In 2000, Blockbuster was the top dog in the DVD rental industry. Few people would’ve guessed that a decade later, Netflix would overtake them and Blockbuster would go bankrupt. Blockbuster had the opportunity to purchase Netflix for $50 million dollars, but turned them down. In hindsight this looks like an obvious mistake, but at the time, it did not look like Netflix was going to be a huge success.
At the time, Netflix’s advantages were not apparent. It took a long time to have a DVD mailed to you. On the other hand, Blockbuster’s customers could get instant gratification by picking up a DVD at their local store. A second disadvantage of Netflix was that people didn’t really know about it. By comparison, Blockbuster stores were in shopping centers all across the United States.
One of Netflix’s advantages was that they were looking into digital distribution, which would neutralize Blockbuster’s brick and mortar edge. The second advantage of Netflix was they used a subscription model, which customers preferred because they were never charged late fees. This subscription model was a fundamental threat to Blockbuster because they relied upon late fees for their profitability. When offered the choice of purchasing a subscription, they preferred Netflix’s model.
The downfall of Blockbuster is a lesson that many brick and mortar stores are trying to avoid. Today, Amazon.com is seen as a threat to all sorts of brick and mortar stores in just about every industry. CEOs around are asking themselves if they might be the next Blockbuster.