#35. The Streaming Wars
Part 3: Netflix vs Blockbuster.
This is the 3rd article in the series: The Streaming Wars.
This series is based on Netflix and its evolution from DVD mailing service to global streaming giant with over 212 million global subscribers, and the fierce competitions (with Blockbuster and other players) it had to overcome on the way to global success. The goal of this series is to provide practical steps and lessons with which you can apply and succeed.
In this article, we will continue the Netflix vs Blockbuster story, and the events that led to the demise of Blockbuster in the race for who would win the streaming wars.
In our last article, Blockbuster launched Total Access a service that allowed users return their DVDs to a Blockbuster store and pick up a new one, instead of waiting to order online like on Netflix. This strategy worked and stopped Netflix’s subscriber growth in its track.
Prior to this strategy Blockbuster had tried everything from copying Netflix’s website to sending spies (posing as Netflix users) to Netflix’s distribution centre to crack the ‘secret sauce’, to no avail. But just when success seemed guaranteed a new player enters the fray.
Enter Carl Icahn
Carl Icahn is the 86-year-old billionaire Wall Street investor with a net worth of about $17 billion. He has been investing since the 1960s. A quick google search returns terms like ‘Activist Investor’, ‘Corporate Raider’ and ‘Most Feared Man on Wall Street’.
His strategy involves buying undervalued stocks and pressuring management into making changes (cost cutting, asset sale, or share buyback) that benefit shareholders. This produces significant returns but often left his target companies ‘mortally wounded’.
Several companies such as RJR Nabisco, Motorola, and Phillips Petroleum, have experienced ‘Icahn’s Lift’. Once he sets his sight on you, you know you are in trouble.
In 2004 he set his sights on Blockbuster.
Blockbuster’s $700 million bid for Hollywood Video caught his attention. Icahn planned to profit from both sides of the deal. He bought $150 million worth of Blockbuster shares and $60 million in Hollywood Video shares and sat back and waited for the merger to conclude.
Unfortunately, The Federal Trade Commission (FTC) did not support the deal and another video rental company — Movie Gallery — made an offer of $1.1 billion for Hollywood Video and won. Blockbuster had to drop out because of its existing debt of $1billion gained from its parent company Viacom prior to becoming independent.
Icahn was furious. First, he demanded a special dividend for his shares and was flatly rejected. Then he launched a proxy fight for control of Blockbuster’s board by giving critical interviews to the press and writing to shareholders.
He won, gaining a sit for himself and 2 others handpicked directors. He effectively gained control of the board and tried to fire John Antioco as the CEO.
He would have won except that John had a clause in his contract that if he was fired, he would be compensated to the tune of $54 million.
Knowing he could not get him removed, Carl Icahn began to frustrate management by constantly second guessing their strategy (growing the online business and removing late fees), asking that board meetings be held at his office. Psychological warfare.
He figured if John resigned willingly, he would not get any of the compensation, which he did not.
With that context in mind, let us return to the Netflix vs Blockbuster battle from our last article.
In the episode above of Business Wars: Netflix vs Blockbuster the battle between both companies is raging on at great cost, although Blockbuster is winning through Total Access. So, Reed Hastings of Netflix requests a meeting with Blockbuster’s CEO John Antioco at his vacation home.
At this meeting, Reed proposed that Netflix buy Blockbuster’s subscribers for $200 per subscriber resulting in a total of $600m (for 3million subscribers).
John Antioco agreed to propose this to his board, but what he did not tell Reed Hastings was that he was going to recommend they reject it and let Netflix die.
Blockbuster: The Board meeting
Its Feb. 2017, John Antioco walks into the Blockbuster board meeting room. His excited about the success of Blockbuster Total Access program against Netflix. His deputy Shane Evangelist presents the latest performance reports, Netflix’s proposal, and his recommendation to reject it.
This is shown in the episode below of Business Wars: Netflix vs Blockbuster.
Blockbuster Online is adding 25,000 subscribers a day thanks to Total Access. At this rate we would have over 4 million subscribers in 6 months. We need 5 million subscribers just to breakeven and stop the losses we take on every time a subscriber swaps out an online DVD for a free store rental.
We don’t want to sell for the price Netflix is offering, let’s just keep doing what we are doing to make sure online grows. We have all the momentum so let’s just hang on a little longer.
- Shane Evangelist
Icahn barely hears what was being said, he had been trying to oust the CEO John Antioco and this latest (positive) performance by Blockbuster would make that harder.
The next item on the agenda was the approval of annual bonuses for John Antioco and his executive team. This was routine, and the board approved all the bonuses, until it came to that of John Antioco which was $7.6 million.
The board led by Carl Icahn decided that his bonus would be cut by half, despite his contract. He rejected it. A few weeks later they sent him a check of $2m far less than the half bonus he was promised.
He returned it.
Carl Icahn went on the offensive publicly criticizing John Antioco’s contract.
Just days before the case went into arbitration Icahn called Antioco and over a long phone discussion they agreed that John Antioco would leave the company in July 2007 and would be paid an exit package of half the initial $54 million plus his full bonus of $7.6 million.
He donated his full bonus to his favourite charity: The Boys and Girls Club of America.
New CEO, Different Strategy
Blockbuster brought in a new CEO James Keyes.
He decided to abandon the previous online strategy, even though Blockbuster Online was growing incredible fast. He increased prices for online customers, significantly cut the marketing budget for Blockbuster Online, and focused on the store-based side of the business.
They needed 5 million subscribers to stop losses and breakeven and were almost there, cutting marketing and the Total Access program would stop growth.
At the end of the year, Blockbuster Online had lost half of its total subscribers and all the members of the senior management (including Shane Evangelist, the head of Blockbuster Online) left the company.
Netflix started growing again.
Blockbuster’s revenue declined significantly, and 3 years later Blockbuster filed for bankruptcy on Sept 23rd, 2010.
In our next article, we would examine the lessons learnt from Netflix vs Blockbuster. Is there anything else Blockbuster could have done? And what’s next for Netflix?, this and many more would be considered.
If you think this is the end of the Streaming Wars, think again.
Bye for now.
Thanks for reading and see you next week.
You can catch up with the past articles in this series: Part 1, Part 2. I previously did a strategic analysis on Netflix, you can also use this framework to analyse other companies.
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Racing Towards Excellence.