ECONOMY STUDIOToday there is one Blockbuster left in the world, an independently owned franchise store in Bend, Oregon1. At its peak, there were more than nine thousand. This is how the money flowed in, and how it flowed out.
The rise
The first Blockbuster opened on October 19, 1985, in Dallas, Texas, with about 8,000 tapes and a computerized checkout2. It grew fast. In January 1994 Viacom agreed to merge with Blockbuster in a deal valued at $8.4 billion, and Blockbuster’s cash flow helped fund Viacom’s bid for Paramount3.
By the end of 2004, Blockbuster had 9,094 stores in the US, its territories and 24 other countries, about 84,300 employees and $6.05 billion in revenue4.
The fee everyone hated
A big part of that revenue came from punishing customers. In 2000 Blockbuster collected nearly $800 million in late fees, 16% of its revenue5.
The same year, the founders of a small DVD-by-mail company called Netflix offered to sell it to Blockbuster for $50 million6. Blockbuster, led by CEO John Antioco, turned them down6. Netflix was on track to lose about $50 million that year6.
Too late, and too expensive
Blockbuster did try to change. It launched BLOCKBUSTER Online in August 2004, and on January 1, 2005 it ended late fees, giving up an estimated $400-450 million of revenue in 2005 plus about $50 million in launch costs4. By 2009, late fees had shrunk to $134 million, about 3% of revenue5.
Without its most profitable fee, revenue slid every year: from $6.05 billion in 2004 to $4.06 billion in 2009, down about a third, with a net loss of $558.2 million in 20097.
The leadership changed too. Antioco left in 2007 after clashes with activist investor Carl Icahn over pay, and Jim Keyes, formerly of 7-Eleven, took over8. Total Access, which let online members swap DVDs in stores, was run at a loss8.
Squeezed from both sides
Competition came from two directions. Redbox kiosks rented new releases for about $1 a night, and Coinstar reported about 13,700 DVD kiosks by the end of 20089. Netflix launched streaming in 2007 and had 20 million subscribers by the end of 201010.
By January 2010 Blockbuster was down to 6,520 stores with $975 million in notes outstanding, and its annual report warned of “substantial doubt” about its ability to continue as a going concern11.
The fall
Blockbuster filed for Chapter 11 bankruptcy on September 23, 2010, listing about $1.02 billion in assets and $1.46 billion in liabilities12. Dish Network bought it at auction in April 2011 for a bid valued at about $320 million, and in November 2013 said it would close the remaining roughly 300 company stores13.
The popular story says Netflix began with a late fee on a rented copy of Apollo 1314. Netflix’s co-founder says that isn’t how the idea came about, and that Netflix itself charged late fees at first14. The real lesson is in Blockbuster’s own numbers: a business whose profits depended on a fee its customers hated.
