Bye Bye Blockbuster, via Marketing Myopia

Blockbuster turns out to be the definitive case study of a company so successful and so powerful that it couldn't imagine its business model being overtaken by new technology.

Once upon a time, Blockbuster was the 800-lb gorilla of video rentals, with giant stores from coast to coast, filled with thousands of VHS tapes (later, DVDs). Then came Netflix and other DVD-by-mail rental startups, challenging the market leader with inexpensive subscriptions and more lenient return policies. Blockbuster tested some new services but with legacy leases, its retail structure probably dominated strategy discussions year after year.

Another important consideration was customer behavior. Wouldn't viewers rather pick up a DVD for that day's viewing, instead of waiting for a DVD to arrive by mail? Blockbuster clearly thought so, and Redbox had the same strategy. But customers were busy booting up new devices and living the wireless life--disruptive technology. And that's what flattened Blockbuster, in the end.

Blockbuster went bankrupt in 2010. Then the brand and assets were bought by Dish Network in 2011. Now Blockbuster is finally admitting defeat and closing all its remaining stores. Redbox still has its DVD rental kiosks but it also has an instant streaming subscription option.

In contrast to Blockbuster's marketing myopia, Netflix had its strategists looking ahead and steered its customer base toward all-digital delivery, reducing costs and allowing for instant analysis of customer likes/dislikes/behavior. Thanks to big data (a top buzzword of 2013), Netflix was able to determine exactly what its customers want to see--and commission or license entertainment exclusively for its streaming viewers. In other words, Netflix realized it was NOT only in the entertainment-by-mail business.

Netflix's Moments of Truth

Netflix has been so popular and resilient that it's hard to believe how poorly it handled its price increase and subsequent proposal to split into two companies, one for DVDs and one for streaming entertainment. (I've been a customer for years, DVDs being my preference, and after the price hike, I chose DVD-only rather than pay more for the privilege of streaming as well.)

Announcing that DVD-only subscribers would be shunted to a new division, Qwikster, caused such an uproar among inconvenienced customers that CEO Reed Hastings soon reversed this decision and did away with Qwikster. But the damage had been done.

Now that Netflix's latest quarterly earnings are out, it's clear that the company is losing subscribers--more than 800,000 defected in the last quarter. In other words, subscribers are voting with their money. And the defections may not be over.

As Netflix expands into other nations, its strong US base is not as sturdy as it was even 6 months ago. Plus Netflix's stumbles are hurting its standing in the financial community.

As the Washington Post points out, the battle for our living room is far from over, and once-dormant competitors like Blockbuster are scoring points. This year has brought several moments of truth for Netflix--and so far, the company is standing but staggering.

Old Marketing Rules Still Apply

Marketing's roots go back to one of Peter Drucker's most famous quotes:

“There is only one valid definition of business purpose: to create a customer.”

— Peter F. Drucker, Management: Tasks, Responsibilities, Practices

Even with all the business innovations, technological advances, and economic upheavals of the many decades since this was written, Prof. Drucker's observation is still a succinct description of what marketing should be doing.

In other words, no matter how the tools change, matter how the times change, no matter who the audience is and how it's changing, the old marketing rules still apply.

Video rental giant Blockbuster--now in bankruptcy--is a prime example of not moving quickly enough to keep up with snowballing shifts in customer behavior. In resisting the competitive onslaught of Netflix's online convenience and the instant-gratification benefit of Redbox's vending machines, Blockbuster took its eyes off the purpose of creating and retaining a loyal customer base, and thus lost its long-standing advantage.

Netflix wasn't substituting technology for a focus on the customer--it was using its insights into customer behavior to build a business based on creating and satisfying customers. The same holds true for Redbox, which didn't invent the vending machine but saw it as a cost-effective way to give movie-lovers access to recent releases at a low price and in convenient locations. Redbox created so many customers for its business model that vending machines are now seen as a prime way to distribute movie rentals.

The old marketing rules have not gone away...in fact, they're more important than ever.

What Happens After Blockbuster's Bankruptcy?

Blockbuster finally filed for bankruptcy protection today. TechCrunch, the well-respected tech blog, started its post this way (and I couldn't have said it better myself):

It’s come to this: the success of Netflix and Redbox in the United States have driven Blockbuster, as expected, to file for bankruptcy protection after failing to adequately and swiftly adapt its movie-rental model from physical storefronts to mail-order and online technology pioneered by its aforementioned competitors.

Now the question is: Can Blockbuster, slow to change its strategy in the past despite clear and present competitive danger, market itself into a profitable future? First, a look at the numbers:

• Blockbuster has 3,000 stores but will probably close hundreds and hundreds to cut its costs for bricks-based retailing and encourage customers to rent via electronic methods.
• Redbox has 23,000 kiosks in retail stores across the US and is expanding every day. Its costs are far lower than bricks-based Blockbuster and its limited inventory also keeps costs under control.
• Netflix has 15,000 subscribers and enjoys growth momentum. Its costs don't include storefronts, but renting DVDs by mail is more expensive than instant viewing (especially with a USPS rate increase in 2011). It must put more movies up for instant viewing to contain costs.

The next 6 months will be the real test. If Blockbuster (with its long-established brand) can convert customers to kiosks and online rental transactions by demonstrating a meaningful advantage or at best competitive parity with real benefits (such as first-release of movies, ahead of competitors), it could survive and ultimately reshape its destiny for a profitable future.

For an excellent analysis of Blockbuster's "blind spot," see this Fast Company post.

Can Blockbuster Rebuild?

Blockbuster is having a hard year (and it's only February). It's closing more stores, rolling out more movie kiosks in partnership with NCR, streaming movies online, and trying to regain momentum lost to Netflix and Redbox.

Some observers wonder whether Blockbuster will ever catch up to Netflix, which was once considered a feisty start-up long-shot and now dominates the industry. The Blockbuster brand is well known, but can the company transition from a "retail" brand to a broader concept?

Downloadable, streamable, and DVR-recorded movies from sources such as Amazon and Hulu.com are a competitive challenge for Blockbuster, which not long ago said its 2009 financial performance would not be, well, much of a blockbuster.

The company has a new iPhone app, which is a good thing. It's also got a mobile site, optimized for cell phone screens. But can Blockbuster rebuild in time?