Netflix, Blockbuster and the Offer That Was Turned Down

The story

In the 1990s, renting a movie usually meant driving to a Blockbuster store. At its peak, Blockbuster had about 9,000 locations and around $6 billion a year in revenue. It also made a lot of money from late fees, the charges you paid for bringing a movie back late. In 2000 alone, those fees brought in about $800 million.

Netflix started much smaller. It launched in 1998, renting DVDs by mail from a website. Co-founder Reed Hastings has said one spark for the idea was a $40 late fee he got from Blockbuster. Netflix soon switched to a monthly subscription: you paid one price, kept movies as long as you liked, and never paid a late fee.

In 2000, Netflix was losing money, and the dot-com bubble was bursting. Hastings and co-founder Marc Randolph met with Blockbuster's leaders, including CEO John Antioco. Their pitch: Blockbuster could buy Netflix for $50 million, and Netflix would run Blockbuster's online business. Blockbuster turned them down. Netflix's former finance chief, Barry McCarthy, later said Blockbuster "laughed us out of their office." From Blockbuster's point of view at the time, this was understandable. Netflix was tiny and unprofitable, and most customers still went to stores. Few people in 2000 could picture renting movies without ever leaving home, and Blockbuster's leaders had a huge, successful business to run.

Netflix kept growing anyway. It passed 1 million subscribers within about three years of that meeting and reached 6 million by the end of 2006. Blockbuster did eventually respond, and it fought harder than many people remember. In 2004 it launched Blockbuster Online, which gained more than a million subscribers in under a year. In 2006 it added "Total Access," which let online customers return DVDs at stores and get a free movie. It worked so well that in one 2007 quarter Netflix actually lost 55,000 subscribers. But each in-store swap cost Blockbuster about $2, and the company was carrying about $1 billion of debt from when it separated from its former owner, Viacom, in 2004.

Then the leadership changed. In 2007, after a dispute with investor Carl Icahn over his pay, Antioco left. The new CEO, James Keyes, pulled back from the costly online push and focused on the stores again. Meanwhile, Netflix began streaming movies over the internet in 2007, a change that would make both DVDs and video stores far less important.

On September 23, 2010, Blockbuster filed for bankruptcy protection. It had about 3,000 U.S. stores left and listed about $1.46 billion in debts. That same year, Netflix reached about 20 million subscribers and began expanding to other countries. Years later, only one Blockbuster store remained, in Bend, Oregon.

It is tempting to say that Netflix simply "killed" Blockbuster, but the true story is more interesting. Blockbuster saw the threat, built a strong answer, and for a while was winning. What sank it was a mix of heavy debt, a business that depended on fees customers hated, and a change of leaders who stepped back from the future just as it was arriving.