No matter what business you’re in, you can’t ever take your finger off the pulse of future trends driven by technology and evolving customer tastes. Look no further than our society’s current movie consumption habits for an example of what to do and what not to do.

The Rise and Demise of Blockbuster

In the 1980s, people were just buying their first VCRs. They were so pricey, it seemed you almost had to take out a home equity loan to cover the cost. Remember?  The video rental industry sprouted quickly thanks to the efforts of a bunch of small, nimble entrepreneurs who opened shops in their areas. Then along came Blockbuster, using sophisticated operations and technology to quickly become the dominant force in the market.

Blockbuster exploded into a multi-billion dollar company by applying a simple, traditional business model to a new technology in the 1980s and 90s. For decades people had been renting things—cars, lawn equipment, plates and chairs for wedding receptions, even RVs. Blockbuster merely substituted video cassettes for plates and chairs, and voila!  The company cleaned up.

At Blockbuster’s peak in 2004, the company operated more than 9,000 stores. The undisputed market leader also had become the darling of Wall Street, with a long list of suitors hoping to acquire the company. The business was on autopilot with expected double-digit sales growth as far out as any analyst could imagine. 

Aside from Blockbuster, the movie rental business was very fragmented: lots of small, locally-owned stores, and just a few regional and national chains. Blockbuster was the blockbuster in its industry. It had better technology, better locations, and the largest inventory of the latest releases.

It couldn’t fail.

But it did. The overriding problem was that the company lost touch with its customers and stopped paying attention to shifts in technology.

VCRs were being replaced by DVD players and people were starting to use the web to interact with companies. And lurking just below the surface was a firestorm of customer malcontent. Many of Blockbuster’s customers dreaded the video rental experience (disclaimer: I counted myself as one of them). It was a hassle to drive to the store, spend time looking through all the movies, stand in line to check out, and—worst of all—return your movie to the store the next day. The shopping experience added up to about as much time as it took to watch the movie.

Another nagging problem was that if you failed to return your movies on time, Blockbuster nailed you with late fees. Those late fees became huge profit centers for video stores, even though they were endlessly frustrating for customers. Video stores found it acceptable to punish their customers, creating obvious dissatisfaction, to maintain short-term profitability. How foolish and short-sighted.

Finally, Blockbuster had the latest movies but not always the deepest selection, and there was no easy way for a customer to remember which movie he or she wanted to rent next time.

Blockbuster’s answer to these challenges? Build more stores, and let people rent for two days for the same price. These were Band-aids that didn’t fix the overriding problems.

After returning Apollo 13 well past its due date and getting punished with a $40 late fee, Reed Hastings had had enough. He bankrolled a new venture to mail movies to people’s homes—free shipping, rent as many as you want, and NO late fees. Netflix was born.

For a reasonable monthly fee (about the cost of four movie rentals from Blockbuster), Netflix customers could get an unlimited number of movie rentals. The convenience seemed almost too good to be true: they mail movies to you, you keep them as long as you want, and you mail them back, postage paid. Netflix built sufficient movie distribution centers to minimize mail delivery times. They used technology (a website) to allow you to save your preferences in a movie queue so you were always getting something you wanted. They offered limitless options for unique personal tastes and interests by building the largest and most diverse movie inventory on the planet—significantly larger than Blockbuster’s.

You know how the story ends.  Customers flocked to Netflix. Blockbuster went bankrupt.  

Why did Blockbuster fail? They failed to plan for newer technology that was right in front of them. In retrospect, it was obvious. Yet somehow they were oblivious.

Lessons to Be Learned from Blockbuster’s Bust

What can you learn from Blockbuster’s failure?

Shifts in technology created a scenario in which consumers were compelled to reevaluate their options. (If we had never shifted from VHS tapes to DVDs, Netflix probably would not have been launched because VHS tapes would have been prohibitively expensive to mail.) That happens with surprising frequency in almost every industry. If you use technology to produce or deliver a product or service, or to communicate with your customers, you must foster a culture that embraces new technologies—one that challenges and incentivizes employees to constantly come up with new ways to make things better for customers. 

What comes next for the movie watching industry? Change is still in the air.  Next week’s post will look ahead instead of back.