Understanding the Blockbuster Business Model

For many years, families made a trip to Blockbuster to rent a movie. It was a lot like going to the library. You’d browse the store, pick up a new release for a couple bucks, and have a couple days to watch the film. If you brought it back late, you got late fees. Many blame Netflix and other online streaming services for the downfall of the Blockbuster business plan, but it didn’t have to be that way.

In the year 2000, Reed Hastings, who is the CEO of Netflix, offered to manage an online streaming service for the Blockbuster team. Netflix would essentially become a subsidiary of Blockbuster. Hastings got laughed out of the meeting. Fast forward to 2015 and Netflix is winning Emmy Awards for independently produced television has a valuation that hovers around $30 billion. Blockbuster filed for bankruptcy in 2010.

What Was the Problem of the Blockbuster Business Model?

Although no one would want to admit it, Blockbuster didn’t make much money from the simple rental of movies. They earned their profits by charging late fees to customers. Netflix could completely change the dynamic of the business profile of Blockbuster by offering a late fee free experience. People could keep the movie for however long they wanted and just pay a monthly fee. Even the postage was pre-paid.

What makes more sense to the customer? Patronizing a business that will charge you late fees for being 10 minutes late? Or having a fee-free existence? Even responsible customers could damage Blockbuster’s profit profile. If they returned movies on time all the time, there would be no real way for the company to make money.

Consider the Threshold Business Model

To be fair to Blockbuster, Netflix had its own disadvantages. It took close to a week in the early days of the service to replace movies. You had to constantly update an online list and hope that you’d get the next movie you wanted to see. There was no guarantee. It was not unheard of for people to go to Blockbuster to pick up the movies they wanted to see immediately and then use Netflix for the other movies.

What wound up destroying the Blockbuster business model was the successful implementation of what we’ll call the “Threshold Business Model.” It is based on the theory of collective behavior. As more people experienced Netflix, they enjoyed it, told their friends, and eventually the word of mouth created new subscriptions. People still held onto Blockbuster, but the peer pressure of everyone going to Netflix and liking creates a threshold that eventually allows one business to dominate and the other to file for bankruptcy.

A Good Decision, But a Moment Too Late

Once the Blockbuster model was threatened, it made shifts to create an online streaming platform. Late fees were eliminated. It was a $400 million gamble that was proposed. Create Total Access for Blockbuster and let people keep movies indefinitely without late fees. It created a mutiny within the company and eventually the gamble was reversed.

Would the gamble have paid off? No one knows. In retrospect, the Blockbuster business model should have tried it since they’d be out of business 5 years later. At that time, however, $400 million in 2005 was money that many felt Blockbuster couldn’t afford to lose.

Is the Blockbuster Business Model Still Viable Today?

The idea of penalizing customers to make money is a bad business model. A business should be creating a positive income source rather than a negative income source. The Redbox business model is an example of this. Instead of charging late fees, they charge customers a daily rental fee up until a certain point and then the movie becomes theirs. Instead of late fees, people choose to pay extra rental fees instead.

Is the structure of Redbox the sames as the old Blockbuster business profile? Yes. There’s just one key difference. Instead of demanding compliance, Redbox puts the choices in the hands of the consumers instead. This is where Blockbuster could have survived if they had adopted a similar model. Redbox is highly competitive and growing despite the prevalence of streaming services.

What is the lesson to learn? It is important to focus on the positive attributes of an interaction with a customer instead of the negative attributes. Fines and penalties work for libraries because they receive public funding. It didn’t work for Blockbuster because eventually their customers got tired of being penalized. The writing was on the wall, but it was ignored. Observe all trends, be proactive, and that will lessen the risk of a business today suffering from a similar fate.