One of the great business anecdotes regarding the perils of shortsightedness is the fall of Blockbuster Video, especially in light of how that company had multiple opportunities to buy Netflix but declined to do so. Of course, we all know today that Netflix is a behemoth in the world of media and Blockbuster sits upon the ash heap of history. This fact has caused many to ponder what might have been if Blockbuster had said yes all those years ago. Might they still be around today?
Not That Simple
Of course, this anecdote oversimplifies what really happened in the early 2000s, back when Netflix was desperately trying to convince Blockbuster to buy them. This was long before online media streaming, long before Netflix was producing its own movies and television shows. In those days, Netflix was merely a DVD-by-mail rental company, one that was losing tens of millions of dollars per year. The hubris of Netflix was such that despite a dysfunctional business model, the company’s leadership thought that Blockbuster should purchase them for $50M but still allow them to operate mostly independently as Blockbuster’s DVD-by-mail service. And for what? A business with a brand name that was largely unknown at the time, and a team of guys to run a by-mail service that was losing money?
Blockbuster’s Real Problem
The truth is, Blockbuster’s real problem was not a shortsightedness when it came to the next wave of technology. (Netflix hadn’t even figured that out until several years later.) Their mistake is far more tragic: Blockbuster had a customer service problem. You see, as it turns out, an outsized portion of the company’s profits were actually derived from late fees—something on the order of $140M in revenue every quarter. Consider the reality of that for a moment: this was a company directly profiting from the frustration of its customers. While you can rightly point out that the customers were responsible for returning their rentals late, none of these people were happy to be penalized. This policy created an adversarial relationship with the company’s customer base, one that critical to the chain’s profit model.
Bait and Switch
In the ensuing years, competitive pressure (from the likes of a now healthy Netflix, still a DVD-by-mail company, as well as Hollywood Video, another in-store movie rental chain) convinced Blockbuster to eliminate late fees beginning in 2005. Knowing that doing so would damage the business’s valuation, Blockbuster management pulled a bait-and-switch of sorts: if a customer was a week late on returning a movie, the company would simply charge that customer as if he or she had bought it rather than rented it. On its face, that seems fair, especially since the customer would then still have the chance to return the movie later to recover that charge; however, the company would then charge its customers a “restocking fee,” which many interpreted as a late fee by another name. The company was subsequently sued for false advertising around the country, further damaging its reputation.
The End
Blockbuster would make other critical mistakes, including a botched attempt at launching its own DVD-by-mail service to compete with a then-surging Netflix that had finally figured out its own business model. This attempt cost the company millions, and when combined with the large debt the company already had, led to its collapse. (Blockbuster paid a $5 dividend per share when it separated from Viacom in 2004; it was forced to take a nearly $1B loan to cover this. When Blockbuster filed for bankruptcy six years later in 2010, it was still in debt to the tune of a billion dollars.)
If Blockbuster had actually chosen to purchase Netflix back in 2000, it’s unlikely this would’ve changed the course of the company’s future much. The company predicated too much of its profit on penalizing customers and made bad decisions otherwise. The biggest difference, then, is that instead of an alternate reality with Blockbuster taking the place of what Netflix is now, neither would exist as Blockbuster crashed and burned anyway.
Lessons
Blockbuster existed in a time of great upheaval: the movie rental business went from VHS cassettes, to DVDs, to DVDs-by-mail, to DVDs-by-kiosk (e.g. Redbox), to online streaming within a 7-year span (2000–2007). While most of us will never run a business contending with such seismic industry changes in that short amount of time, we should remember that Blockbuster’s problems were not about failing to navigate change. The company failed because it didn’t value or respect its customers when it played gotcha games with its late fees and then attempted to bait-and-switch those fees later.
The lesson we can learn is that we should always predicate our business models on a superior customer experience. This starts with a great product, sure, but this also means employing a well-trained and empowered staff that is capable of earning customer loyalty through respect and gratefulness. In other words, don’t run a business that thrives on an adversarial relationship with its patrons. Appreciate the customer’s patronage, and he shall reward you with repeat business and referrals.
Want to learn more about measuring and training your employees on their customer service and sales skills? Want feedback on whether your company’s processes are friendly and friction-free? Send us a message today, and let’s start talking about how you can take charge of your company’s reputation in 2023.
Speaking of, Happy New Year from all of us at The Brandt Group!
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