Blockbuster's CFIT

Tonight in the undergraduate strategy class, we discussed the sad story of Blockbuster Video, the video rental store that consolidated the fragmented industry, made Wayne Huizenga even richer, and somehow managed to botch decades of multi-billion-dollar cash flows into Chapter 11 last week.

The 2000s were not kind to Blockbuster: it lost money four of the past five years (all but 2006), and entered 2010 with a negative shareholder's equity. Although its traditional rivals (notably Hollywood Video) fared even worse than it did, it faced a bevy of daunting substitutes.

Still, all but one of these substitutes was obvious a decade ago. The only new wrinkle under the sun is Redbox and the video kiosk, which has commoditized video rentals to the consternation of both studios and the video chains. And even kiosks were not a secret forever. In 2004, USA Today reported:

Even McDonald's (MCD) is thinking about getting into the act. It's testing kiosks in its Denver stores where customers can rent and return videos for about $1 a day.

So clearly Blockbuster had a lot of time to come up with a response to its major challenges, particularly Netflix, video downloads and kiosks.

Blockbuster started a video-by-mail service, several download services, and licensed its name to NCR to create Blockbuster Express (which survives its Chapter 11 filing.) Despite foolish optimism by some analysts, none of them caught on.

So my question: couldn’t they see these problems coming a decade ago? And why didn’t they do anything about it? Is this another example of controlled flight into terrain (CFIT).

There could be some problems specific to Blockbuster. It was milked as a cash cow by Viacom/CBS for decades, and since 2005 has had to cope with Carl Icahn as its major shareholder and micromanager.

More generally, it’s not a tech company, and so it never had the genes of a Netflix or Amazon or other company that “gets it.” However, Barnes & Noble has made a credible showing against Amazon — even if its website and e-books never quite catch on, they certainly have done everything we would expect out of a follower.

But perhaps there’s also the general problem of hubris. In my research, teaching and consulting, it’s been quite clear that overconfidence is an endemic problem for market leaders. Companies that dominate their industry or segment believe their own PR and assume that ongoing dominance is their God-given right.

Or it could just be that — as Richard Foster, Clay Christensen and others have observed — cannibalization is really hard to do. You see where you need to go, but the short-term incentives prevent you from doing what needs to be done long-term — like competing with the retail storefronts, eliminating late fees, or whatever Blockbuster needed to do.

I don’t know that there’s a happy ending for Blockbuster, but there’s certainly no shortage of object lessons. I have a class full of students who’ve learned from their mistakes, and I know there will be others in the years to come.