Blockbuster: Movie Business Remains a Moving Target

Though it may be hard to believe, there was a time when bright blue-and-yellow Blockbuster signs did not grace every strip mall and service road in the U.S.

But like Starbucks and Wal-Mart, Blockbuster has become a fixture in towns big and small, seemingly overnight. In the 20 years since its founding in 1985, Blockbuster Inc. has opened 9,100 stores in 25 countries.

During that time, it has rented millions of movies, and pushed the owners of countless mom-and-pop video stores into early retirement. Blockbuster has also become the conduit of choice for major Hollywood studios looking to move their hits into the home.

For the most part, when any new technology threatened the $6 billion Dallas-based juggernaut’s business model, it coolly assimilated it and capitalized on the change. When the popularity of the DVD quickly overtook VHS, Blockbuster simply dumped most of its aging videocassettes and happily embraced the slimmer, cheaper, more durable optical discs. Thanks in large part to Blockbuster’s switch, DVDs have mushroomed, from 22 percent of the home video entertainment market in 2000, to more than 90 percent today. Some experts predict Blockbuster will discard its entire tape inventory within the next two years.

But DVDs brought about some other, less welcome, changes for Blockbuster. The inexpensive nature of DVDs—the studios priced them around $20 at wholesale, as opposed to the $80 they were charging for VHS “rental-priced” cassettes—brought about a fundamental change in the dynamics of the movie rental business. Consumers were suddenly able to buy movies at a reasonable retail price soon after they had become available for rental. And about five years ago, that’s exactly what they started doing. That struck at the heart of the $6.8 billion video rental market, of which Blockbuster holds a 40 percent share.

Then, in 1998, a pesky dot-com by the name of -Netflix Inc. appeared on the scene, proposing to mail DVDs to customers, thus saving them the expense of late fees, and the hassle of a trip to the local Blockbuster.

Blockbuster’s financials began a rollercoaster ride and the stock price plummeted from a high of more than $18 in 2002, to less than $10 today. Last year, the company declared a $1.2 billion loss, thanks in part to a costly spin-off from former parent company, Viacom Inc. All of this drew the interest of the infamous corporate raider Carl Icahn, who snatched up shares on the cheap, ultimately acquiring 9 percent of the company, and earning himself a seat on the board this past May.

He has been publicly butting heads with CEO John Antioco, insisting that Blockbuster should tread water and reap the profits from its dominant position in a mature, possibly dying, industry rather than investing in high-risk technologies such as online rentals.

But Antioco has remained steadfast in his belief that online rentals are the only growth segment in an otherwise shrinking industry. Kagan Research LLC says online rental revenues jumped from virtually nothing when Netflix started in 1998, to $522 million in 2004. The analyst firm expects the industry to grow to $931 million by the end of this year, and to $2.9 billion in 2009.

And so, by late 2003, Blockbuster executives were feverishly putting the final touches on some major competitive restructuring, most of which would roll out in 2004.

Antioco earmarked tens of millions of dollars for several key initiatives to revitalize the core rental business and create new revenue: Online rentals, an in-store monthly subscription service called Movie Pass, a video game subscription service called Game Pass, a movie and games trading program, and the still controversial “No More Late Fees” effort.

Some of the new programs mimicked those of Blockbuster’s competitors, some were entirely new business models, and some were pure marketing shtick. But coming along for the ride on each and every one was CIO John Polizzi and Blockbuster’s IT department. The metamorphosis Blockbuster underwent in 2004 touched every part of IT, and it is a process that continues today. “It was a monster year,” recalls Polizzi, a 30-year veteran of the IT business. “It was the most complex set of initiatives that I’ve seen a company take on. There was no shortage of things to do.”

Story Guide:

  • Web-based Mail Order: Threat or Menace. The Netflix effect
  • Real-world Stores Get Dissed by Digital Media Fans, But Remain a Major Asset.
  • New Strategies Work but Some, Like Trade-ins, are More Complicated Than They Look.
  • Can the Economics of Video-on-Demand Work?
  • Q&A: Blockbuster CIO Aims to Turn Tech From Threat to Opportunity

    Next page: The Netflix Effect

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