DON'T BE A BLOCKBUSTER!

LOSING SO SLOWLY YOU THINK YOU’RE WINNING!

Yes, we’re going to talk about this one again! I did an episode on this topic well over 2 years ago, but I find myself talking about this topic over and over in a variety of conversations about growth, change, the evolution of business and customer demands, and how hubris, which is an overabundance of pride and self-confidence, have led to the downfalls of nations, people, and companies since time immemorial. What are we talking about? We’re going to talk about the rise and fall of Blockbuster and the lessons learned from it. And yes, we cannot talk about the rise and fall of Blockbuster without also talking about the rise of Netflix. 

It would be very easy to dismiss the downfall of Blockbuster simply as the natural evolution of the entertainment business and trend toward digital streaming, and away from renting physical DVDs and VHS tapes. If you’ve never dug into this story, it would be very easy to dismiss the Blockbuster demise as just that, the end of one era and the beginning of another. However, being the student of business I like to think myself to be, this is an awesome case study to learn from. For the same reason we autopsy bodies to determine a cause of death, we can autopsy the death of businesses and whole industries to glean some lessons that might help us avoid the same demise ourselves.

If you’ve ever taken any first responder medical training, you’ll know the acronyms MOI and NOI, which stand for mechanism of injury and nature of injury. As a first responder, one of the first things we do is determine if the scene is safe before rushing into a potentially chaotic and dangerous situation only to make it even worse by our own presence. If you come across a car accident, you first determine if there is an existing threat of causing further accidents by you being there, is there a gas leak and explosion hazard, is this an ambush, is it safe to approach, and so on. You quickly assess the scene to determine if it’s safe to enter. Then, the very next step is to determine the number of people in need of help and the ABCs of medical response which stands for airway, breathing, and circulation. 

I’m not going to go through the whole process of emergency medical response on this episode, but I want to point out the similarities between emergency medical response training and assessing a business. One of the things a first responder has to consider is the mechanism of injury (MOI). If it’s a car accident, the mechanism of injury could be blunt trauma, there could be deceleration injuries, there could be penetrating injuries, and so on. Having some idea about the mechanism of injury can lead the responder to properly and rapidly assessing the nature of the injury (NOI) in order to provide some basic level of care until the next level of care arrives. Knowing the mechanism of injury can also help the responder find potentially life threatening hidden or internal injuries that even the victim doesn’t realize are present. 

When a business fails, especially one as massive as Blockbuster was at the time, deserves a full assessment to determine the mechanism of injury, as well as the nature of the injury or injuries that caused its demise. And that’s what this episode is about because the reasons are very important to learn from if you don’t want to become a victim of the same causes. 

You might be tempted to think that you, as an appraiser, an agent, maybe a lender or some other type of business, couldn’t possibly fall victim to the same forces as what took down Blockbuster, but you’d be 100% wrong in your thinking. In fact, I see it happening every single day in my own industry, the appraisal industry, but not necessarily by a big company but by tens of thousands of independent companies called appraisers, Realtors, and loan originators. You might also be tempted to simplify or reduce the downfall of Blockbuster to the rise and dominance of Netflix, but that would be a mistake because it would deny you the opportunity to learn from story. 

The downfall of Blockbuster is nuance and multi-faceted, for sure, but there are a plethora of lessons to be learned from the story. For your convenience, I’m going to condense the story for you, and also give you 3 vital lessons sifted from my research of this little business case study. 

As a brief recap of the rise of Blockbuster, the first store opened in Dallas, Texas in 1985. It was founded by a former oil executive named David Cook. He saw the demand for that kind of entertainment and also had some programming experience, so he developed a state-of-the-art bar coding system to track all the titles and rentals in each store. Over the next 10 years or so, Blockbuster added video game rentals, DVDs, a rewards program, and music rental and some 9000 brick and mortar retail stores. They were growing like gangbusters and were the 800-pound gorilla in the industry. In fact, they were more like the $800,000,000 gorilla because that’s what their revenue was at their peak. 

The problem with Blockbuster, which didn’t appear to be a problem for them for a long time, was that about 15% of their revenue came from punishing their customers with those dreaded late fees. Granted, it was the accepted standard for that industry at that time, but it was still a thorn in the side of the customer. In 1994, Blockbusters biggest investor, Wayne Huizenga, the owner of Waste Management, sells Blockbuster to Viacom for $8 billion dollars. Probably one of the smartest investor moves ever since Blockbuster’s future was beginning to experience some high-speed wobble with competitors like Family Video and Hollywood Video taking some of their market share. 

Fast forward to 1997-98 when Netflix was founded. Although not even a bit player in that market, the idea was born out of, you guessed it, a $40 late fee that Netflix founder, Reed Hastings, had to pay for being a couple weeks late on returning the Apollo 13 VHS tape. 3 years later, in the year 2000, Reed Hastings and Marc Randolf, the founders of Netflix, approach then CEO of Blockbuster, John Antioco, and offer to sell Netflix to Blockbuster for a meager $50,000,000. Sounds like a lot of money, but, in retrospect, a mere drop in the bucket relative to the value of Netflix today, which is somewhere between $100 billion and $200 billion. 

Here was the problem for Blockbuster at the time: of their $800,000,000 in revenue, $120,000,000 to $200,000,000 came from smacking people like you and I in the face for returning videos late. Not only that, but to implement the Netflix system, they’d have to invest another $200MM. So, as they saw it, buying Netflix and evolving with the times was going to cost them around $400MM. What did they do? They literally laughed at the Netflix founders when presented with the offer to buy them out. 

Fast forward to today, Netflix is a behemoth, Blockbuster went bankrupt. So, here are the lessons to be learned from this story. And remember, it’s not so simple to just say that Netflix put Blockbuster out of business because that would be too easy, and all the business lessons would be lost. Blockbuster put Blockbuster out of business through a long series of missteps and missed opportunities that many businesses and businesspeople are facing similarly today.

Lesson number 1: Identify the real business you’re in and you win, fail to and you lose, even if it’s over a longer time horizon. Blockbuster absolutely dominated the landscape for video and entertainment rental from 1985 until the mid 2000’s. Even with competition like Family Video and Hollywood Video, they were doing well. But, they forgot what business they were in! They were in the business of making people happy. They did it better than almost anyone else for many years. In fact, they did it so well that the Theater business suffered when Blockbuster came on the scene. 

However, when they lost sight of what they were in the business to do, the downfall began. They started to think they were in the business of punishing people for not returning VHS tapes when they demanded them. That doesn’t make people happy, it pisses them off! When you lose sight of the real business you’re in, or worse, fail to properly identify the real business you’re in, you’re on the path to extinction. Gary Keller, the founder of Keller Williams, coined the saying that ‘sometimes you’re losing so slowly, you think you’re winning.’ Appraisers make this critical mistake daily. They think they’re in the business of providing high quality opinions of value to people and businesses that care about that when, in fact, they’ve never asked their clients what they really want. 

Lesson number 2: Adapt or die. This one is pretty simple friends. There are few examples from the business world more poignant than this one. Blockbuster failed time after time to see the writing on the wall. When DVD’s arrived on scene, Blockbuster was late to the game and others established themselves first. When people screamed about late fees and how they were leaving for other services, Blockbuster ignored them. When Netflix offered them the deal of the Century and offered to run the mail order portion of their business going forward, they laughed at them. When Netflix started to have some success with their mail order business with no late fees, Blockbuster finally stepped up and canceled their late fee program, but it was too late. 2 years later they abandoned that campaign and reinstated the late fees. 

When Netflix was absolutely hammering their business model in the mid 2000’s, Blockbuster tried to step up with those little rental kiosks around town. The problem with this was two-fold; Redbox was already dominating in that arena, and the technology was already outdated. Not to mention, you still had to pay late fees. In fact, in 2008, when Netflix was flying high and proving their monthly subscription business model with no late fees, the then CEO of Blockbuster, Jim Keyes, said this, “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.” Did they try to adapt and learn from what somebody else was doing and doing well? Nope! Did they see the writing on the wall based on what the Netflix customers were saying with their dollars? Nope! 

We can see examples of this all around us, friends! Forces screaming for changes and demanding that certain business models adapt or perish. What do those businesses and people do? Yell, scream, complain, bitch, moan, and cling to their old business models and tools without ever asking their clients and customers what they want. Appraisers especially are having their Blockbuster moment right now. Their clients and customers have been demanding faster, better, clearer, and more consistent for a decade now. And, while some have stepped up and given them what they’ve asked for, the vast majority have not, choosing instead to dig in their heels and demand that their clients and customers adapt to their ways of doing things and their views on how it should be done. 

I won’t be hyperbolic and say that this is the worst I’ve ever seen when it comes to an industry that can’t get out of its own way, lots of industries and businesses are like this. Businesses are run by humans, and humans have egos. It’s when we let our egos run our businesses and industries that things go pear shaped and we suffer the consequences. Blockbuster let its ego get In the way of good decision making and it cost them their business. In fact, many people don’t know this, but after Blockbuster turned down the Netflix offer, eventually they realized that this subscription and streaming thing might have some legs after all. Who did they hire to develop and manage their subscriptions and streaming service? None other than Enron! If you aren’t familiar with Enron and what caused their demise, just Google it and learn how laughable that move was in the downfall of both companies. 

You will adapt or you will perish, friends. That’s not me saying it, it’s been said for thousands of years. Darwin told us back in the 1800’s that those incapable of adapting will eventually be culled from the branches of the ever-evolving tree of life. It’s as true in business as it is in biology. When your customers and clients are telling you what they want and what they will pay for, it is wise to listen and adapt, even if your ego is screaming at you to fight it with all you’ve got.

The third lesson from the rise and fall of Blockbuster is that, when you let your customers’ needs and wants drive your innovation and systems, you always win. Blockbuster forgot what business they were in and relied too heavily on their late fee model to drive cash flow to pay for a bloated brick and mortar system. Instead of adapting to what the market was demanding, they yelled back at their customers and effectively said, ‘you don’t know what you want, so we’ll tell you what you need! This might work in a doctor’s office, or at your counseling appointment, but it’s not advised when it’s at the people paying for the service. A customer driven approach will always win, period, full stop!

If you never ask your customers what they actually want, you’ll never know what or how to deliver what they need. A corollary to this lesson is that a customer’s silence should never be taken as tacit approval that what you’re doing is right or the right way. Just because somebody doesn’t speak up and tell you what they want does not mean they like what you’re delivering. I hear this all the time from appraisers. When I ask them if they’ve ever talked to their clients and asked them honestly what they want, they say, “well, they’ve never complained about my service, and they keep sending me orders.” 

Friends, just because somebody doesn’t complain, and just because they might continue to send you business for a period of time, it should never be taken as approval of what you’re offering. Sometimes people have no other choice. Sometimes they disappear before you really notice them being gone. Sometimes it’s only after somebody better comes along and shows them what real service is like that they wake up and your business starts to lose. Remember, sometimes we’re losing so slowly we actually think we’re winning. It’s only after it’s all gone that many people wake up and realize it’s too late. 

It might not be too late for you, my friend, but I would recommend some deep thinking about the 3 lessons from the rise and fall of Blockbuster and how it might apply to your own business is you don’t want to end up like them. It wasn’t Netflix that forced Blockbuster into bankruptcy, it was the blatant arrogance of their own leadership and the people running the system that caused their downfall. It was their inability to read the writing on the wall, adapt to the desires of their customers, recognize some very real threats in the market, and their inability to reinvent themselves when all the signs were saying it’s time. Blockbuster was so busy trying to protect a dying business model that they failed to act. Remember, it took about 10 to 12 years for Blockbuster to eventually close up shop. It didn’t happen overnight. It happened so slowly they thought they were still winning. 

Until next week, my friends, I’m out…