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After the Web · Era 3 · The early Web

1985–2010Chapter 11 (2010-09-23); most of its assets were bought by Dish…

Blockbuster

A video rental chain: in 2004 it had more than 4,500 company-owned stores and revenue of $6.1 billion. In 2000 about a sixth of its revenue came from late fees. When the internet arrived, Blockbuster did not ignore it and launched a DVD-by-mail service, but almost five years after Netflix's subscription and at great expense. In September 2010 the company filed for bankruptcy.

Founders David Cook
Domains blockbuster.com
subscriptionincumbentlate-fees

In brief

Blockbuster was a video rental chain that in 2004 had revenue of $6.1 billion and more than 4,500 company-owned stores. A noticeable share of the money came from late fees: $795.8 million in 2000, 16.0% of total revenue. When Netflix's subscription came to the market, Blockbuster did not ignore it: it launched Blockbuster Online in August 2004 and eliminated late fees from 2005. This did not save the company, and in September 2010 it filed for bankruptcy. The dossier is useful because it shows the price of a leader's response: each step was logical, but together they cost hundreds of millions of dollars a year.

How it started (the founders)

David Cook opened the first rental store in 1985; before that he had worked on software for the oil and gas industry estimate. An official company document is more sparing: Blockbuster Entertainment Corporation was incorporated in Delaware in 1982, "entered the movie rental business in 1985," and on September 29, 1994, merged into Viacom. The role of Wayne Huizenga and the size of the Viacom deal (≈$8.4 billion) are known only from later retellings, and these disagree with each other rumor.

The current company, Blockbuster Inc., went public in August 1999 while remaining a subsidiary of Viacom; Viacom fully exited it in October 2004. The first "internet steps" were cautious: at the end of 2000 the company launched a trial video-on-demand service in four U.S. markets and planned a co-brand with DIRECTV.

Year-by-year timeline

Lesser-known but significant facts

  1. Blockbuster's 10-Ks for 2000 and 2001 contain neither the word "Netflix" nor the word "Enron." Netflix is first mentioned once, in the 10-K for 2004, then 3 times (2005), 13 (2006), and 16 (2007).
  2. Late fees grew faster than the company. $583.9 million (1998) → $692.6 million (1999) → $795.8 million (2000), a share of 15.0% → 15.5% → 16.0%.
  3. The company calculated the elimination of late fees in advance. In the 10-K for 2004: without late fees, 2005 would lose $400–450 million in revenue and $250–300 million in operating income.
  4. In fact, late fees made up about 14% of rental revenue in 2004, and after they were eliminated, rental revenue fell by 5.0%. In the 10-K for 2005 the company writes that the program reduced rental revenue by more than $500 million and cost about another $60 million in expenses, above the $400–450 million forecast; revenue for the whole company in 2005 was $5.86 billion versus $6.05 billion in 2004.
  5. Many franchisees did not follow the "end of late fees." At the start of the program about 550 franchise stores took part in it, and by February 2007 about 130; according to the 10-K, many franchisees did not eliminate late fees or went back to them.

Legend vs. the record

The first growth lever

The dossier's documents say almost nothing about the chain's early growth; by 1999–2000 late fees were adding a noticeable increase: +$108.7 million and +$103.2 million a year. The lever of the response to the internet was not the website but Total Access, a subscription from the end of 2006 in which a disc received by mail could be exchanged for a free rental in a store. By the end of 2006 the online service had about 2.0 million paying subscribers, and the target for the first quarter of 2007 was 3 million Total Access subscribers, but the in-store exchange cost the company about $140 million in 2007. After the change of CEO the terms were changed, and the subscribers who cost the company the most left or moved to a more expensive plan.

The paired story

The pair is Netflix: the rental giant versus DVDs by mail.

Parallels today (projects from the catalog)

What a builder can take from this in 2026

  1. Work out how much the revenue that makes customers angry brings in. Blockbuster knew the figure in advance: $400–450 million. If it is comparable to your profit, the response cannot be launched on the fly.
  2. Do not launch two products when one of them eats the other. The free in-store exchange under Total Access cost ≈$140 million in 2007. Before launch, check what a "generous" bonus for your most active customers costs.
  3. Partners are not obliged to follow you. The franchisees went back to late fees; if part of your revenue goes through partners, check whose model pays off.
  4. Advertising that a fee is gone is also subject to scrutiny. Over the end-of-late-fees advertising, the company had to enter into a settlement with 47 states.
  5. Do not build a story on a single scene. The $50 million meeting rests on a book by the rival's founder; it is not in Blockbuster's documents.

Discrepancies and what we could not verify

Sources (primary first)

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The same thing, about today

The same breakdowns, but of projects launching right now: what the product is, where the first users came from, how they charge. The card is free, the full dossier is $5 (the dossier itself is written in Russian).

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