Saturday, June 10, 2017

The rise of Netflix and fall of Blockbuster

The article “Seven ways to fail big” is about most significant business failures from the year 1981 to 2015 and the lessons to avoid those catastrophes. It’s an insightful article, based on research on 750 major business failures in U.S. and claims that almost half of them could have been avoided if better business strategies were used. One big example is the failure of “Blockbuster”.

Blockbuster was an American Company, founded in 1985 and was known as King in its market. It used to provide video renting service. The firm downfall started in 2004 from $6 billion revenue to bankruptcy in 2010 because of its slow reaction to deal up with the new competitors in the digital market. Its competitors were Netflix and Redbox, offering renting videos to a customer by using better strategies and latest technologies. Slowly Netflix took the entire customer base of Blockbuster.

Prior to the failure, Blockbuster had many opportunities to avoid the worst-case scenario. In 2000, Netflix approached this giant video rental firm for the partnership worth $50 million. At that time Blockbuster could have easily afforded that amount, but it rejected the offer without doing a detailed analysis of the threat that can lead it to disaster. Blockbuster instead decided to merge with Enron Broadband Services to roll out on-demand movies. In 2001 Enron Broadband filed bankruptcy due to the accounting scandal, leading loss of $1.6 billion to Blockbuster. Extremely poor execution and lack of commitment to the strategy lead to its failure.

Famous quote: “Failure is a success if we learn from it” by Malcolm Forbes truly explains that if we learn from failure, then no one can stop us from achieving success. So, following lessons can be learned from Blockbuster’s failure:

1) The Synergy Mirage: Blockbuster planned to merge with Enron Broadband Services to provide on-demand movie service to the customers, but Enron got bankrupted due to its accounting scandal. So, the wrong decision of Blockbuster to merge with Enron rather than Netflix led to the huge loss of the company.

2) Bet on wrong Technology: Blockbuster thought that the customers like walking to store, picking up a movie and popcorn, but they miss interpreted that customers were interested in walking into a store and purchasing movies rather than watching movies. So, it setup a massive distribution network for movie studio product, without thinking that customer preferences may change. Whereas, Netflix started its mail-order business for renting bigger libraries of movies with monthly subscription much cheaper than Blockbuster. Netflix did not invest much in it as they knew the online streaming will be the ultimate distribution method. Thus, huge investment in wrong technology eventually led to the loss of Blockbuster.

3) Stubbornly Staying the Course: Blockbuster had multiple opportunities to acquire Netflix, but they turned down as did not want to disrupt its revenue. Instead, it tried to add more books, toys to their physical store. Blockbuster was trying to manage their business by looking their past strategies while Netflix had a clear focus on the future- video streaming.

Thus, these factors led to the rise of Netflix and fall of Blockbuster.

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