NETFLIX TOLD BLOCKBUSTER TO BUY IT, THEN BLOCKBUSTER BECAME THE COMPANY NOBODY NEEDED
In 2000, Netflix was struggling. Blockbuster was the giant. Reed Hastings walked into Blockbuster with an idea that sounds almost impossible today.
Buy Netflix.
Blockbuster said no.
A few years later, the two companies were fighting directly for the same customers.
And eventually, one of them became a global streaming giant.
The other disappeared from almost every American shopping street.
NETFLIX WASN'T ALWAYS A GIANT
Netflix launched its DVD-by-mail service in 1999.
Customers could order movies online and receive DVDs through the mail.
There were no traditional video-store shelves.
No driving to a store.
No searching through a wall of plastic cases.
And Netflix eventually introduced a subscription model that allowed customers to keep DVDs without traditional due dates and late fees.
But in its early years, Netflix was still tiny compared with Blockbuster.
In 2003, Netflix had about 1.93 million subscribers and generated $272 million in revenue.
Blockbuster, meanwhile, was one of the biggest names in video rental.
THEN REED HASTINGS WALKED INTO BLOCKBUSTER
Around 2000, Netflix co-founder Reed Hastings reportedly explored selling the company to Blockbuster.
Netflix was still struggling.
Blockbuster had the stores.
Netflix had the online model.
The idea was that the two businesses could potentially complement each other.
Blockbuster could gain Netflix's technology and online operation.
Netflix could gain access to Blockbuster's enormous customer base and physical infrastructure.
But the deal never happened.
Netflix remained independent.
And that decision became increasingly important as the internet changed how people rented movies.
BLOCKBUSTER DIDN'T IGNORE NETFLIX FOREVER
This is where the story gets more interesting.
Blockbuster eventually entered the online rental market itself.
By 2004, the company was fighting Netflix directly.
Blockbuster offered customers an online rental service.
And it had something Netflix didn't:
thousands of physical stores.
Customers could rent online but also interact with Blockbuster's stores.
That created a hybrid model.
Online
Physical stores
Blockbuster believed this combination could compete with Netflix.
THEN BLOCKBUSTER STARTED COPYING NETFLIX'S ADVANTAGES
One of Netflix's biggest selling points was eliminating traditional late fees.
Blockbuster eventually attacked the same problem.
In December 2004, Blockbuster announced that it would eliminate late fees for its customers.
But the move was expensive.
The company estimated the change would cost $250 million to $300 million in operating income during 2005, plus another $50 million for marketing and implementation.
Think about what was happening.
Netflix had introduced a business model that made one of Blockbuster's most profitable traditional practices look increasingly unpopular.
Blockbuster was now spending hundreds of millions of dollars changing its own model.
THE ONLINE WAR GOT SERIOUS
By 2005, Blockbuster was no longer just experimenting.
It had become Netflix's major online competitor.
A contemporary report showed Netflix with approximately 70% of the U.S. online rental market, while Blockbuster had more than 25%.
Blockbuster had gained roughly 750,000 subscribers after entering the online market.
So Netflix hadn't simply escaped Blockbuster.
It had forced the giant to follow it onto the internet.
BUT BLOCKBUSTER HAD A BIGGER PROBLEM
Blockbuster's physical stores were built around an older behavior:
Go somewhere to get entertainment.
Netflix was built around another:
Bring entertainment to me.
That difference became increasingly important.
Netflix could add customers without opening another store.
Blockbuster had to operate thousands of physical locations while simultaneously investing in its online business.
The old infrastructure that had once been Blockbuster's greatest advantage was becoming expensive to maintain.
NETFLIX KEPT MOVING
Netflix didn't stop at DVDs.
The company was already thinking about digital distribution.
In 2004, Hastings told the Los Angeles Times that the long-term goal was to deliver movies directly to televisions digitally and remain independent.
The technology wasn't ready to completely replace DVDs yet.
But Netflix was preparing for the next business model.
Blockbuster was still heavily tied to the existing one.
THEN THE INDUSTRY CHANGED
DVDs themselves became temporary.
Broadband improved.
Streaming became practical.
Customers became comfortable watching entertainment without physical media.
Netflix eventually transformed itself from:
DVD-by-mail company
into:
streaming company
And later into:
global entertainment company.
Blockbuster struggled to make the same transition.
BLOCKBUSTER'S OWN ONLINE SERVICE WASN'T ENOUGH
This is important because the story is sometimes oversimplified.
Blockbuster did see the internet coming.
It did launch an online rental service.
It did remove late fees.
It did compete aggressively with Netflix.
The problem wasn't that Blockbuster completely ignored technology.
The problem was that its existing business was enormous, expensive and built around physical stores.
Changing direction was much harder when the old business was still sitting everywhere.
NETFLIX WAS WILLING TO DESTROY ITS OWN OLD BUSINESS
Netflix eventually did something Blockbuster struggled to do.
It allowed its own successful DVD business to become less important.
Streaming could eventually replace DVDs.
That meant Netflix was effectively willing to move away from the business that had created it.
The company wasn't protecting DVD rental forever.
It was protecting the relationship with the customer.
That distinction mattered.
BLOCKBUSTER'S ADVANTAGE BECAME ITS BURDEN
For years, Blockbuster's stores were its competitive advantage.
Customers knew where they were.
They were everywhere.
They were convenient.
They generated revenue.
But once customers no longer needed to visit a store, those same locations became expensive overhead.
Netflix had warehouses.
Blockbuster had thousands of retail locations.
The economics were completely different.
THE END WAS FAST
Blockbuster filed for bankruptcy protection in 2010.
At its peak, the company had thousands of stores around the world.
But the physical video-rental model had become increasingly difficult to sustain.
Netflix, meanwhile, continued moving toward streaming.
The company that had once been small enough to approach Blockbuster about an acquisition had become the company changing the entire industry.
THE IRONY OF THE $50 MILLION STORY
One of the most famous versions of this story says Netflix offered to sell itself to Blockbuster for $50 million.
The exact details of the meeting and valuation are often repeated differently, so the safest lesson isn't the precise number.
The important fact is the strategic contrast:
Netflix was struggling and looking for a way forward.
Blockbuster was the established giant.
Blockbuster had the customers.
Blockbuster had the stores.
Blockbuster had the brand.
But Netflix had built its business around a different question:
What will customers want next?
THE BUSINESS LESSON
Blockbuster wasn't destroyed because it was stupid.
It was destroyed by a difficult business problem:
The thing that made it powerful also made it difficult to change.
Thousands of stores were valuable when people wanted stores.
They became liabilities when people wanted convenience at home.
Netflix started with almost none of that infrastructure.
That made it easier to build around the new behavior.
MAACAT PERSPECTIVE
The most interesting part of this story isn't that Blockbuster rejected Netflix.
It's what happened afterward.
Netflix started as the smaller company.
Blockbuster was the giant.
Then Netflix entered Blockbuster's market.
Blockbuster followed Netflix online.
Netflix moved beyond DVDs.
Blockbuster couldn't move fast enough away from stores.
And eventually:
The company that once wanted to buy Netflix disappeared from the market.
The lesson isn't simply:
"Always choose the new company."
It's this:
A successful business can become trapped by the very infrastructure that made it successful.
Sometimes your biggest advantage today can become your biggest cost tomorrow.
