The worst trades in history… Blockbuster spurns Netflix

Blockbuster was set up in 1985 by David Cook following a dispute with the video chain Video Works. His idea of setting up a chain of video stores that featured a wide range of titles, didn’t stock adult movies and displayed the videos on the shelves (rather than behind the counter) proved a hit with customers. Fuelled by the acquisition of rivals, Blockbuster would reach 3,400 stores by 1993, and was purchased by media company Viacom for $8.3bn the same year. The deal was not a success, but Blockbuster was still worth $2.5bn when it was returned to the stock exchange in 1999. moneyweek.com

What was the idea?

In 2000 Blockbuster received an offer from an upstart DVD-rentalby-post service called Netflix – ironically founded out of anger at Blockbuster’s fees for returning films late – which was growing in popularity but losing money. Netflix wanted Blockbuster to buy it for $50m, with the idea that Netflix would become the rental arm of Blockbuster and be advertised in its stores. Blockbuster turned down the deal, believing Netflix would add little to the firm and might end up taking business away from its physical locations. It spurned repeated offers from Netflix, including one as late as 2007.

What happened next?

From 2000 onwards Blockbuster would make several errors. Its plans to deliver video on demand with Enron unravelled. A deceptive attempt to end explicit late fees, only to claw them back, generated bad publicity. Worst of all, activist investor Carl Icahn removed CEO John Antioco in 2007, who was starting to imitate aspects of the Netflix model, including another attempt at online streaming. Blockbuster’s sales plummeted, resulting in the store declaring bankruptcy in September 2010. In contrast, Netflix now has a market capitalisation of $163bn.

Lessons for investors

Blockbuster’s bankruptcy wiped out its shareholders, destroying what had, at its peak in 2004, been a firm with a market cap of $5bn. The management’s decision to spurn Netflix needn’t have been a fatal error – they could easily have replicated Netflix’s model, or bought Netflix only to drag it down with them. Still, the decision was indicative of a company that was failing because it was unwilling to adapt to new technologies. Indeed, Icahn prevented it from taking steps that might have saved it from destruction, showing that interventions by activists are not always positive. 3 February 2023