How To Be Less Blockbuster And More Netflix

Blockbuster should have blocked-out Netflix. They created a network of national video-rental stores, bringing convenience (and millions of frustrated “I can’t decide” Friday night moments) to America. Their eventual downfall? The late fee. Fortunately for us, their demise and Netflix’s rise is full of teachable moments. 

Nobody liked late fees. No one. Well, no one except for Blockbuster shareholders, who saw late fees as an ingeniously profitable idea. If customers hated being charged them, they’d just return their tapes on time, right? Like forcing kids to eat their veggies, late fees were a moral and public good to shareholders. Cue Gordon Gecko explaining, “Greed is good.”

In 1997 Reed Hastings did three particularly noteworthy things. A. He rented and returned a copy of Apollo 13 to a Blockbuster (late of course), B. paid a $40 late fee (it was pretty late, and this story may be apocryphal), and C. he founded Netflix. A few years later in 2000, Blockbuster did two noteworthy things of their own: They A. Reported about $800 million in late fees, and B. passed on the opportunity to buy a pesky little competitor named Netflix for a cool $50 million. The rest is history. Let’s review what went wrong and what we can learn from it. 

Seth Godin says all businesses need to ask and answer these four questions:

1. Who do we serve?

2. What do they need?

3. What do we own?

4. What do we know?

Blockbuster and Netflix served regular people who wanted (needed) the convenient entertainment of watching a movie at home. Both companies bought (owned) a physical supply of videos and DVDs to distribute to their consumers. Everything else hinged on question #4. 

Blockbuster “knew” physical locations worked and that late fees drove profits. Netflix “knew” everyone hated late fees, and that if a cheaper-than-real estate/super-convenient website could be profitable without late fees, they could take over the market. 

The world evolves. Market cycles are the lifecycles of businesses. Some businesses die off, others evolve. Netflix has been an evolutionary beast. After navigating around the late fee greed/“transition to the web” meteor that killed Blockbuster, they pioneered streaming and most recently moved into content creation. It’s worth reflecting on each of those major iterations. 

We may not be able to emulate Netflix in our respective fields, but we can use this example to understand the dynamism behind Godin’s four questions and hopefully avoid going the way of Blockbuster. The products, services and revenue streams are usually easy to see, but really listening to what our clients need and considering what we know about where we are and where we’re going is how we’ll survive.