When Your Assets Become Liabilities, a Blockbuster Story

Last week, Jonathan Baskin, a former executive at Blockbuster and now a brand consultant, wrote a fascinating insight in Forbes into the setting for the demise of his former employer.

Baskin argues that Blockbuster and its executives early on failed to recognize that its primary value was not as they believed, convenience, “get a movie right in your neighbourhood!” Logically, if physical reach is your key value-add, then a strategy mixing new store expansion and existing store acquisition makes perfect sense. And, of course, that is exactly what Blockbuster did.

However, in the mid-90s, as Hollywood had a few bad years – not putting out enough movies that people wanted to see – Blockbuster’s revenues fell as well. It turns out that customers were not coming to Blockbuster for convenience, but rather to catch the must-see movie that they didn’t have the opportunity to see in theatres, or were not sufficiently motivated to see at theatre prices but were still enticing enough to see on a rented tape.

Movies (and all entertainment) follow a “density calendar”. If there are enough exciting ones in a given period of time, few will see them all, creating great demand for rentals. But there is a certain density below which even the most casual film-goers will have seen everything they want to see. For those in the technology world, this is like network technology (anyone remember CSMA/CD?): over a certain threshold, rentals will skyrocket; below that threshold, it will plummet.

Rentals act like highly leveraged derivatives on the underlying Hollywood theatre films. Above a certain price, and the derivatives are worth a huge amount; below it, they might as well be worthless.

In Baskin’s article, he lays out the attempt to reimagine Blockbuster as a convenience store (swap all of the executives), which failed, as did the business eventually.

But why could Blockbuster not have imagined itself in other businesses? Why was it so bound to foot traffic into its rental locations, its physical stores as a convenience?

Blockbuster’s execs (and Board) built its entire business on its physical neighbourhood stores and its supply chain as its critical assets. Every alternative scenario, however radical, started or ended with the assumption that those stores are assets. But assets in one business model are liabilities in another. Blockbuster needed to recognize not only the business they were in, but to question the entire premise of its business model. If it had been willing to do so, it could easily have owned the DVD-by-mail market long before Netflix, and possibly even online streaming.

Netflix today is worth almost $20BN; Blockbuster is worthless.

But it is very hard to let go of your assumptions…

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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