NETFLIX VS. BLOCKBUSTER  
100  million  hours.    

That’s  how  much  time  people  spend  on  Net8lix  each  day.    

69  million  subscribers  in  60  countries,  with  another  130  countries  on  the  way.    A  library  of  
50,000  hours  of  movies  and  television,  available  at  any  time,  on  almost  any  device.  

It  wasn’t  always  this  way.    

Not  long  ago,  you  had  to  get  in  a    car  to  get  a  movie  when  you  wanted  it.  Video  rental  stores  
dominated  the  1980s  and  90s,  when  millions  rented  movies  on  VHS  and  DVDs.  The  king  of  
the  video  rental  age  was  Blockbuster.  

THE  VIDEO  RENTAL  AGE  

The  video  rental  industry  was  born  in  1977,  

20  years  before  Net8lix  was  founded.    VHS  
rental  was  a  convenient  way  to  watch  movies  
after  their  theatrical  run.      

Prior  to  video  rentals,  people  either  went  to  

the  theater,  or  waited  for  a  movie  to  come  on  
television.      If  they  missed  it  on  the  night  it  
aired,  they  were  out  of  luck.  

 After  decades  at  the  mercy  of  networks  and  

studios,  at  last  viewers  had  some  freedom  —  
and  the  video  rental  business  took  off.
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Initially,  studios  had  feared  the  video  rental  business,  as  well  as  VHS  itself.    Did  they  really  
want  to  allow  copies  of  their  movies?    What  would  that  lead  to?    But  soon  the  convenience  
of  home  video  took  the  country  by  storm.    

The  model  worked:  by  1985,  there  were  over  15,000  video  rental  stores;  in  1991,  the  VHS  
industry  cleared  $10.6  billion  in  rentals  and  $4.6  billion  in  purchases1 .  The  addition  of  DVD  
and  Blu-­‐ray  added  even  more  margin.  Video  rental  stores  rented  VHS  tapes  for  an  
inexpensive  price  —  but  daily  late  fees  ran  into  big  numbers.    And  one  chain  dominated  the  
industry:  Blockbuster  Video.  

THE  RISE  OF  BLOCKBUSTER  

Dallas-­‐based  Blockbuster  was  founded  by  David  Cook  in  1985.    Supported  by  Cook’s  
experience  building  databases  for  the  oil  industry,  Blockbuster  created  a  huge  warehouse  
that  supplied  stores  with  movies  based  on  demographic  data.    Waste  Management  magnate  
Wayne  Huizenga  acquired  Blockbuster  in  the  late  ‘80s  —then  used  his  franchise  experience  
to  put  the  company  into  hyper-­‐growth.    

Blockbuster  soon  moved  into  game  rentals,  and  then  into  DVD  rentals.    In  1993,  
Blockbuster  was  acquired  by  Viacom  for  $8.5  billion.    Before  long,  the  word  Blockbuster  
was  as  synonymous  with  rentals  as  Kleenex  was  with  facial  tissues.  At  their  peak  in  2004,  
Blockbuster  had  9,000  stores  and  60,000  employees  and  was  opening  a  new  store  every  24  
hours.  Blockbuster  was  unstoppable  —  or  so  it  seemed.  

Blockbuster  considered  its  8irst  move  into  Internet  delivery  in  2000.  They  were  interested  
in  buying  a  small  player  in  the  space  —  for  a  paltry  $50  million.  They  ultimately  passed  on  
the  acquisition.    

The  name  of  the  small  company  they  almost  bought  was  Net8lix.  

THE  BIRTH  OF  NETFLIX  

Legend  has  it  that  Net8lix  began  when  CEO  
Reed  Hastings  returned  a  rental  copy  of  Apollo  
13  late  —  and  was  charged  a  fee  of  $40.  The  
outrageous  fee  signaled  a  market  opportunity.  

Hastings  brought  the  idea  to  his  friend  Marc  

Randolph  —  another  Silicon  Valley  
entrepreneur  who  was  looking  for  a  new  

1  http://www.deseretnews.com/article/228706/VIDEO-­‐INDUSTRY-­‐HOPES-­‐LATEST-­‐HITS-­‐WILL-­‐HELP-­‐SUMMER-­‐RENTALS-­‐

REBOUND.html?pg=all

Seth  Shapiro  |  New  Amsterdam  Media  LLC  |  December  2015  

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Internet  sales  play.  The  eventually  settled  on  an  online  video  tape  rental  service,  
appropriately  dubbed  NetFlix.  

The  company  was  founded  in  1997  with  $2.5  million  from  Hastings.  Since  they  knew  the  
DVD  format  was  the  way  of  the  future,  they  started  building  the  systems  to  rent  them.  First  
they  tested  new  DVD  mailers  –  and  were  pleased  when  the  disks  came  through  the  mail  
undamaged.    

They  later  found  out  dumb  luck  was  on  their  side:    had  they  picked  a  different  post  of8ice  
with  a  different  sorting  process,  the  disks  might  have  been  destroyed.…  and  Net8lix  might  
have  ended  right  there.    

Hastings  and  Randolph  rented  of8ice  space,  hired  a  handful  of  employees,  and  used  the  back  
area  of  the  cramped  of8ice  for  DVD  storage.  By  1998,  Net8lix  was  online,  with  30  employees  
and  925  videos.  Despite  the  growing  number  of  subscribers,  the  price  of  DVD  players  was  
too  steep  for  most  households.  Hoping  to  encourage  the  growth  of  the  DVD  market,  Net8lix  
gave  out  free  rental  coupons  with  new  DVD  players.    

Scaling  up  brought  on  serious  problems:  storing  and  distributing  DVDs  was  a  nightmare,  
and  their  staff  was  still  picking  the  movies  by  hand.    Net8lix’s  1998  losses  were  $11  million.      

THE  MODEL  THAT  WORKED  

In  1999,  the  company  pivoted  from  pay-­‐per-­‐rental  to  the  monthly  subscription  fee  it  still  
uses  today.  It  was  that  change  —  and  a  series  of  other  innovations  —  that  8inally  started  to  
give  Net8lix  an  edge.  

First,  Net8lix  developed  several  distribution  centers,  dramatically  speeding  up  delivery.  
Next,  they  introduced  custom-­‐made  sorting  machines,  dramatically  increasing  speed  and  
cutting  down  on  manual  labor.    Yet  despite  these  innovations,  rising  subscriber  numbers,  
and  a  modern,  sleek  website,  Net8lix  burned  through  investor  money  at  an  alarming  rate.    
As  the  year  wore  on,  there  was  no  respite  in  sight.  The  cost  of  innovation  was  killing  them.    

By  the  end  of  2000,  Net8lix  made  the  painful  decision  to  offer  the  company  for  sale  —  to  
Blockbuster.  They  would  use  the  $50  million  sale  price  to  defray  losses,  and  become  the  
online  division  of  the  behemoth  of  video  rental.  It  made  sense  to  everyone.    

But  Blockbuster  passed.  The  giant  of  video  rental  decided,  on  balance,  that  online  delivery  
was  not  that  interesting.    They  had  over  50  million  customers  renting  videos  in  their  stores.  
They  were  generating  staggering  amounts  of  cash.  Like  most  companies  at  the  top  of  the  
cycle,  they  saw  no  reason  to  believe  that  this  would  change.  Net8lix  was  a  blip  on  their  radar.  

Instead  Net8lix  went  public  in  2002,  selling  6.3  million  shares  for  $95  million.  It  began  
investing  in  distribution  centers,  building  10  alone  in  one  year,  and  incorporating  

Seth  Shapiro  |  New  Amsterdam  Media  LLC  |  December  2015  

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automated  sorting  to  ease  the  pains  of  manual  labor.2  The  next  year,  Net8lix  turned  its  8irst  
pro8it  ever.  By  2005,  Net8lix  reached  4.2  million  subscribers.  In  2007,  it  delivered  its  
billionth  DVD.    

Going  public  gave  Net8lix  the  cash  it  needed  to  explore  new  options.  While  Blockbuster  had  
effectively  bet  on  the  past,  Net8lix  decided  to  bet  on  the  future:  in  2007,  it  launched  a  
streaming  service.    In  the  long  run,  it  was  a  brilliant  business  decision.  In  the  short  term,  it  
created  a  new  era  of  pain.  At  the  time,  less  than  50  percent  of  U.S.  households  had  access  to  
high-­‐speed  broadband.    The  platform  it  chose,  Microsoft  Silverlight,  limited  the  devices  they  
could  service.    

So  in  2008,  Net8lix  partnered  with  platforms  including  Sony  PlayStation,  Microsoft’s  Xbox,  
and  a  range  of  new  Blu-­‐ray  players.  And  in  2010,  Net8lix  switched  to  Amazon’s  cloud  
technology  and  transitioned  to  HTML5,  a  universal  web  standard.  HTML5  meant  Net8lix  
could  reach  iOS  powered  products  like  iPad  and  iPhone  —  an  increasingly  important  
market  segment.    When  it  split  its  subscriptions  plans  into  two  —  DVD  and  streaming  
—  Net8lix  received  a  massive  pummeling  in  the  stock  market,  and  eventually  lost  half  of  its  
DVD  subscribers.  But  it  also  gave  rise  to  another  trend:  Net8lix  became  America’s  largest  
source  of  Internet  traf8ic  during  evening  hours.    

Though  Blockbuster  held  onto  its  leadership  in  physical  rental,  the  writing  for  DVD  was  
already  on  the  wall.  Blockbuster’s  value  plummeted  between  2003  and  2005.  They  
scrambled  to  compete  online,  but  could  never  catch  up  with  Net8lix.  Because  Net8lix  had  bet  
big  on  reaching  every  device,  they  were  available  to  a  wide  swath  of  digital  consumers,  at  a  
better  price,  with  a  far  better  customer  experience.  

In  truth,  the  only  way  Blockbuster  could  have  beaten  Net8lix  was  to  become  Net8lix.  And    
they  had  already  missed  that  window.  

THE  GLOBAL  LEADER  IN  SUBSCRIPTION  VIDEO  

Today,  Net8lix’s  market  cap  is  roughly  $50  billion.  Its  streams  now  account  for  one  third  of  
all  U.S.  web  trafFic.    

In  September  2010,  Blockbuster  8iled  for  bankruptcy.  In  2011  its  assets  were  bought  by  
DISH  Network  for  a  $234  million  —  about  three  percent  of  what  it  was  worth  at  its  
pinnacle.    At  8irst,  DISH  announced  it  would  close  most  of  Blockbuster’s  retail  stores  —  but  
upon  reassessment  in  2013,  it  shut  down  the  company  and  closed  every  store.  

Net8lix  has  gone  on  to  become  not  just  a  subscription  service  but  a  premium  content  
creator,  with  shows  like  House  of  Cards  and  Orange  is  the  New  Black  placing  them  in  the  top  
tier  of  networks.  Net8lix  is  now  the  largest  U.S.  video  subscription  service,  with  more  than  
double  the  number  of  subscriptions  as  the  number  two  service,  Comcast.      

2Top  Down  Innovation.  Cham:  Springer  International,  2014.  Print

Seth  Shapiro  |  New  Amsterdam  Media  LLC  |  December  2015  

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Net8lix  is  now  worth  over  $55  billion  —  over  two  times  the  market  value  of  CBS  and  about  
three  times  that  of  Viacom.    It’s  also  an  international  juggernaut,  reaching  65  nations  with  
more  on  the  way.  Net8lix  pioneered  the  concept  of  “binge-­‐watching",  driving  viewership  for  
network  shows  like  Breaking  Bad  and  Mad  Men.  In  so  doing,  they  not  only  reinvented  the  
“rental”  business:  they  contributed  greatly  to  the  reinvention  of  media  itself.  

DISRUPTION  AND  INNOVATION  LESSONS    

Blockbuster  and  Net8lix  illustrate  the  power  of  industrial  disruption  by  technology  —  and  
the  danger  of  ignoring  the  inevitability  of  change.  Blockbuster  wasn’t  just  dethroned  as  the  
number  one  video  retailer.  It  wasn’t  just  forced  to  diversify  or  rebrand.    It  was  completely  
annihilated.  
There  are  eras  in  business  history  in  which  incumbents  are  very  hard  to  displace  —  in  
which  being  established  is  the  ultimate  advantage.    We  are  not  living  in  one  of  those  eras.  
Rapid  technological  advances,  an  increasingly  competitive  global  marketplace  and  a  shifting  
geopolitical  climate  give  today's  disruptors  —  from  Net8lix  to  Amazon  to  Uber  —  a  
tremendous  leg  up.  

From  the  big  three  networks  to  the  big  three  auto  makers,  the  past  40  years  have  been  a  
disaster  for  leading  companies  that  believed  they  were  untouchable.  Tech  disruption  will  
soon  spread  to  banking,  heath  care,  insurance,  real  estate.  The  question  is  whether  8irms  in  
these  spaces  will  be  more  prepared  than  Blockbuster  was.  

Seth  Shapiro  |  New  Amsterdam  Media  LLC  |  December  2015  

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Seth  Shapiro  |  New  Amsterdam  Media  LLC  |  December  2015