Blockbuster: How DVDs & Late Fees Sunk The Movie Rental Giant

In 2000, Reed Hastings, founder of then wet behind the ears rookie movie service Netflix, flew to Dallas, to meet with John Antioco, CEO of then behemoth movie rental company, Blockbuster.

Hastings proposed a partnership to Antioco:

Let Netflix run Blockbuster’s brand online and in return Blockbuster would promote Netflix in its stores.

And wouldn’t you know it, Hastings got laughed out of the board room.

In 2000, Blockbuster topped the video rental industry, with thousands of locations, millions of customers, huge marketing budgets, and efficient operations.

It dominated the competition.

So it’s no surprise Antioco’s team laughed at Hastings’ proposal.

Not only did BlockBuster miss an opportunity to partner with Netflix, but they also turned down a chance to buy them for a mere $50 Million.

But Blockbuster had a hidden weakness, clear to no one at the time.

Blockbuster’s Late Fee Fiasco

Its main revenue stream came from late charges.

Blockbuster’s profits depended on penalizing patrons who held onto their movies and games longer than their rental period.

Late charges are a key part of Blockbuster’s business model, and if they wanted to compete with Netflix or other streaming services, this model would need revamping.

In 2000, Netflix mailed videos to customers.

Netflix’s early adopters convinced the late majority and laggards of its brilliance.

As Netflix gained steam, Antioco became worried.

And so, in a bold move, Antioco discontinued late fees and invested heavily in a digital platform to ensure Blockbuster’s future.

Jim Keyes, one of Antioco’s lieutenants, pointed out the cost of dropping late fees totaled $200 Million and another $200 Million would be charged to launch Blockbuster online.

This damaged the company’s profitability.

DVD Deals Another Blow to Blockbuster

The biggest disruption to Blockbuster’s business came when movie studios switched to DVD format.

They offered movies at prices everyone could afford, as opposed to selling VHS tapes for insanely high prices, which made Blockbuster appealing in the first place.

With this switch, Wal-Mart, Best-Buy and Target became Blockbuster’s biggest competitors.

They priced movies at or below wholesale costs.

It makes more sense for a customer to buy the movie for $5 than to rent it for the same price from Blockbuster.

Antioco’s decision making lost him his job in a 2005 compensation dispute with Blockbuster’s board of directors.

The board appointed Keyes CEO and he immediately reversed Antiocos’ changes in an attempt to increase profitability.

It wasn’t enough as Blockbuster filed for bankruptcy 5 years later.

Dish Network to The Rescue?

Dish Network brought the company out of bankruptcy for $320 Million in hopes of keeping 600 Blockbuster stores open for business.

However, in 2013, Dish Network announced it would be closing the remaining stores.

All that is left of Blockbuster is one lonely store in Bend Oregon.

They still have 4000 accounts and sign up new customers each day, although it is mostly a tourist attraction for those in need of 90s nostalgia.