The Blockbuster case study

In the fall of 1985, David Cook founded Blockbuster, which would later emerge as a home for not just video/DVD movie rentals but also as a social space for local movie buffs to meet and socialize. Within the next few years, backed by its success, Blockbuster expanded its operations internationally and became a popular household name. Soon after, Viacom acquired Blockbuster and took it public in 1999. At its peak, Blockbuster had over 9000 stores worldwide and boasted a revenue of USD 5.9 million [1]. Buoyed by the momentum and consumer demand, Blockbuster cemented its position and business model and leveraged its almost monopolized market advantage to penalize loyal consumers for late returns; this is evidenced by the fact that, in the year 2000, roughly 16% of Blockbuster’s revenue came from late fees. By the turn of the century, with the exponential growth of technology, customer preferences and demands were evolving rapidly. Rather than walking into a physical store to rent DVDs, consumers fancied the idea of browsing DVDs on the web and having them delivered to their doorsteps at a palatable subscription fee minus the late fee that Blockbuster was infamous for. Capitalizing on digital disruption and changing customer demands, several new players emerged in the video rental space, such as Netflix and RedBox, offering newer channels such as DVD-by-mail and online streaming services. Despite the shift in consumer demand, digital disruption, and mounting competition, Blockbuster did little to change its strategy and refused to adapt to changing market trends. Ironically, in the year 2000, Blockbuster turned down an offer to acquire Netflix for USD 50 million, which subsequently led to Blockbuster filing for bankruptcy within the decade [2].

The primary factors attributed to the downfall of Blockbuster are the following:

• Failure to embrace the digital disruption: Blockbuster was comfortable with the existing business model and failed to recognize the shift in industry trends and customer needs and preferences, leading them to dismiss the potential of online rentals and streaming services, which ultimately disrupted the traditional brick-and-mortar video rental model. The company was too slow to adapt to the emerging trends such as online subscription and streaming services, whereas competitors such as Netflix were already capitalizing on digital technologies to offer convenience and accessibility to consumers, causing a dent in Blockbuster’s market share.
• Failure to create customer value: Blockbuster misplaced its focus on topline revenue rather than creating consumer value. The company failed to generate consumer value while heavily relying on maximizing profits and revenue by charging loyal customers late fees. It also failed to assess the significant consumer value that could be generated by adopting modern digital trends. Competitors such as Netflix offered greater convenience, broader content libraries, personalized recommendations, and subscription models that resonated with consumers. Blockbuster struggled to match the offerings and value propositions offered by its competitors.
• Poor strategic decisions: Blockbuster made several strategic missteps that further exacerbated its decline. For instance, the company passed on an opportunity to acquire Netflix in its early stages, underestimating the potential of the emerging business model. Blockbuster also pursued late-entry initiatives such as DVD kiosks and online streaming, but these efforts failed to regain lost ground.

There have been several technological innovations that transformed the world forever, from the invention of paper to penicillin and electricity. However, the inventions of the last century, such as airplanes (1903), television (1927), VCRs (1965), personal computers (1971), cellular phones (1973), the internet (1983), the World Wide Web (1989), portable GPS (1990), Google Search (1997), Facebook (2004), YouTube (2005), the iPhone (2007), and Android (2008), have democratized technology advancements to the masses.

Another technological advancement that is fundamentally altering the way businesses innovate is artificial intelligence (AI). In 1950, Alan Turing, in his seminal paper titled Computing Machinery and Intelligence, opened with a thought-provoking question, “Can machines think?” [3]. Since then, AI has undergone rapid evolution and has matured into a disruptive technology that is having a profound impact on almost every industry. AI is powering creative applications, including autonomous vehicles, robotic surgery, fraud detection, and generative AI that creates new art, to name a few.

If we map these disruptive technologies against the time it took for them to penetrate the market, technological advancements in recent times, such as personal computers, the internet, mobiles, social media, and digital payments, only needed a quarter of the time to permeate the market compared to the innovations of previous generations [4]. In fact, modern technology disruptions are only growing exponentially, forcing enterprises across industries to keep up or lag behind [5]. It is important to note that the modern technology innovations of the digital era (highlighted area in the chart below) have exponentially penetrated the world market:

Figure 1.1 – Technological innovations and the time taken to penetrate the world market

Let’s compare two revolutionary technological advancements - the automobile and mobile phones. The invention of the automobile disrupted the way we travel, and the invention of mobile phones transformed not just how people communicate but also how modern-day businesses are conducted. Since its invention in the late 19th century, it took the automobile industry over six decades to penetrate the market and become established, versus the advent of mobile phones, which only took a decade. Modern-day technologies evolve at a rapid pace, and it is crucial for organizations to stay relevant.

For mobile device manufacturers, it wasn’t easy to stay abreast of the fast-paced technological advancements and the exponential disruption in communication technology at the turn of every decade: analog cellular (1G), digital cellular (2G), mobile broadband (3G), native IP networks (4G), and new radio (5G); traditional providers, such as Nokia and Motorola, who once commanded significant market share, were phased out by new entrants such as Samsung and Apple [6].