To Return on Time is Kind, to Rewind is Divine

By Earl H. Perkins | published Wednesday, November 13, 2013 |
Thursday Review Associate Editor

This past November the marketplace finally killed Blockbuster Video—the company that starting dying long ago for its refusal to see the handwriting on the wall.

They say the popularity of digital movie distribution brought on its demise, but I like to consider another scenario.

At one time, Blockbuster seemed to have a store on almost every corner in this country. Founded in 1985 by computer programmer David Cook, the first Blockbuster store opened in suburban Dallas, Texas. Cook and his partners developed and implanted what was—by those standards—a sophisticated computer database and check-out system for VHS and Betamax video cassettes of popular movies. Cook quickly attracted more investors, including Wayne Huizenga, who bought the majority of stock in the new video rental chain.

Using a flexible business model which allowed each retail location to easily adapt to its community or neighborhood—and by employing mostly teenagers and young people willing to work for relatively low wages in button-down shirts—Blockbuster became a cultural and marketplace phenomenon akin to McDonalds or Burger King. Indeed, at its height Blockbuster operated over 9000 video stores, making it one of the biggest retail brands of the 20th Century. There was fierce competition, but Blockbuster bought up the companies it couldn't run out of business or marginalize: Sound Warehouse & Music Plus, Movie Gallery, Erol’s Video, Ritz Video, Hollywood Video, Xtra-vision and others. More profits rolled in. Swollen with cash in the early 1990s, Blockbuster bought Spelling Entertainment and a one-third interest in Republic Pictures before a huge merger with Viacom in 1994, a deal in which Viacom shelled out a record-breaking $8.4 billion. And still the company grew, expanding into sports entertainment, theme parks, and buying up video rental chains in dozens of countries, including Canada, Britain, Portugal and Japan.

But a software geek named Reed Hastings, and his drive to the gym one day, put the video giant on a path to permanent bankruptcy.

Back in 1997 Hastings forgot about a copy of Apollo 13 that he'd rented, but the memory of that videotape came rushing back after he received a late fee for $40 from Blockbuster. He decided there had to be a better plan than purposely alienating all your customers. After all, who on this planet hasn't accidentally forgotten to return a video on time? Later that day, as he was headed to his gym for a workout, he had his business epiphany: the gym charged between $30 and $40 a month for unlimited access. In short, for one simple, flat fee, you could work out as many times as you wanted, any time the gym was open. Franchises like Gold’s Gym had a retail model that was flexible enough to meet almost any customer’s schedule or lifestyle.

This was certainly a better business model than what the major video players offered. By that year Blockbuster had what was rapidly becoming a monopoly, and that meant that they didn't have to worry about customer service, especially in those markets where Hollywood Video or Movie Gallery were fading. Some of Blockbuster's employees were truly wonderful, but when you ran into a bad one it was like negotiating with the Third Reich. They let you know they were on every corner and they weren't going anywhere. Nor would they budge.

After extensive research, Hastings teamed with Marc Randolph to start a flat-rate film rental-by-mail service, which took the industry by storm. Just about every customer has had a disagreement with Blockbuster, but Hastings was already a millionaire from the sale of his software company. It turns out he had a knack for debugging software, which had previously not been done very effectively.

Next, he decided to debug the world of video rental, where the simple act of forgetting to rewind, or the return of a tape a day late, would become cause for customer grief. He would simplify that model to eliminate the hassles. Hastings called his by-mail operation Netflix. Soon, Netflix became just as ubiquitous as the iconic Blockbuster storefront, but with the apparently decisive advantage of no late fees: the movie shows up in your mailbox, you watch it when you get around to it; then, you mail it back at your convenience by sticking in a little prepaid envelope. No late night drive to the video store; no arguments with the obtuse clerk behind the counter; no store manager pointing to the blue and white sign that said “to rewind is divine.”

Almost overnight, Netflix became its own cultural phenomenon. The explosion of Netflix (and the parallel growth of Redbox, a kiosk-type machine from which customers can rent movies with the same ease as purchasing a vending machine Dr. Pepper) to provide first-run movies for a couple dollars combined to sound the death knell for Blockbuster. Blockbuster was bought and sold by larger companies at various times in the last several years, and each new investor struggled to halt the downward slide. There were even late attempts to replicate the Netflix model. But the bleeding continued until its stock became worthless and its inventory meaningless.

The retail giant will close its DVD-by-mail business by mid-December, and its remaining 300 US stores should be shuttered by early January.

Dish Network paid $320 million for Blockbuster as it emerged from Chapter 11 bankruptcy in April 2011. The satellite pay TV service retains the company's licensing rights and its huge video library. Dish is focusing on Blockbuster @Home's streaming service (added fee for Dish Pay-TV subscribers) and Blockbuster On Demand's streaming service for the general public.

Interestingly enough, Hastings says internet television is the wave of the future. And I wouldn't be betting against this guy again. After all, he offered the Netflix deal to Blockbuster first, but they saw no future in it and showed him the door.