An innovative business is one that lives and breathes out of box. Innovation is not limited to having a good idea but a combination of good ideas, good people and an instinctive understanding of what the consumer wants.
Most people born during the 80’s and 90’s remember the big blue and yellow Blockbuster sign shaped to look like a movie ticket. Founded in 1985, Blockbusted reached it’s peak in 2004, with 84,300 employees and 9,094 retail outlets across the globe. In 2010 they filed for bankruptcy, and on August 11th 2017, in Sydney, one of the few remaining Australian retail outlets will close its doors forever, representing a generational shift in the way kids of the 80’s & 90’s and the kids of the 00’s & 10’s consume video content.
So how did a company with $37M in assets, the market leader at that time in the movie rental industry and a larger workforce today than any Australian publicly listed company lose so much in just a short period of six years?
Let’s take a look at the role Netflix played.
A lot of commentary online talks about Netflix having a large part to play in the demise of this iconic company. The Netflix offering challenged Blockbuster in the market in two ways:
- How it delivered the content
- How it charged for the content
Blockbuster derived a significant amount of revenue from late fees. The problem with this thinking was that Blockbuster based its business model on penalising its customers. In terms of content delivery, Netflix appealed to those customers who found going to a store difficult, and who were happier to use the internet and shop online instead.
In the year 2000, Blockbuster had the opportunity to purchase Netflix for $50M and integrate it as part of their online strategy. Sitting at that time from a position of strength, Blockbuster chose to decline the offer as the Netflix billing model was that of subscription base with no late fees, which acted as a significant threat to their existing revenue model. Added to this, Blockbuster could not see how people would want to use the internet to select their movies rather than going into a retail store. Interestingly, in 2005 Blockbuster removed those same late fees they were trying to protect, but then reinstated them in 2010 because they were losing $300M annually.
In 2003 Netflix posted its first profit of $6.5M. In 2004, Blockbuster then decided to move into the online movie rental market reaching 2 million subscribers by 2006, however Netflix had reached 6.3 million by the same time. In an attempt to compete with Netflix, Blockbuster offered an unlimited subscription plan called the ‘Total Access Plan’. However in 2007 Blockbuster removed the offer from market because they were losing too much revenue. Due to the removal of this service, Blockbuster lost 500,000 subscribers within 3 months, followed by an announcement shortly after that they would no longer report its subscriber numbers after this date.
In a 2008 interview, Blockbuster CEO Jim Keyes stated “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.”
In late 2010 Blockbuster filed for bankruptcy.
So what can we learn from the fall of this giant?
Personally, I do not believe the competitive threat created from Netflix was the leading cause to the demise of this business. Blockbuster’s leadership team was too reliant on their dominant market position and a lack of understanding/acceptance of a changing market’s wants and needs, as seen by the CEO’s comments in 2008. I see this really as their largest failure. What Blockbuster failed to identify was that Innovation is a survival imperative. If an organisation does not change what it offers the world and the way in which it creates and delivers its offerings, it could well be in trouble as in this case Blockbuster was.
What can we learn from the disruptor, Netflix?
When looking at Netflix, a company now worth $80Bn US, they illustrate a design principle that any company looking for ideas on how to succeed at disruptive innovation should consider. It has four parts:
- Think Big
- Start Small
- Fail Quickly
- Scale Fast
Even today to in order to continue to differentiate its offerings, and appeal to a larger audience, Netflix is reinventing itself as a content creator rather than just a company that simply delivers content. You only have to look at the success of TV series like House of Cards or Orange is the New Black to see where Netflix is going with this.
Both unfortunately and fortunately, we as small, medium and large enterprises are all faced with both the challenge and the opportunity that Blockbuster and Netflix faced. The internet as a marketplace, the internet of things and online social networking in today’s world present both challenges and opportunities. Holding on to the past will get us through for a while but ultimately will always end up in failure.
The key takeaway is always to keep the customer as the focus point, to understand their needs, wants and things that they do not yet know they want, and to use that understanding to re-create your offering to meet those needs.