Blockbuster's $980 million voluntary Chapter 11 bankruptcy filing Thursday marks the end of a very rough road for the video rental company. At some level, Blockbuster's demise was caused by the Internet, which made it easier to download movies and to rent DVDs than to rent VHS tapes. But Netflix (NFLX) faced the same threat from video streaming, and it has handled that transition masterfully. Why the difference? Netflix harnessed technology to create a service that customers like better than their competitors' offerings. Blockbuster was deal-bait.

Blockbuster's bankruptcy will keep some of its stores open and transfer control from Viacom's (VIA.B) Sumner Redstone to corporate raiding veteran Carl Icahn. So if you rent from one of Blockbuster's 3,000 company-operated stores; 400 franchise stores, DVD-by-mail, or rental kiosks you can continue to do so, according to the Dallas Morning News. Not only that, but your rewards programs, coupons and gift cards will continue to be honored.

Icahn has obtained the financing to keep all this running, helping persuade 80% of Blockbuster's senior secured debt holders to give it $125 million in new debtor-in-possession financing that will allow it to pay suppliers and employees. The new deal cuts its $980 million in debt to about $100 million as the Dallas Morning News reports.

Blockbuster: Doing Deals, but Lagging on Innovation

Blockbuster has an interesting history that features repeated episodes of deal-makers using it to make a quick buck rather than focusing on beating the competition. According to TheStreet.com, Blockbuster was founded in 1985 by a Dallas oilman with a passion for databases. He sold a third of the company for $18 million to Wayne Huizenga, a guy with a record of consolidating fragmented industries like waste management.

By 1989, Huizenga had acquired many Blockbuster rivals and got into some trouble for questionable accounting. At the same time, growth was slowing and new ways for people to see movies -- pay-per-view and cable programming -- were getting more mainstream. By 1993, Blockbuster had 3,400 stores and decided that the growth market was in music. So it proposed a merger with Viacom, which ended with the latter paying $8.4 billion to acquire Blockbuster, according to TheStreet.com.
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Blockbuster struggled with cash flow after Viacom's disappointing August 1999 offering of 18% of its shares to the public, but its deeper struggle was that it was consistently late to the new technology party. Its responses to Amazon's (AMZN) DVD service; Netlfix's mail rental service, and Coinstar's (CSTR) kiosk service all came years too late. In 2004, Icahn -- who had acquired Blockbuster rival Hollywood Video -- bought 9.9 million shares of Blockbuster to push through a merger between the two.

That merger failed, and Icahn sold Hollywood Video to Movie Gallery in January 2005 -- but he still owned his stake in Blockbuster. With today's bankruptcy filing, Icahn has finally gotten his wish to take over Blockbuster, but it seems like a pyrrhic victory.

While it's still the largest U.S. video rental company with 47 million customers, Blockbuster has lost market share to Netflix's DVD by-mail business and Redbox's DVD rental kiosks, according to the Dallas Morning News. Netflix has "15 million by-mail customers to Blockbuster's 2.6 million. Redbox has more than 20,000 kiosks to Blockbuster's 7,000."

NetFlix: Customer-Focused Innovation Leads to Growth

Netflix, by contrast, has been thriving -- even though its traditional model of renting DVDs through the mail is threatened by video streaming. As I wrote in a March 26 article on DailyFinance, Netflix started with a simple, but brilliant idea: Charge people a reasonable flat fee, and mail DVDs to them as often as they want. Later, Netflix took its delivery process one step further: It started allowing people to view streaming videos online.

Netflix's corporate mindset has been key to its ability to adapt as people started gravitating toward online video streaming. It's method is to put new technology at the service of customers while keeping a close eye on changing delivery costs and the competition.

Netflix expects that over the next several years, following the Postal Service's proposed 7% rate hike for DVD mailers, its annual costs to shipping DVDs will climb from $600 million to $700 million. As these charges rise and it becomes more expensive for consumers to rent DVDs by mail, Netflix plans increasingly to focus on online streaming and making more titles available for download.

While the company has grown quickly, Netflix is concerned about the competition -- both old-style movie viewing options and the DVD-rental kiosks. As far as the consumers go, Netflix thinks that busy people see downloading a movie through Netflix as a less expensive -- at $8.99 per month for unlimited rentals -- and more time efficient way to see a movie than making a trip to a movie theater.

The upshot of all those differences in corporate philosophy is that Netflix is prospering while Blockbuster is bankrupt. The contrast highlights why customer-focused innovation trumps deal-doing as a way to grow a business. That our economic system has become so focused on the latter rather than the former helps explain why we're having so much trouble creating enough jobs to employ the 8.4 million people who have been tossed out of work since December 2007. America should take a lesson from Netflix.


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12 Comments

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Nicole

I like the convenience of renting old/current DVD’s, Blu-ray’s and video games all from one place which is why Blockbuster is still a better catch. Blockbuster is known for having large selections that vary over numerous genres. I just started a new membership with Blockbuster since I work for DISH Network, and was curious to see how they changed things since I remember Blockbuster from years ago. I’m getting 3 months free from DISH Network and this includes their in-store and mail-in services. No late fees and no commitment, but I have access to new releases 28 days before their competitors. http://bit.ly/l2OWJ8

August 11 2011 at 11:40 PM Report abuse rate up rate down Reply
malcolm

taking the human element out of the equation will always result in cheaper product/service. redbox doesnt have to hire many since its a vending machine that you deal with not a human and netflix is mail order or internet service. well thats the wave of the future less humans needed since technology is the answer. travel agents, insurance agents, soon real estate agents etc. will no longer be needed.

September 24 2010 at 7:24 AM Report abuse rate up rate down Reply
romdallas

It was $8.4 BILLION (not "measly $8.4 million"). That is why its decline is so spectacular, though nothing as brilliant and rapid compared to Lehman, Wachovia, GM, AIG, etc

September 23 2010 at 11:37 PM Report abuse rate up rate down Reply
bouncerdave2006

if they dropped tgheir prices maybe the could compete.redbox charges a dollar a night so why cant blockbuster?

September 23 2010 at 10:54 PM Report abuse rate up rate down Reply
skooli

I don't understand why actual movie production companies can't directly offer this service for an even cheaper price. Ok, yes I do, wholesale to resale. Duh...

September 23 2010 at 10:44 PM Report abuse rate up rate down Reply
jimobrien

Correction - 2001 was the year of this Blockbuster-Enron debacle.

September 23 2010 at 10:18 PM Report abuse rate up rate down Reply
jimobrien

Blockbuster had a great chance to be a leader in online video and they funded a large-scale project in 2002 (well before Netflix), but, they ignorantly gave this contract to Enron (you can't make this stuff up) which had NO infrastructure. They believed the Enron liars and the whole online effort failed miserably. They wrote off millions of dollars and never got another online effort together until far too late... They also didn't appreciate what can be done via the mail, which Netflix mastered. A one-two punch, and they're OUT, sadly along with their investors... Hope they can recover someday - they were great pioneers, and, their stores have served tens of millions of people very well.

September 23 2010 at 10:16 PM Report abuse rate up rate down Reply
JIM

As far as mailing movies Blockbuster is much faster and i have tried them both. Neither of them are very good at moving movies up from the very long wait and long wait ratings, as a matter of fact ive never seen them move up at all.

September 23 2010 at 5:32 PM Report abuse -2 rate up rate down Reply
1 reply to JIM's comment
ED

I find just the opposite to be true. Netflix will mail out the new dvd, the same day, that the old one is received, and I receive the new one, on the following day. So if I mail one, on Monday, they get it, on Tuesday, and I have another, on Wednesday. With Blockbuster, it can take 5 to 6 days to turnaround. Also Blockbuster dvds are frequently damaged, while Netflix have never been, so you can't blame the post office. Just this month, I received three cracked copies, of the exact same film, over a period, of two weeks, and finally I had them take the title, out of my queue, because I was so disgusted. For two weeks, I got nothing to watch, for my money, from them, because of this situation. By the way, they weren't sending back the exact same cracked dvd, either, because I retained the cracked ones, until I gave up, on it. See full article from DailyFinance: http://srph.it/cUd4M0

September 23 2010 at 6:53 PM Report abuse +2 rate up rate down Reply
Hello Robert

ok, sounds great you go girl

September 23 2010 at 5:04 PM Report abuse rate up rate down Reply
Gumby

oh what a stupid headline question you make!!

September 23 2010 at 4:37 PM Report abuse rate up rate down Reply
1 reply to Gumby's comment
Rhonda White

{gumby}???~ What in the world are you talking about~? :):);)D=)

September 23 2010 at 8:24 PM Report abuse rate up rate down Reply