If I never received another disc in the mail from Netflix, I’d be perfectly happy. As it is, I only watch an actual disc maybe once a month. So I’m basically paying my 9.99 (or whatever it is) for an unlimited streaming service of a pretty decent collection (I admit that their streaming catalog is MUCH smaller than their disc catalog, probably by an order of magnitude, but still pretty good).

Hello Hollywood ?!?! No one (or at least some of us) wants your discs anymore !!! License all your content to Netflix for streaming and we’re good to go ! Your cost to do that is $0 !! What are you waiting for ?

Danny says:

Two things...

There are two things that I think Blockbuster could have done that would have at least given them a fighting chance against Netflix.

1. As someone above said, “So basically, instead of cannibalizing their own business, they fed it to Netflix.” Blockbuster should have gone all out with the online offering and if in the end they decided to go online only then so be it. They tried too hard to keep the online and brick and mortar offerings separate (which I find weird). If they have just let them meld from the get go they would have stood a better chance.

2. Game rentals. One of the main reasons I picked Blockbuster over Netflix was because I thought they would have had the since to offer game rentals from the beginning. I thought wrong. Just checked the site for the first time in about a month or so (I keep upwards of 40 titles in my queue at all times so I don’t have to look at it too often) and saw that they finally started offering game rentals. If they had offered game rentals from the get go they could have come in as one of the first online offerings to have games and movies. (And could have possibly headed off other sites like Gamefly.)

All in all Blockbuster is like the execs of the music/recording industry. They have more than plenty of opportunity to take the lead in their industry and take advantage of what was available. But no they decided to live in the past and they got left behind.

Anonymous Coward says:

Did NetFlix win or did Blockbuster lose? I lost faith in BB after their “no late fees” oopps, there are actually late fees deal. They pissed me off on how they treated me so I don’t use them anymore.

Companies forget how their actions play out, they begin to think that they are too big to fail, that their customers will put up with their crap. Sometimes that is true but sometimes you end up in bankruptcy. Politicians know that also, I think that the Dems won the White House more because of GWB than anything else.

Senh (user link) says:

Blockbuster's Netflix Clone Was Badly Managed

I’m surprised Netflix last this long too. They have a really good website with a great recommendation engine and a huge selection.

Blockbuster had always thought Netflix was a niche market and didn’t took them seriously. When they started to, they didn’t know how to execute. There was a new exec every six months. You can’t get stuff done when your leaders are leaving so quickly.

Gene Cavanaugh (profile) says:

Netflix and Blockbuster

What, am I reading “Moderation in all things?” – what happened to “digital Mike”, “it works or throw it out?”.

Seriously, well written – I would love to see us go back to the system of the 1800s (well, some improvements, but keep the spirit!). I may be an IP (aka patent) attorney, but I am also a loyal American. Ideas aren’t inventions until they are tied to execution! Further, “limited time” should MEAN limited time!

As to copyright, I am not sure it should exist.

Anonymous Coward says:

For a while Blockbuster’s service was substantially better than Netflix’s… maybe a bit smaller selection, but more movies for a smaller fee, and they leveraged their retail outlets to allow basically instant rentals.

But, over a few months, they eliminated everything they had that offered a competitive advantage over Netflix. After that, I switched to netflix.

I would switch again to Blockbuster if they reinstated their older policies, or allowed RENTAL OF VIDEOGAMES, or ADULT VIDEOS. Both are no-brainer ways to totally gain an advantage over netflix.

Jeremy2020 (profile) says:

The thing I find interesting is I worked for blockbuster when I was younger (1999-2000) and our store got new updated computers and new internal software that was apparently being rolled out nationwide.

The new software had an option for online rentals. We were told that it wasn’t active at the time, but users would be able to ‘rent movies online’.

They seemed to have some plans for starting some type of service a long time ago. Wonder what happened with that.

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