Introduction
Does everyone still remember Blockbuster? It’s a relic of a bygone era. Before online streaming, from the 1990s to around 2010, the mainstream way to watch movies or TV shows at home was to rent DVDs (or earlier, VHS tapes) from a Blockbuster store. At its peak, Blockbuster employed over 80,000 people and operated 9,000 stores worldwide. However, in 2010, Blockbuster officially lost its competition with Netflix and declared bankruptcy that same year.
During the Netflix-Blockbuster battle, one decision stands out as particularly unique, and I’d like to explore it with you: Netflix quietly watched Blockbuster bleed out while choosing to do nothing.
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Timeline of the Love-Hate Relationship Between Blockbuster and Netflix
1985
Blockbuster begins renting VHS tapes for movies.
1999
Blockbuster goes public on the NASDAQ with an IPO at $15 per share, achieving a market cap of approximately $3 billion that year.
1998
Netflix launches its online DVD rental service, with no physical stores, no late fees, and a subscription model.
2000
During the dot-com bubble, Netflix attempts to sell itself to Blockbuster for $50 million but is rejected and ridiculed.
2002
Netflix goes public on the NASDAQ with an IPO at $15 per share, reaching a market cap of around $300 million that year.
2003
Early in the year, Netflix announces it has reached 1 million subscribers. By the end of the year, it achieves $20 million in revenue and a profit of $6.5 million.
2004 Mid-Year
Blockbuster launches its own “Blockbuster Online,” an online DVD rental system. At launch, it offers 25,000 movie titles and tens of thousands of web pages for users to browse. More importantly, for $19.99 per month, users can rent 3 DVDs at a time with no late fees—a price point lower than Netflix’s $21.99 monthly subscription at the time. On the day of Blockbuster Online’s launch, Netflix’s stock price drops.
October 2004
Netflix announces a $4 price cut to $17.99 per month in response to competition from Amazon and delays its expansion plans in the UK. The price drop causes its stock to fall, as analysts predict Netflix won’t generate significant profits. However, Netflix’s CEO states, “The prize is big, the stakes are high, and we really want to win.”
End of 2004
Blockbuster Online lowers its monthly subscription fee to $14.99 and announces it has reached 1 million subscribers—a price lower than Netflix’s at the time! Blockbuster Online achieves this milestone much faster than Netflix did.
Faced with Blockbuster’s aggressive push, how does Netflix respond?
Facing Blockbuster’s Aggressive Moves, Netflix Chooses to “Do Nothing”
Why did Netflix decide to do nothing? Because Netflix knew:
- Blockbuster Was Heavily in Debt
When Blockbuster launched its online service, it was already carrying $1 billion in debt (due to a special dividend payment required during its 2004 spin-off from its parent company). This debt was a significant burden, as launching an online subscription service is costly, requiring substantial marketing, logistics, and warehousing expenses. - Blockbuster Was Losing Money on Its Business
Based on Netflix’s calculations, its $17.99 monthly fee was the lowest price at which it could break even and potentially profit. If the price dropped further, Netflix knew it would lose money on each customer and fail to cover monthly operating costs. Thus, when Blockbuster offered services at a lower price than Netflix, Netflix understood Blockbuster was operating at a loss. - Operating at a Loss Without a Rich Backer
Many companies use heavy subsidies in their early stages to acquire customers—essentially losing money to achieve success—such as Uber or Shopee. These loss-making strategies succeed because they have deep-pocketed backers. With heavy subsidies, competitors with shallower pockets are forced out, allowing the survivor to dominate the market and later adjust fees. Uber and Shopee, for example, raised rates after becoming market leaders.
However, in 2004, Blockbuster had already spun off from its parent company, which was unwilling to provide further financial support. Having gone public, Blockbuster also couldn’t raise additional capital through another IPO.
Netflix understood these factors and, based on its CFO’s projections, estimated that Blockbuster would be unable to sustain its losses within one to two years, forcing it to either abandon the plan or raise prices.
Thus, Netflix made a bold decision: it would not lower prices to compete with Blockbuster, instead maintaining its current operations and using profits to strengthen its infrastructure (e.g., website, logistics, algorithms). This allowed Netflix to solidify its foundation and better meet customer needs beyond price.
This decision drew significant criticism from the market, slowed Netflix’s growth, and led Wall Street traders to heavily short its stock. Many analysts downgraded Netflix and recommended selling its shares. Reuters even interviewed the CEO, asking how long this no-price-cut strategy would last. The CEO replied it would continue until the competition was defeated. Netflix was resolute in doing nothing to counter Blockbuster.
What Happened Next
2005
Blockbuster struggles with its $1 billion debt, negotiating with creditors for relaxed repayment terms. To cut marketing costs, it also removes some high-licensing-fee movies. Meanwhile, Netflix, debt-free and financially healthy, reaches 4 million subscribers by the end of the year.
2006
Blockbuster announces an increase in its monthly subscription fee to $17.99, matching Netflix’s price. Netflix, by doing nothing, forces Blockbuster to adjust its fees, avoiding a price war. Later that year, to prevent customers from choosing Netflix at the same price, Blockbuster launches Total Access, allowing subscribers to rent movies either online or in-store to attract users. While successful, this strategy further strains Blockbuster’s profitability.
2007
Blockbuster’s board undergoes a shakeup. Due to unprofitability from low-price competition and Total Access, the original CEO is ousted, and a new CEO takes over. The new CEO refocuses on physical stores and raises the subscription fee from $17.99 to $19.99 per month. Blockbuster never recovers, heading toward bankruptcy and delisting.
Reflection
Netflix’s analysis was correct—Blockbuster’s reliance on short-term low pricing for growth proved unsustainable, especially since its online DVD rental service undermined its own physical stores’ operations and revenue. Without steady income from stores to fund the money-burning online rental business, Blockbuster gradually collapsed.
The waiting game without lowering prices must have been incredibly tough for Netflix, especially waiting against the odds. In contrast, charging forward with a set strategy is easier because there’s a goal to pursue, even if results aren’t immediate—you know you’re moving forward. However, Netflix’s decision to hold firm and wait for its competitor to implode, backed by a robust financial model, required extraordinary confidence (in its financial projections) and exceptional strategic execution. This was another masterful move by Netflix.
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