Global
28 August 2020

When Failure to Innovate Becomes a Blockbuster Problem (and the Netflix Inverse)

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In Recode’s Land of the Giants podcast, an early episode covers a popular case study of contrasting businesses. Infamous to a degree, the details of the rise of Netflix to digital dominance and the spectacular fall of Blockbuster as both a brand and service presents remarkable lessons for innovation teams, both corporate and startup alike.

The timeline specifically provides the most salient takeaways of how Netflix continually pushed innovation at every chance and how Blockbuster dismissed an agile, adaptive mindsight even with multiple opportunities. And this was no small business. At its peak, Blockbuster had $6B in revenue and more than 9,000 stores world-wide. 

Now they have only one. It’s in Bend, Oregon. 

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Source: voanews.com

This post will layout the key dates of the Netflix/ Blockbuster history, and then look to other examples for how to apply this information to the general economic uncertainty for innovation in 2020.

The Netflix/ Blockbuster timeline

1997: Netflix was founded.

While it seems strange to think, Netflix is almost a 25-year-old company. The main motivator for creating the company was that the technology of DVDs was much easier to store and mail than VHS tapes. 

Netflix founder Reed Hastings saw an opportunity similar to early Amazon with bookselling. Netflix offered an easy, browsable experience that included the renter not needing to go to a brick and mortar, and most importantly, no late fees. Out of all its shortcomings, Blockbuster customers hated late fees the most, though they made up, at one time, 70% of Blockbusters profit.

2000: Netflix was for sale. 

Right around the dot com bust, Netflix offered the company to Blockbuster for $50M, really not an extravagant cost for a $6B revenue business. However, Blockbuster felt unthreatened and declined the sale. 

Netflix decided to double down on their strength, delivering a wide variety of titles to people fast and simply. 

2004: Blockbuster starts an online delivery service. 

A full seven years after Netflix began, Blockbuster launched their online service that looked to duplicate, almost exactly, the Netflix experience. They have one upper hand – brand recognition. So with a huge Superbowl ad, they gain a million subscribers in nine months. It took Netflix five years to gain that many subscribers.

2005: Blockbuster tries to corner the market. 

To try and win the market, Blockbuster took away late fees, and also offered in-store returns with immediate new rental for online subscribers. They were losing about $2 every time someone returned their mail rental to a store, but it was working. Netflix started to lose subscribers. 

Takeaway: They largest takeaway from this tactic is that Blockbuster was actively RESPONDING to Netflix. They were not particularly at all interested in actually INNOVATING for the market place, or at all for its customers.

2006: Netflix innovates, again. 

With a subscription war, Netflix begins to offer online streaming of their content. Blockbuster does not have this capability. 

2008: Recession. 

Lack of financial regulatory oversight leads to a global economic recession. 

Blockbuster faces problems with repaying debt they’ve accrued, hindering their strategy to drive Netflix out of business. Retrospectively, Hastings, Netflix’s CEO, admits that had Blockbuster not had problems with debt, they would have won the subscription battle, and drove Netflix out of business.

2009: More innovating from Netflix.

Netflix offers a $1,000,000 prize for the contest of who can write a better algorithm for their video suggesting technology. 

Takeaway: Even in a recession, Netflix pushed for continuous innovation.  

2010: Blockbuster filed for bankruptcy.

The beginning of the end. 

2013: Netflix started providing original content. 

With competitors diminishing, Netflix continued forward with their own original content, allowing them to own more of the rights of what they offer on their platform and to their customers. 

2016: Netflix jumps into feature films.

Netflix starts producing feature films that have wide theatrical release in international cinemas. This allows them to be considered for film awards and start to disrupt large feature studios. 

2019: Netflix purchased their own cinema.

Netflix takes over the lease for The Paris theater, a 71 year old cinema in Manhattan. This allows an all-Netflix all the time physical cinema.

Innovation Is Constant

As noted above, the two biggest takeaways from this time of two different companies is:

  1. Blockbuster: Failure to think forward and responding to the competition instead of proactively leading the market. 
  2. Netflix: a persistence to be agile and always be evolving – leading the market. 

A further important note about Netflix is that even over the span of two different economic recissions in 2001 and in 2008, they pushed forward with innovation instead of acting conservatively. Had Blockbuster been more open to market evolution and the roles new startups can serve to help an established corporation, they would have purchased Netflix, and perhaps even allowed them to drive their online presence. 

As 2020 continues forward in an economic nightmare, innovation needs to be top of mind for both startups and corporations alike. 

We wrote two different pieces recently about corporate innovation with startups and startup accelerators, and particularly how corporations need to invest hard into innovation right now, during economic recessions. 

7 Ways Corporations Benefit From Startup Accelerators

In Recessions, Investing in Innovation is Essential


Two Concluding Examples

In addition to the saga of Netflix and Blockbuster, there are many other examples of established companies failing to innovate, however the two below, one big and one small, are good food for thought.  

Apple 

Apple did something gigantic in 2001, which extraordinarily reshaped their identity. 

From the Huffington Post

“While Apple actually got its start in 1975, the Apple we know today largely came of age… by the middle of 2001. The dot-com bubble had burst - leaving a sour taste in the mouths of many when it came to anything involving newfangled technology. That didn’t stop Apple’s Steve Jobs from commissioning a team of engineers to whip up a prototype for a new personal music player, a gadget later dubbed the iPod.”

Oracle and Ksplice

It doesn’t even have to be that big and flashy as monoliths. A smaller example that comes to mind is in 2010, when Ksplice, a startup that eliminated rebooting for system updates, fresh off of winning $100k at the MassChallenge awards, was quickly bought by Oracle. Even in low economic times, Oracle remained invested in innovation. 

 

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