Do you remember Blockbuster? It’s one of the relics of a bygone era. Before the advent of online streaming, from the 1990s up until the early 2010s, the mainstream way to watch movies or TV shows at home involved heading to Blockbuster stores to rent DVDs (or even VHS tapes earlier on). At its peak, Blockbuster boasted over 80,000 employees and about 9,000 stores worldwide. However, by 2010, Blockbuster officially declared bankruptcy, having lost the competitive battle with Netflix.
During the battle between Netflix and Blockbuster, there was one decision by Netflix that stood out, which I’d like to discuss with all of you. That decision was Netflix’s choice to simply watch Blockbuster bleed out, opting to do nothing.
powered by ChatGPT
Chronology of War Between Blockbuster and Netflix
1985 – Blockbuster kicks off its movie rental business with VHS tapes.
1999 – Blockbuster goes public at $15 per share on the NASDAQ, achieving a market valuation of approximately $3 billion.
1998 – Netflix launches its online DVD rental service without any physical stores and does not charge any late return fees, opting for a subscription model instead.
2000 – During the dot-com bubble, Netflix, struggling to stay afloat, offers itself for sale to Blockbuster for $50 million. Blockbuster declines the offer, a decision it would later regret.
2002 – Netflix goes public, listing at $15 per share on NASDAQ, starting with a market value of about $300 million.
2003 – At the beginning of the year, Netflix announces it has reached one million subscribers. By year-end, it reports revenues of over $20 million and profits of $6.5 million.
Mid-2004 – Blockbuster launches its own online DVD rental system, “Blockbuster Online,” with an initial library of 25,000 movies and tens of thousands of web pages. Crucially, they set their monthly subscription fee at $19.99, allowing customers to rent three DVDs at a time without incurring late fees, undercutting Netflix’s monthly fee of $21.99. The launch of Blockbuster Online leads to a drop in Netflix’s stock price.
October 2004 – Netflix, in response to competition from Amazon and others, reduces its subscription fee by $4 to $17.99 and slows down its plans for expansion into the UK. The price cut leads to a further drop in its stock price, as analysts predict difficulties in achieving substantial profits. However, Netflix’s CEO remains optimistic, stating, “The stakes are very high, and we want to win.”
End of 2004 – Blockbuster Online announces a price cut to $14.99 per month and reaches one million subscribers, achieving this milestone faster than Netflix did and at a lower subscription cost than Netflix’s at that time.
Facing the Onslaught from Blockbuster, What is Netflix’s Next Move?
Facing Blockbuster’s Aggressive Push, Netflix Chooses to ‘Do Nothing’
Why would Netflix decide to do nothing? Netflix knew that:
- Blockbuster was Heavily Indebted
At the time of launching its online service, Blockbuster was already burdened with $1 billion in debt, a remnant from the special dividends it had to pay following its spin-off from Viacom in 2004. This debt was a severe issue for Blockbuster because starting an online subscription service involved high costs, including significant expenses for marketing, logistics, and warehousing.
- Blockbuster Was Operating at a Loss
Based on Netflix’s calculations, the $17.99 monthly fee was nearly the lowest they could offer while breaking even and potentially making a profit. Any lower could mean incurring losses on acquiring each customer and running operational deficits monthly. Therefore, when Blockbuster provided services at a lower monthly rate than Netflix’s, Netflix knew Blockbuster was operating at a loss.
- Operating at a Loss Without Financial Backup
Many companies subsidize heavily to gain customers early on, operating at a loss to achieve market dominance, such as Uber and Shopee. These businesses rely on “sugar parents” or substantial financial backing that allows them to sustain losses and eliminate financially weaker competitors. Once they achieve a dominant market position, they gradually adjust their pricing strategies. Uber and Shopee are prime examples of this approach, adjusting their rates once they became market leaders.
However, by 2004, Blockbuster had been spun off from its parent company, which was unwilling to provide additional financial support. Moreover, Blockbuster was already a public company, which limited its ability to raise further capital through the stock market.
Strategic Patience and Market Insight
Netflix’s decision to ‘do nothing’ was based not on inaction but on strategic patience and precise market insights. They understood the financial pressures Blockbuster was under and chose to wait them out rather than engage in a potentially costly price war. This approach not only preserved Netflix’s resources but also allowed them to continue focusing on improving their service and expanding their content library without the burden of unsustainable financial tactics.
As a result, Netflix’s strategy of watching and waiting as Blockbuster struggled under its financial and operational burdens allowed Netflix to emerge stronger and more prepared to dominate the streaming market. This case is a classic example of how understanding the broader market environment and competitor vulnerabilities can be a more effective strategy than aggressive competition. It highlights the importance of strategic decisions in business, particularly in fast-evolving industries like digital streaming.
Netflix Knows the Situation and CFO’s Forecast
Netflix was aware of the financial woes Blockbuster was experiencing with $1 billion in debt from the special dividends paid out after their spin-off. The CFO predicted that Blockbuster could not sustain its losses for one to two years and would have to either terminate the plan or adjust the pricing.
Netflix’s Bold Decision
In a bold move, Netflix decided to stop competing with Blockbuster on price reductions. Instead, it maintained its current operations and used its profits to strengthen its infrastructure—enhancing the website, logistics, algorithms, etc.—to solidify its foundation and fulfill customer needs beyond just pricing.
This decision drew significant criticism from the market; growth slowed, Wall Street traders heavily shorted Netflix stocks, and many analysts downgraded Netflix’s rating, advising clients to sell off its stocks. Reuters even interviewed the CEO asking how long the no-price-drop strategy would hold, to which he replied it would continue until they beat the competition. Netflix was resolute in its stand to do nothing and face Blockbuster head-on.
The Subsequent Story
In 2005, unable to manage its $1 billion debt, Blockbuster negotiated with creditors to ease the repayment terms and also cut marketing costs by dropping some high-licensing-fee films. In contrast, Netflix was debt-free and financially healthy, ending the year with 4 million subscribers.
In 2006, Blockbuster adjusted its monthly subscription fee to $17.99, matching Netflix’s price, which automatically avoided a price war without Netflix having to do anything. Later that year, to prevent customers from choosing Netflix over them at the same price, Blockbuster launched the Total Access service, allowing subscribers to rent movies online or from stores to attract customers. Although a successful strategy, it put an even greater strain on Blockbuster’s profitability.
By 2007, there was a change in Blockbuster’s board as the low pricing and Total Access service had failed to be profitable, and the CEO was ousted in favor of a new one. The new CEO decided to refocus on physical stores and increased the subscription fee from $17.99 to $19.99. However, it was too late, and Blockbuster could not recover, eventually heading towards bankruptcy.
Lessons Learned
Netflix’s strategy of inaction was based on its understanding of Blockbuster’s unsustainable financial practices and market positioning. By maintaining its service quality and customer satisfaction, Netflix not only avoided unnecessary price wars but also positioned itself as a stable and reliable service provider, eventually outliving its once formidable competitor. This narrative showcases the importance of strategic patience and understanding market dynamics, proving that sometimes, doing nothing is doing something.