There’s a story that Marc Randolph, co-founder and former CEO of Netflix, never seems to tire of telling. In 2000, he and co-founder Reed Hastings met Blockbuster’s then chairman and CEO, John Antioco, at the video rental firm’s Dallas HQ. Blockbuster had about 5,000 stores in the US at that point, while Netflix had just started offering its new subscription model. The pair offered Blockbuster a 49% stake in their three-year-old business for $50m – and were laughed out of the room.
That rejection is widely regarded as one of the biggest mistakes in business history. Fast-forward to today and Netflix has a market cap of just over $250bn (£200bn), while Blockbuster is defunct, having filed for Chapter 11 bankruptcy protection in 2010.
Many people believe that the Netflix rebuff sparked Blockbuster’s fatal decline, but that’s an easy conclusion to draw with the benefit of hindsight, claims James Keyes, who replaced Antioco as CEO in 2007.
“It’s like asking: ‘Why didn’t you buy Apple stock in 1985?’” says Keyes. He maintains that he would have done the same as Antioco if he’d been at the meeting.
“I would have said ‘no’ at the time. All Netflix had in 2000 was DVDs by mail, which was absolutely something that Blockbuster could replicate on its own,” he recalls. “There really wasn’t a strategic advantage [to investing].”
The challenge of replicating success
In 2007, Keyes was identified as the ideal candidate to turn around a beleaguered Blockbuster due to the success he’d had leading the convenience store chain 7-Eleven. Between 1985 and 2005, he held a number of senior positions at the retailer, including CFO, chief operating officer and, finally, CEO between 2000 and 2005.
During those 20 years, Keyes helped 7-Eleven end a decade-long run of declining same-store sales, successfully restructured the business following bankruptcy and led it on a 36-quarter run of consecutive revenue growth.
Blockbuster wasn’t doomed to fail at all
Technology was the single biggest contributor to the turnaround, according to Keyes. Taking cues from the success of 7-Eleven’s Japanese stores, the US operation brought in automated systems to enhance the decision-making capabilities of each store owner. Rather than distributors and central office having the power to set delivery schedules and decide which products to stock, the responsibility was placed in the hands of the store managers.
“We didn’t take the people out of the equation, instead the technology enhanced the ability of the retailer to be a better retailer,” Keyes says. There was optimism that he could achieve a similar turnaround at Blockbuster in part because the firm was so far behind from a technology point of view.
“Blockbuster was still early in its digital transformation when I joined. Its core systems were programmed in Fortran, an early programming language that’s one step above punch cards,” Keyes jokes. “It had not upgraded its technology to even maintain effective operations inside the stores, much less be able to enter the digital age with streaming.”
Blockbuster left playing catch-up
It seems that Blockbuster never did catch up. The firm’s failure to keep pace with digital advances in the industry was seen by many analysts as the main reason for its downfall. Writing for Business Insider in 2010, streaming media industry analyst Dan Rayburn noted: “When asked different questions about Blockbuster’s digital strategy, CEO Jim Keyes responded by saying things like, ‘these times demand a conservative approach’ and ‘we will proceed cautiously as to how aggressive the company should be’. For a company that has almost no digital offering today, those are some pretty scary statements.”
The reason for this conservatism was the fact that Keyes believed Blockbuster’s shops still had the ability to generate more cash. “We had to focus on fixing the stores and generating more cash, so we could invest in the digital future,” says Keyes.
This left Blockbuster playing catch-up with the digital disruptors. To overcome that, Keyes’ plan was to focus on securing exclusive content that would provide the company with a useful competitive advantage. An acquisition of the now defunct video-on-demand service Movielink, a collaborative venture between five of the major Hollywood movie studios, gave Blockbuster a streaming platform to finally allow it to compete with Netflix and a digital library of 3,000 titles.
However, the sale closed in August 2007, just prior to the 2008 financial crash. This posed a problem for Blockbuster because it was yet to repay the almost $1bn of debt it had been loaded with by its former owner Viacom before it was spun out in 2004. The large amount of debt on the balance sheet made it hard to justify additional spending on its digital offering to shareholders when the majority of Blockbuster’s revenue still came from its physical stores. This meant Blockbuster was unable to secure exclusive rights to Movielink’s back catalogue of films.
“It’s a lot more challenging to do a major transformation in a public market environment,” Keyes says. “If I had a crystal ball, I would have acquired [Movielink’s] content and locked it down exclusively. That meant Netflix would have had very little to stream, but we passed on that opportunity.”
Blockbuster’s cash problem
Keyes’ final roll of the dice came in 2008, when he attempted to purchase the struggling electronics retailer Circuit City. Keyes saw an opportunity to bundle Blockbuster’s on-demand service with sales of its devices. “It could have been a Trojan Horse for our video-streaming service,” he says.
However, analysts saw it as a last ditch effort from a former 7-Eleven CEO to rescue another retailer, rather than the business opportunity Keyes had intended. CNBC host Jim Cramer even added Keyes to his ‘Hall of Shame’ over the decision. At the time, Keyes found the constant criticism hard to handle. “It’s not fun at all,” he says. “Most of my friends and family were saying, ‘Jim, get out of there.’ ”
Blockbuster’s offer was ultimately withdrawn, following the due diligence process.
Most of my friends and family were saying, ‘Jim, get out of there!’
In moments like this, Keyes says it’s important to remember that others are not privy to the same information you are. “When you get someone online that accuses you of screwing up the company, you need to remember they weren’t looking at the balance sheet at the time,” he adds. “That’s what allows you to continue onward to the next opportunity, by recognising that you did your best with the information and resources you had at the time.”
The final “crushing blow” for Blockbuster was the decision of the movie studios that it partnered with to go from 90-day credit, to cash. It was this, rather than a failure to keep up with digital upstarts like Netflix and Redbox, that Keyes believes was the cause of the company’s demise. “It made it impossible to sustain the company at that point and forced us into a restructuring,” he says.
Ultimately, Keyes remains convinced that the Blockbuster brand could have survived had circumstances not conspired against him. “I don’t think it was doomed to fail at all,” he says. “Blockbuster had huge potential. If we put together the pieces of the puzzle that I had planned, we would have had older movies exclusively and new releases on demand as well. If that had happened, I think it would have been strongly competitive with Netflix.”
James Keyes’ three pieces of advice for business leaders
1. Business leaders should all know the importance of cash flow but the bigger the corporation, the harder it is to persuade the organisation to embrace its importance. This is the main difference between being held to an earnings-per-share standard and EBITDA.
The reason that EBITDA is so important in a private company is the ability to satisfy financial obligations. During difficult economic times, as we have seen in the past year, businesses must be extraordinarily focused on cash flow so they don’t find themselves behind the power curve.
2. Lesson number two is the importance of embracing change and communicating that change throughout an organisation. Change is always difficult and it can be challenging to communicate the difference between a subscription strategy and an on-demand strategy, for example. Having people rally around that strategy requires tremendous clarity. That makes good communication during challenging times extremely important.
3. The third one lesson is a little more personal. When you’re going through tough times, there’s a tendency to take criticism personally. There was a picture of me in the New York Times with a Pinocchio nose.
That is hard on friends and family because even though you know you’re doing the right things and proceeding on a strategic vision, the criticism is easily lobbed in from the outside. At the end of the day, it’s business, it’s not personal. You have to block out the noise.
There’s a story that Marc Randolph, co-founder and former CEO of Netflix, never seems to tire of telling. In 2000, he and co-founder Reed Hastings met Blockbuster’s then chairman and CEO, John Antioco, at the video rental firm’s Dallas HQ. Blockbuster had about 5,000 stores in the US at that point, while Netflix had just started offering its new subscription model. The pair offered Blockbuster a 49% stake in their three-year-old business for $50m – and were laughed out of the room.
That rejection is widely regarded as one of the biggest mistakes in business history. Fast-forward to today and Netflix has a market cap of just over $250bn (£200bn), while Blockbuster is defunct, having filed for Chapter 11 bankruptcy protection in 2010.
Many people believe that the Netflix rebuff sparked Blockbuster’s fatal decline, but that’s an easy conclusion to draw with the benefit of hindsight, claims James Keyes, who replaced Antioco as CEO in 2007.
