The once ubiquitous Blockbuster movie rental chain has all but disappeared today in the wake of its disastrous bankruptcy. Behind Blockbuster’s current sorry state is a story of self-inflicted injury — a tale of how Blockbuster had the path to industry dominance paved for them by Enron Broadband Services (EBS), but failed to recognize the gift.
Way back in 1999, Blockbuster had a thriving business renting out movie DVDs. This was long before Netflix or any other companies had made a serious large-scale start on video-on-demand (VOD) services over the Net. It was mid-1999 when EBS approached Blockbuster about creating a partnership to move Blockbuster into the VOD business.
Enron Broadband Services was a fledgling, but wildly innovative, company in 1999. Although EBS was only about a year old in its then-current incarnation, it had already proved itself to be a pioneering force in the industry. EBS was not the inventor of concepts such as cloud computing, services embedded in the network, and apps on demand — however, by the time EBS began talking with Blockbuster in 1999, EBS already had working versions of those technologies, in use with customers, long before these now-dominant technologies were in wide commercial use by other firms.
EBS proposed a great deal structure for its partnership with Blockbuster. The relationship would be based on what was essentially a revenue-sharing deal. EBS would do most of the heavy lifting to build a VOD infrastructure for Blockbuster, and the two companies would share the revenue from the VOD business once it was up and running.
Although EBS had other suitors for a video-on-demand partnership, it chose Blockbuster because the Blockbuster name was big back in 1999. However, EBS soon found out that Blockbuster never really seemed to have any sense of urgency about the idea of video-on-demand. Like many successful companies, Blockbuster was making so much money with its current business model that it wanted to ignore the coming changes of which EBS tried to warn Blockbuster. Basically, Blockbuster signed on to the partnership with EBS because EBS was doing all the work to launch the new operation — Blockbuster had little skin in the game of actually building the new VOD business.
Blockbuster executives never seemed to really expect EBS to be able to build a functional video-on-demand operation, at least not quickly. And yet, by the end of 2000, EBS had a robust VOD infrastructure up and running on its state-of-the-art network. All the tests of the VOD technology were successful, including testing with customers.
The biggest problem EBS and Blockbuster faced with this new VOD business back in 2000 was a lack of access to movie content. The large film corporations and broadcasters had not yet embraced the VOD concept at that time; therefore, getting them to release content for distribution via VOD was a difficult, negotiation-intensive process. The Blockbuster executives, who never liked the VOD concept themselves, used the lack of content as their excuse to abandon the partnership with EBS in 2001, saying that they wanted to stay focused on Blockbuster’s bricks-and-mortar stores rather than pursue an online business model.
Blockbuster’s stupidity in 2001 seems unimaginable as we look back on it now. At essentially zero cost to itself, Blockbuster had been handed a video-on-demand infrastructure by Enron Broadband Services. Yes, the major film studios were initially skittish about the VOD business model, but they were coming around slowly but surely, testing the market by releasing more and more VOD content over time.
As the first major entrant into wide-scale VOD movie delivery, Blockbuster was poised to dominate that emerging business and to scale up its revenues dramatically. And yet Blockbuster walked away from this gift — Blockbuster really did not want video-on-demand to ever happen because it did not want to go through the effort required to adapt to a new business model. Blockbuster’s fear of change led to its eventual withering on the vine as new entrants took over the VOD business.
Although EBS did not know it when they sought out the partnership in 1999, it seems that Enron and Blockbuster were a terrible mismatch for a business relationship — two companies at opposite ends of the innovation spectrum. Blockbuster had become a staid company, locked into a business model that it was afraid to change. EBS, on the other hand, was an exuberant upstart, full of great technologists brimming with innovative ideas, but not yet hard-nosed enough to pick its partners wisely.
Ironically, both of these companies eventually faced bankruptcy, but for diametrically different reasons. If, as many have suggested, Enron’s downfall was really the result of an excess of innovation, then surely Blockbuster’s demise was the result of a lack of innovation.
And when Enron imploded, it pulled EBS down with it, effectively snuffing out one of the most promising , but little studied, companies of the dot-com boom era.
[To read more about Enron Broadband Services, including the battle between the EBS executives and the U.S. Justice Department, check out the book, Blogging Enron: The Enron Broadband Story, by author and blogger, Cara Ellison.]
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