We all heard the Story, how Netflix was founded when Reed Hastings was fed up with Blockbuster when he was too embarrassed to return a “Apollo 13” movie to blockbuster due to abysmal late fee and thought of a solution without it. Startup’s grows up with the cautionary tale how Blockbuster Laughed at hastings when he proposed to sell netflix at 5 Million dollar and keep laughing year after year of offers till blockbuster went all the way to declare bankruptcy .
How much of it is the Real Truth? And what really went in the first war of DVD Rentals that secured Netflix’s dominion and Demised Blockbuster? What was Netflix before what it is today. Did Blockbuster did nothing as fabled to protect its empire?
The Next parts are a Summary from the Popular Book “Netflixed” that actually wrote an impartial story of Netflix and Blockbuster and a Full account that time.
Netflix-Who Found it and What was it:
Many people may not know it Netflix was not the original idea of Reed Hastings. It was Marc Randolph , a high up Marketing Team Leader of Hastings Software Firm who originally thought of the idea “An Online Site for DVD Rental”. Users could browse and rent DVD Movies that one can Watch. The DVD’s would be send to the renters thorough Mail Orders. Mardolph’s a Marketer at heart was fascinated at a mail order marketing system that he feels would sweep the market.
Reed Hasting was even back then regarded as a “Pure Genius” His software firm Palo Alto was sold at 200 Million Usd and was a most Sought founder for Vc’s . People took note that this man was a true Visionary and can create a money making Company that can innovate the future.
After the sale of the company, Reed and Randolph would talk on and on what they can do next. Marc would propose an idea and Reed ever the Calculated and Analytical should shoot it down.Eventually Marc Randolph thought that the emergence of E-commerce and the buzz of Amazon meant more and more people go online for purchase. Right now there is no Site that can enable to rent movies online and fulfill it through a Delivery System instead of Going to BlockBuster and Home Video. Reed Pointed Out VCR which was the leading Video Standard was not Postal Friendly due to its Size and will be Unable to scale up to attain profitability. Marc then deduced that “DVD Technology” which was in its early stages will be the default standard and that format is postal friendly due its size. Also, Blockbuster ,Hollywood Videos and other giants that owned the offline rental markets are still not considering DVD rentals that much due to lesser movie selection and low DVD player sales. So, there is a GAP. Hastings deduced this as an executable venture and gave his go through only after He received a DVD by Mail sent through Marc Randoplh. The speed of Delivery and the undamaged DVD convinced the Seasoned Innovator this Idea may work. And the Company was formed. It was not called netflix then.
It was decided that Marc Randoplh would run the Show as CEO and Reed Hasting will be the Investor. Reed was already set his sight on reforming the US Education System and get into politics and would concentrate there. But he will keep an eye on the company and advice [read instruct] Marc on the business. Marc Randoplh assembled a team of Creative marketers and Engineers to start the Online Rental Business.
The Journey Starts……..
The takeover of the Conqueror:
Netflix even in it’s early days were hailed as an efficient operation and superb Customer Service. These were the Signature feature of Marc. however, Marc Randolph a good guy at heart was not a ruthless executor. He cannot take hard decisions and at the end he is not the “Reed Hastings”who can get Vc’s lined up to invest in his idea that always makes money. Netflix’s growth was good but it was not able to cut it’s teeth in Online rental nor create the future. Cash Burning was epidemic and the leadership was challenged. During this time Reed also came back from it’s other ventures and decided to run Netflix directly. Being the largest shareholder and the more Efficient One it was not a problem. Marc Randolph was reluctantly sidelined and Reed Hastings became the main man of Netflix. It also signaled a new era of Netflix. Within Months the core founding team of Marc Randolph consisting with Creative Markers and Generalists was replaced with Hastings loyal Members. The revered Specialists and Mathematicians that are innovators and Hard Data Executives. Netflix during this time started creating a culture that is now the signature mark of it’s uniqueness and Advantage. Eventually Marc Randoplh and Michal Lowe (Founder of Redbox ) left netflix to allow hastings get full control and execute his grand Strategy “ To Get America’s Eyeball and Destroy Blockbuster”. Hastings by this time assembled the fabled netflix team of Mccarthy , McCord, hunt, Kilgore and Ross. this team became one of the most fearsome management groups of the digital era
On BlockBuster:
Blockbuster was suffering long before netflix. It’s offline stores were facing a massive decline in traffic. Quality of Service plummeted and revenue tanked. It was a time for change and the board appointed a turnaround CEO “Antioco” to bring back the glory days . Antioco managed to change the tide . The stores were improved , revenue increased a bit and the stock price of blockbuster increased . Antioco was a visionary Leader who directed with firm hand a future of Blockbuster in the new Digital world . A Future that may belong to the Walmart , Amazon or the new imminent threat Netflix , which by now was the top leader in Online Rental of DVDs
The First Contact:
In the Early days of the Streaming wars Netflix , nearly exhausting of cash was checking for a way out . Reed Hastings and Marc Randolph met with Antioco and Shepard to discuss the option of selling Netflix to blockbuster for 5 Million Dollars. Antioco laughed on Reed’s Face . And send them away. That;s how the story is.
However in the later times we can see Antioco didn’t entertain the offer not because he is not futuristic. But because of the following opinions
- The DVD rental was just a middle ground . Online Streaming and video on Demand would be the real Evolution. Why buy the middle point when the main battle would be in streaming . Where Netflix sill is nothing.
- The Price in his mind was too much for the venture losing money and still has no clear path to profitability.
- Blockbuster already has a plan to launch it’s own Movie Rental Platform “Blockbuster Online “ that he planned to sync both the online and offline part to form a unified Strategy. Netflix will be totally out gunned and nothing not even “Reed Hastings” Can do anything about it.
The meeting ended with no deal and officially started the War between Netflix and Blockbuster. Reed Personally vowed to destroy Blockbuster for the insult. However, no deal means hard winter and the first Layoffs of Netflix nearly half of all employees were sacked . With the remaining top people left . Reed hasting begins his assault.
Blockbuster Online: Rise, Prominence and Demise:
Antioco was convinced that the retail stores were a goner . and it simply has no future in the new age. Online rental would be the new trend . Together with his COO Shepard he formulated the plan to create block busters own online rental platform. “Blockbuster Online” the Project’s head was Evangelist . The Strategy was simple , the Blockbuster online will look and function exactly like Netflix. The User layout and functions of the site was nearly identical with Netflix . However, the main asset of Netflix by then was not the beautiful site but the well honed execution process of rental delivery perfected by Hastings and Mccarthy and the cine-match algorithm that can recommend movies to users based on ratings and interest. These cannot be acquired easily but learn over time through rigorous trial. Nevertheless Blockbuster has the advantage of a large Selection of movies that were beyond Netflix's Library and it has thousand of Storefronts owned and Franchise to work with it’s online platform. Antioco was confirmed they would beat Netflix.
However, the initiative met with a number of unexpected challenges:
- Blockbuster still made all it’s revenue from offline store sales. The Store Managers already facing a threat from online rentals and declined store revenue was reluctant to support blockbuster online as it would mean more declining offline sales. They fiercely lobbied against the project and event sabotaged most campaigns designed to promote it. Including convincing customers the online site is here only for a while and not to use it
- The Blockbuster franchise were even more livid than store owners , who demanded the online site be put down or else they won't pay the fee required by blockbuster. It went all the way to Federal court itself. However, the online site remains
- The Board of Directors were old fashioned and couldn’t see the future antioco told about the vision. Blockbuster has survived for decades , a Multi Billion Dollar Moneymaking Venture. It;s unlikely a digital company or technology can defeat it’s decade all strategy. If the store sales were flat then the CEO should focus there more instead of testing the new Online Rental Site , which needs to be fed with cash from offline sales.
Despite the challenges Antioco remains committed to an online future and Empowered Shepard and Evangelist to take blockbuster online go big. 25 million dollar was approved for the online project. Which was a huge sum considering blockbuster’s finance was quite shaky at that time.
Success:
Blockbuster Online from it’s early days were focused on a core objective . Take subscribers from Netflix. It;s pricing was lower than Netflix and unlike Netflix renters can rent both from online or from offline under a single package. The DVD’s can also be returned in Blockbuster stores and rent a new one then and there. Consumers were hooked. Subscriber numbers were off the charts . Blockbuster within months were getting the numbers that took years for Netflix to achieve. The Program was called “Total Access” Netflix was forced to reduce price , the price war was emptying both party. By then Amazon and Walmart came to this category as well and the price war intensified.
Netflix was getting very vulnerable yet Reed Hastings were assured by Barry McCarthy the CFO that the Financial Calculation of Blockbuster Online Shows that they cannot continue the cash burn beyond a few more months. When they raise the prices the subscribers will come back to Netflix. Netflix needs to cut deep and weather the winter.
The Demise of Blockbuster:
Enter the invader:
Carl Icahn was and still is one of the most famous , notorious and successful venture capitals of the business world. A self made billionaire. Carl made money not only through high Value but though short sales and Hostile Takeover. Put simply, he takes control over boards though shareholders forces the directors on reforming the company based on his vision , Appointing his preferred CEO in command etc. If a company turns around good , if not he arranges complete closure and recoups investment though selling and taking over physical assets of the company or selling the firm to the highest bidder. His reputation and notoriety was far reaching. More than a few business books have written on his adventures.
Now The tycoon sets his eyes on Blockbuster. He sees no Future on online but is convinced that the offline stores will be the key to profitability. There were the focus should be. If not the huge assets of Blockbuster can be of tremendous value if sold as parts or to a company. Even a merger with other Video Rental firms may be more worthwhile to pursue instead of burning money online.
Through a coalition of Equity Firms Carl Icahn took over netflix board and tried to force changes on blockbuster. Antioco held firm and that started a conflict between the board and the management.
The Fall:
Blockbusters Total Access program was a smash hit. Consumers were flocking to the brand like the old days. Netflix was badly hurt yet it had no option than to grit teeth and hold on. It was during this time that The First of the working technology of Netflix Streaming and Movie Download Feature was introduced . As well as the movie recommendation system the cinematch algorithm vastly improved were rolled out. Netflix presently in tights were creating early versions of it’s future. The Present though was declining subscriber growth .
However, by this time the relation between antioco and icran deteriorated beyond repair . And Antioco under fury resigned from Blockbuster . That Started a series of Events that began the end the Company
- Immediately after the departure of Antioco , Carl icahn proceed to take the helm of Blockbuster. The new CEO was his own hand picked Person from Seven-Eleven, Keyes , a CEO who was from pure retail and a champion on Seven Eleven turn Around. Carl convinced the board that a pure retail player like keyes will help re ignite blockbuster’s Retail Stores , where the future still is for Blockbuster.
- The new CEO Keyes, immediately after recruited , announced his plan to lessen funding initiative for Blockbuster online. His open criticism of Antioco and the online initiative signaled the way forward. One by one Shepard , Evangelist and others who were part of the dream team of Antioco left the company , sensing the imminent disaster of Blockbuster. The war is over
- Most of the above names immediately after leaving Blockbuster , sold its stock after vesting period and invest in Netflix. In their minds they already know who would win. They didn't need to guess whether Netflix will win they were confirmed Blockbuster is done.
- Keyes Planned a major retail initiative to turn blockbuster into a major retail outlet Food , games, Fashion, Gadgets everything would be sold in the blockbuster stores. Nothing happened. The Cash Starved venture could no Longer sustain any costly retail venture. The Online business Lost its edge and leadership and was unable to challenge Netflix anymore. The War is over. Blockbuster was a Dead Man Walking it;s last step
Carl Icahn keeping up with his habits left blockbuster by selling his 17 percent stake. The Long Story Short , Blockbuster Filed for bankruptcy soon.
Reed Hasting and Netflix Crushed the Giant and since this day the story of blockbuster is spoken as a Cautionary tale for Businesses and Startups.
Long Live the King:
With the Demise of Blockbuster , Movie Studio and other big Box Offline Rentals , Netflix Reigned Supreme . Reed Hastings gained the status of one the Iconic Entrepreneurs of the New Era . The Time of Rental Era was nearing an end. The Age of Streaming war began. With Netflix now focusing of Streaming Movie a new frontier opened . New Competitors arrived . Oust were the old guards. Now The newer competitors were the likes of Amazon , HBO, Universal Studio Disney even Apple. Each one of them has created a legend of their own.
The Battle for America’s Eyeball was over , The War for the World’s had Began…….
