The Last Blockbuster — Netflix isn’t (Quite) the Innovation Story You Thought
When I started my first ‘real’ job a few years ago at a Management Consultancy/Digital Consultancy firm (depending on it’s mood) I recall countless spiels about the innovation of companies such as Amazon, Tesla, and relevant to this post, Netflix.
These spiels were for the most part unrelated to anything the company did and seemed in to be there just to rile us up a bit and get us excited about working there. And riled up we got. So I guess it worked.
The narratives around the countless speeches all had the same sort of arc. Visionary tech dude was too forward thinking. Tech dude almost went bankrupt pursuing visionary ideas. Tech dude was eventually right, changed the world, and anyone who owned shares from the start would have done pretty well.
Doe-eyed and excited about the new job, and always incredibly hungover from the nightly food/drink (mostly drink) budget we were given during the induction, I took these stories at face value and didn’t really do any digging.
But yesterday I watched the new documentary ‘The Last Blockbuster’, which is a pretty funny and heartwarming look at the story of Blockbuster Video, centred around the last remaining US store in Bend, Oregon.
The story we were told, and from what I gather this wasn’t just my company it’s basically the little guy motivation story told at every corporate event about innovation, was that Netflix offered themselves up on a plate to Blockbuster back in the early 2000s to the tune of somewhere around $50 million. Sounds like a big number to our layman ears but that’s chump change in the business world. Blockbuster is then said to have laughed Reed Hastings (Co-Founder and Co-CEO of Netflix) out of the room. Blockbuster crumbles due to lack of innovation and Netflix soars to become our streaming service of choice and cemented itself as a verb as well as a noun, which is always a pretty solid achievement.
Now I have nothing against Reed Hastings and Co they’re obviously incredibly smart and forward thinking people and all props to them for reaching the pinnacles that they have. However this simplified narrative completely ignores the the confluence of 2 big factors that ultimately led to Blockbuster’s downfall. Neither of which was a lack of innovation. It should be noted that both Netflix and Blockbuster at the time of their competition with each other were predominantly dvd-by-mail companies. And to all the zoomers who don’t know what that means. F*** You go play tiktok :)
Firstly, Blockbuster was bought by Viacom in ’94, who used it’s insane cash flow to finance it’s bid for film production company Paramount. Viacom’s management of Blockbuster wasn’t great and they eventually spun it off in ’04 saddled with huge amounts of debt which was accumulated over the years by Viacom borrowing using Blockbuster’s cash flow as collateral.
I won’t ruin the whole film, you should watch it, but essentially there were some slightly better decisions made post 2004 by management and a bit of intervention from activist investor Carl Icahn which could have potentially led to a successful Blockbuster. They were undoubtedly still having some issues but they’re streaming business was growing and they had worldwide brand recognition and still had relationships with the studios. The problem wasn’t with the lack of innovation, it was the debt.
After the collapse of Lehman Brothers in 2007 and the ensuing chaos caused by the subprime mortgage crisis, global debt markets completely seized up. This had the unfortunate effect of making Blockbuster’s huge balance sheet liabilities essentially worthless. There was absolutely no was they were going to be able to refinance their debt or raise any more capital by issuing more. They were ultimately unable to keep up with interest payments and went bankrupt in 2010.
And simply put that’s the difference. Netflix had a much better financial situation going into the GFC and were able to raise the capital they needed to grow their streaming business and come out on top. It was the combination of Viacom using Blockbuster as a cash cow and a financial crisis which brought those debt chickens home to roost which crushed Blockbuster. Not the almighty Netflix’s unyielding innovativeness.
I should point out that Netflix is of course an incredible company and the management at Blockbuster was awful for years. But it was a slew of corporate shenanigans by giants like Viacom who caused so many of the problems. Remember that the initial ideas on which Blockbuster was founded were truly innovative and incredibly smart at the time, again watch the movie to see why!
I thought it important to note that techbro story arcs usually have a bit more to them than first meets the eye. Much love to Netflix, more love to chill. And remember that ultimately it was innovation that led to Netflix’s success: innovation of the banks selling dog shit Mortgage Backed Securities for years which ultimately crashed the worlds economy allowing Netflix to emerge triumphant.
-Jackson F-C — The MMT Podcast