How Netflix Destroyed Blockbuster in Just 6 Years (2024)

Blockbuster had a chance.

The company could have saved itself from getting annihilated by Netflix if it had bought it for $50 million when Netflix co-founder, Reed Hastings, gave them an offer.

Not only did Blockbuster decline Netflix’s offer but they also laughed at it. Huge mistake.

In 2010, Blockbuster filed for bankruptcy and Netflix made an annual net income of $161 million.

I have prepared a small timeline to briefly demonstrate how Netflix bankrupted Blockbuster.

Reed Hastings, the co-founder of Netflix, forgot to return a rented VHS tape of the movie “Apollo 13” and was charged a $40 late fee. Hastings and Marc Randolf, who also happened to be co-workers, decided to revolutionize the movie-rental business and founded Netflix. One of the key features of their model was to eliminate late fees.

Netflix officially opened its DVD rental business this year with 30 employees. Remember, this was the time when customers were still used to renting Blockbuster’s VHS tapes, and not many people owned DVD players because they were expensive. However, Netflix founders were willing to take the risk.

It worked. The website received a lot of traffic. Netflix also joined hands with Toshiba, HP, and Sony and offered free DVD rentals to new DVD player buyers.

Netflix received a huge help from Groupe Arnault, a France-based private company owned by Bernard Arnault. A $30 million investment from the company helped Netlfix launch its subscription-based service.

Customers loved the idea of renting out as many DVDs as they wanted for $16 a month (given that they only had 4 DVDs in their possession at any given time). There was no late fee for not returning DVDs in a given period.

Despite its growing popularity, Netflix was still earning a measly $5 million in revenue. Meanwhile Blockbuster, Netflix’s biggest competitor, was killing it and making a whopping $4.5 billion.

This is when Netflix knocked on Blockbuster’s door and asked for some help. As I have already mentioned above, Blockbuster kicked them out in a rather discourteous way.

Netflix was yearning for external assistance as it experienced $58 million in losses this year.

Reed Hastings managed to keep Netflix afloat while he hoped for DVD players to go mainstream. And it finally happened — DVD players were now cheap and people started buying them.

But DVD players were worthless without the right DVDs. No worries—Netflix was there to fill this gap by offering convenient DVD rentals.

They say good things come to those who wait. After years of hardships and brutal rejections, 2003 turned out to be the first profitable year for Netflix.

The company also crossed the 1 million subscriber mark this year.

Blockbuster realized that the old VHS rental model might not be their best bet, and the company began its online DVD-by-mail service, which was similar to Netflix.

The big boy was in direct DVD-rental competition with the little guy, but that didn’t stop Netflix from continuing.

Netflix was slowly increasing its profits as well as its popularity. This was the time during which they shipped 1 million DVDs daily.

As compared to 1998, when Netflix first opened, 2005 was a completely new era. Customers were inclined to ordering DVDs online instead of visiting a physical outlet — something that Netflix was used to and Blockbuster was new to.

Blockbuster’s brick-and-mortar film-rental model was becoming obsolete. The company started losing its revenue as well as popularity, gradually.

Netflix mailed its billionth DVD this year. The company now also started offering an on-demand video streaming service.

But, they hadn’t obtained the copyrights to bestselling movies or TV shows yet, so the videos available on Netflix’s on-demand service were, for the lack of a better word, generic.

During this time, Blockbuster’s profits were declining further and Netflix’s profits were rising.

Netflix realized that it needed to provide more popular videos for its on-demand video streaming service to succeed. So the company signed a deal with Starz to bring more than a couple thousand movies and shows onboard.

Blockbuster’s profits declined further.

By this time, Netflix had signed deals with the entertainment industry giants, such as Disney, Lionsgate, MGM, Paramount, and Sony. Netflix became extremely popular in North America and grabbed a 20% share of peak-hour traffic.

Netflix’s profits increased further and Blockbuster, well, they finally accepted their defeat in this 6-year David versus Goliath type of battle and filed for bankruptcy.

Long-sightedness and adaptability are crucial for surviving and thriving as a business.

Blockbuster’s decisionmakers’ failure to embrace new opportunities and treating their competitors with arrogance led to their destruction.

Remember, your customers will pay for what’s best for them. No matter how popular your business is, your customers will go to your competitors at the drop of a hat if they’re offered better products or services.