What was Blockbuster’s Strength Became Their Downfall
Dan Miller 16 November 2013
The start of the 1980′s brought a major technological innovation to the general public–the ability to record TV programs as well as watch movies once played in the theaters in the comfort of your home. It was definitely a game changer. This was the beginning of the era of ‘video tape’ for home use. Different companies were launching this new technology–each with their own VCR (Video Cassette Recorder) that utilized its unique cartridge style and tape size. At the same time, there was another amazing invention just released called the “Laserdisc”, which could hold an entire movie on what looked like a large vinyl record, used in a Laserdisc player. All of these machines connected to your TV with an antenna cord. No sooner were VCR’s and Laserdisc players available to buy then “video stores” began opening up with movies to rent or buy. Even in my little hometown of Milan, Illinois our local roller skating rink renovated a storage space into a video store. Just starting college in my chosen field of Broadcasting, I was amazed at this new machinery. Once exclusive to TV stations, networks and production studios the magic of video tape was now scaled down to a home playing and recording format. The big decision for the consumer was deciding on what brand and format of VCR to choose–or to go with the Laserdisc player. Each had their strengths and weaknesses. The variety of choices also made it difficult for video stores to decide what formats to order in movies to satisfy enough customers.
I remember that banner day when my mom and step-dad brought home a Panasonic VCR. It was a bulky machine that weighed close to 30 lbs. They chose a VCR using the VHS tape format as it seemed to be trending as more popular. Our machine was so high-tech it even had a remote… a pause button tethered to the machine with a 15′ wire. Then you could pause a movie without getting out off the couch. We hooked our Cable TV to the machine and thought it was simply amazing to record shows and play back later–even fast forward through the commercials (if that was legal to do).
As time went on the VHS format won out has the preferred consumer video tape for home recording and watching movies. Laserdiscs went away because of limited movie selection, its higher price and the player’s lack of ability to record. Narrowing it to the VHS tape format certainly made it easier for video stores that were opening everywhere. I worked at my brother-in-law’s video store in Chicago on Irving Park Road in Spring 1984. It was about that time that single stores bought or added other locations to became small local video store chains. Having more buying power, a chain could buy both a deeper selection of older movies and more copies of newer releases that were in hot demand. New released movies could be rented out at a higher price. Once demand decreased, extra copies of these movies were offered for sale to the customer at about the same price the store had bought the video tape. Business was good. This new burgeoning industry brought many new retailers and jobs to a community.
The ’80′s also ushered in a new retail monster called the “superstore”. These were highly-leveraged chains that came to town leasing or building double, even triple, the square footage space of their locally-owned competition. The superstores would max selection in whatever was their core business, then stock a variety of other goods in other categories around that core business to entice more sales. These retailers understood the psychology and profitability of impulse buying. New superstores opening that decade included Phar-Mor, the super drug store chain, Office Depot, the super office supply chain and Home Depot, the super lumberyard/home improvement chain. Following this business model, a superstore chain rising out of Texas was about to take on the video store business. It was Blockbuster Video–and the name said it all.
Blockbuster Video began in 1985 as one store in Dallas owned by David Cook. As an expert at managing databases, David saw a lucrative video tape market wide open. After opening a few stores he built a massive warehouse for purchasing video tapes in large quantities to bulk up across a variety of movie categories. A full warehouse allowed Blockbuster to instantly stock a new store at opening with a deeper selection of old and new movies than almost any locally-owned store could acquire in four years.
A typical Blockbuster Video store occupied 5,000 – 7,000 square feet and carried over 10,000 movie titles. The store was not only organized in genres such as kids, comedy, sci fi, thriller, drama, documentaries ect., even foreign films, it also contained sections of movies grouped by their lead actors, such as Clint Eastwood, John Wayne and Al Pacino. Yet Blockbuster’s biggest strength was with new movie releases. It carried 5, 10, 15 and up to 20 copies of the same newly released movie depending on the anticipated demand. Blockbuster guaranteed up to 90% of the time to have the new movie you wanted in stock. Besides movies, Blockbuster stocked video games, soda pop, popcorn and a nice selection of candy. No typical local video store could come close to the look, layout and massive selection of a Blockbuster Video store.
When Blockbuster Video came into a market they didn’t buy up competition, they just put it out of business. Little neighborhood video stores were the first to close. Fortunately my bro-in-law sold his video store in Chicago before the onslaught of Blockbuster Video. After the small individual stores, the smaller local video store chains would shutter their doors. Essentially, only well-established video stores in good neighborhood far from a Blockbuster could survive. Even grocery stores decided their video departments were no match for Blockbuster and took that valuable store space for something that made them money. Before long in many communities Blockbuster Video were the only video stores standing and they certainly did a blockbuster business.
In their best-selling marketing book, “Positioning: The Battle for Your Mind in the Marketplace”, authors Al Ries and Jack Trout assert the ultimate goal in positioning–defining, running and marketing–your business is to become established as the top brand in awareness as well as sales within a product or service category. Your business becomes the # 1 brand in the consumer’s mind associated with that category. In the vernacular, that’s when you “own” that category. For example, Kleenex brand owns the top selling position for tissues as Charmin does for toilet paper. Southwest Airlines owns the position as top low-cost airline. When Coca Cola and Pepsi Cola battled it out as the best “cola” drink, 7 UP came around in the 1920′s with a clear lemon-lime carbonated soft drink they positioned as the “Uncola”. 7 UP has owned that position ever since as the top selling lemon-lime soda. And in the category of “video stores”, Blockbuster Video dominated in popularity and sales. Blockbuster owned the position as king of the video stores. The position was so strong that the chain’s advertising turned their name into a great modifier with the slogan, “Make it a Blockbuster Night”.
By 2004 Bloocckbuster had more than 9,000 stores and about 60,000 employes. But in a relatively short amount of time new technology would trip up Blockbuster… and eventually lead to its downfall. The video store giant never had to deal with the earlier confusion of differing video tape formats but later found itself integrating and balancing store inventory with a surging new technology. The LaserDisk made a come back; but not in its 12″ diameter size. Continued advancements in laser electronics brought us the CD audio disk in the 80′s and the video DVD disk in the 90′s. Now an entire movie with an excess of bonus tracks could all fit on a 6″ diameter disc. Consumers were excited as DVD player sales were catching on fire. To stay up with this new demand Blockbuster had to put DVD’s to the shelves right along side their VHS movie stock. The handwriting was on the wall that VHS tape was on its way out–but the transition over a few years was no doubt an annoying expense for Blockbuster. Added to that new movie inventory was the explosion of new video games available in format choices such as Xbox 360, PlayStation and Wii.
But DVD’s and video games also brought new sales to Blockbuster. This wasn’t the set of new breakthroughs that adversely hit Blockbuster. As time went on it was Blockbuster’s downfall not adapting fast enough to the even newer technologies advanced to consumers, best represented by the brands of Redbox and Netflix. These two companies rode the wave of two separate innovations that consumers grabbed on to and found even more appealing than Blockbuster’s super-sized video stores. Redbox and Netflix operated on two separate business models–yet shared two key commonalities. Both trailblazers set their course without physical retail locations of their own and decided at the start to forego the VHS tape market to strictly focus on DVD rentals. Those decisions alone not only saved them millions in overhead, they also made building a massive movie inventory much simpler.
It’s important to understand that while Redbox does not have any of its own stores, they rely on partnering with established retailers having locations that get 15,000+ shoppers per week through their doors. Redbox came out of a venture backed by McDonald’s that sold grocery staples like bread, milk and eggs out of vending machine kiosks along with other machines that rented DVD movies. Coinstar bought the concept and concentrated strictly on movie and game disk rentals. The strategy was genius. Redbox doesn’t have the high expense of a physical store and labor cost to operate it. All Redbox needs is 12 square feet in a highly visible area of the store for their automated kiosk with a web connection for credit card processing–the retailer being compensated by a percentage of the machine’s rental revenue. This tremendously lower cost of doing business allowed Redbox to rent movies much cheaper than Blockbuster, originally for just a dollar a night! The kiosks stock up to 700 disks in an over-sized looking vending machine with the automated ability to both dispense and receive DVD disks. With the last three generations experienced at operating ATM machines and pumping their own gas, consumers had no problems using a vending machine to select and pay for movies. Besides, it’s fun to shop for a movie at this automated kiosk–similar to the enjoyment of choosing a candy bar at a vending machine. And with the economic uncertainty of the 2000′s, the cheap rental price became quite popular.
A majority of kiosks are placed within grocery stores, ideally the high traffic locations sought by Redbox. Having closed their own video departments years ago, grocery stores once again enjoyed the extra foot traffic of being a destination to rent or return movies. Conversely, if needing to make a trip to the supermarket anyway, customers like the amenity of getting their movie rental and groceries at one stop. By 2007, Redbox had more kiosk locations than Blockbuster store locations, then passed Blockbuster in total rentals by 2008. Redbox kiosks carry no where near the 10,000 titles of a Blockbuster store. But Redbox wasn’t trying to over take Blockbuster’s position as top video store. It was beating Blockbuster in convenience and lower prices. Within the principles of positioning, Redbox created and owned a new position of convenient, affordable DVD rentals. But Redbox was only part of Blockbuster’s problem…
Netflix operated on another well-emerged technology–the internet. Instead of building another chain of rental stores to compete against Blockbuster, Netflix put its entire movie selection on a website. Then no different from using Amazon, Priceline or Ebay, customers could order a movie right from the convenience of home–or their desk at work. But, instead of the normal five day up to two week shipping time typical for web orders, Netflix knew their order fulfillment had to be much faster. The goal was to quickly satisfy the customer’s anticipation of watching the movies they just rented on-line. So Netflix set up an array of DVD warehouses across the country that provided 1-day mail delivery of movies to about any home address within that warehouse region. What an astute new approach to movie rentals! A large warehouse in a off-beat location is still cheaper than paying for that retail store on an over-priced retail location. Labor expenditures for Netflix were concentrated on keeping the website updated and orders fulfilled. Netflix didn’t need a fleet of delivery vehicles as the Post Office did the shipping. With such lower operating costs, Netflix could offer unlimited DVD rentals for one flat monthly fee! Netflix even covered the customer’s postage to mail the watched DVD back to the warehouse. Netflix made Blockbuster’s once brilliant business model look archaic. Even with all their convenient locations and enormous selection of movie titles at your fingertips, Blockbuster was being replaced.
If Netflix home delivery was the proverbial stake going into Blockbuster’s heart, the hammer coming down to drive that stake even deeper was the introduction of Netflix on-line movie stream. With the continual advancements in web technology and most of the nation accessible to high-speed internet, video streaming was becoming a common on-line activity. We can thank YouTube for taking those hours of our life we’ll never get back watching cat videos and bicycling fails. Aggrandized on-line video streaming meant you could watch a movie or an old TV show on the web in the comfort of your home–at the convenience of your schedule. On-line movie watching from Netflix eliminated the need of a DVD. Taking from their successful mail-delivery business model, one flat fee to Netflix gives you unlimited viewing from their entire library of movies, documentaries and TV shows. Your only hardware is a newer computer or a TV set up for Netflix streaming. Use a laptop or tablet connected to wireless internet and you can watch a movie from Netflix anywhere and anytime. This is the ultimate convenience! As Netflix on-line grew in popularity other video streaming services stepped up to compete such as Amazon and Hulu. Yet Netflix has remained the most popular on-line streaming site. In fact, Netlix as one website, represents a third of all streaming on the web. Revenues are so strong that Netflix has recently began investing into developing their own original programming–kicked off by the highly-viewed “House of Cards” series. Within a couple of years, Netflix has successfully created a new consumer category–on-line movie watching, of which Netflix is king.
To be fair to the subject of this article, Blockbuster didn’t just sit idly by as 21st century competition utilized new platforms for pushing movie rentals. Blockbuster also developed their automated kiosk system for movie vending rentals called “Blockbuster Express DVD”, aka “Bluebox”, which at one time numbered 10,000 kiosks. In addition, Blockbuster set up a DVD-by-mail service similar to Netflix. Then when purchased by Dish in 2011, Blockbuster began offering on-line movie streaming as well as on-demand movie channels over the satellite provider. But it wouldn’t have mattered if Blockbuster’s kiosks held more movies than Redbox, if the DVD mail service was a little cheaper, or if the on-line streaming looked a little sharper and cleaner. Blockbuster wasn’t the company to rush these cutting-edge services to the public first–to cut Redbox and Netflix off at the pass and be the first to present these new innovative movie renting venues to consumers. Unfortunately Blockbuster wasn’t being proactive in the development of new technology–just reactive after someone beat them to the punch. In dealing with categories and brands, the human mind works quite simple. It remembers who made the effort and splash to get there first. The brand who owns that first position is usually who gets the most business.
The truth is that it’s hard for such entrenched category leaders to believe they can be ousted from their top position. Who could take on Blockbuster Video with more stores and bigger selection? No one, directly. The real problem for Blockbuster was learning to think out their category–to seriously play the “what if” on anticipating yet uninvented opportunities or potential competition to the video store model. Instead, like many other category owners, Blockbuster management put on the blinders which prevented a clear view of competition on either side of their category. Case in point, in 2000 Blockbuster turned down a chance to purchase a young Netflix company for a mere $50 million.
Just by pure observation over the years it safe to presume Blockbuster’s chief concern was protecting their top position of the video store category. And to their effort, Blockbuster never lost that position. But while Blockbuster dominated as king of the video stores, Redbox developed and owned the position for convenient, affordable DVD rentals. Netflix created a new category to own the mail-in DVD rentals; then within a few years created and owned the movie steaming on-line category. And about the time when Redbox locations surpassed the number of their video stores Blockbuster had to be feeling the effects of lost business. Store traffic continued to decline and Blockbuster rental sales plummeted. In 2010 Blockbuster filed for bankruptcy and began massive store closings. Satellite provider Dish bought Blockbuster at an auction. Their $320 million investment was primarily for Blockbuster’s on-line library. In November 2013, Dish announced it was closing remaining Blockbuster-owned stores, ending the video store’s 28-year run.
When you think about it, in just short amount of time Blockbuster rose as big and reputable nationwide chain and then fell as it lost its usefulness to the general public. This article did a general overview of Blockbuster, leaving out many of its details, twists and turns. But from the perspective of brand positioning, the tale is not complicated. It’s a lesson of whether ownership seeks to only maintain dominion of a category, or to remain innovative and significant as a brand. Forward thinking management continuously looks for how their brand can better serve customers of their core product or service. Without concerted visionary thinking your brand goes by wayside… like horse carriages, steam tractors and the typewriter. We who lived in the late 80′s and through the 90′s will always put Blockbuster at the top of the video store category. It’s just that the video store category lost it’s relevance.
Wikipedia “Blockbuster LLC” as of 11/09/2013
CoStar website article “Blockbuster Closing Up to 960 Stores Through 2010″ 9/16/2009 Sasha M Pardy
Chicago Tribune website article “Elusive Video” 7/10/1990 Jim Sulski
Wikipedia “Rebox” as of 11/12/2013
The Hollywood Reporter article “Video Accounts for 53 Percent of Internet Traffic” Andy Lewis
CNET article “Redbox pays $100 million for NCR’s Blockbuster Express” 2/06/12 Greg Sandoval
Redbox, Redbox Profits November 2013
CNN Tech article “Your late fees are waived: Blockbuster closes” Todd Leopold