Friday, September 24, 2010, 8:44 AM ET|Posted by Will RichmondBlockbuster's bankruptcy filing was a long time in coming, but is still daunting when you think back to how omnipresent and powerful the company used to be. To be sure, there has been a lot of distracting M&A and corporate drama surrounding Blockbuster over the years which no doubt contributed to its decline. Still, there have been fundamental shifts in its business that Blockbuster missed.
Specifically, Netflix has been both a catalyst of Blockbuster's demise and also a big beneficiary. Now, with Netflix aggressively pursuing over-the-top streaming, it is inevitably going to put pressure on traditional pay-TV operators. So what might pay-TV operators learn from Blockbuster's bankruptcy? Here are 6 things. No doubt there are more.
1. Love your customers, don't abuse them - Blockbuster earned the enmity of its customers with egregious late return fees. Short-term that was profitable, but long-term it built up huge resentment and frustration (Netflix lore is that CEO Reed Hastings started the company in response to his own frustration over late fees). When customers feel taken advantage of, the door swings open to competitors. Many pay-TV subscribers spending $100 or more per month feel they're over-paying for lots of channels they don't watch. That should be a red flag to prompt changes in pay-TV packaging.
2. Don't cling to incumbent business models - When you have a good thing going, it's tempting to not to change. Blockbuster hung on to its store-based and pay-per-rental model and entered fixed price DVD-by-mail and online distribution late and half-heartedly. As Andy Grove famously said, "Only the paranoid survive." The point is, the world changes and so must business models. For pay-TV providers, just because multichannel subscriptions have worked for years doesn't mean they always will.
3. Physical infrastructure may not matter as much as hoped - It's often the case that having lots of physical infrastructure creates a big entry barrier for would-be competitors. For Blockbuster, its network of thousands of stores was thought to be an insurmountable advantage. But Netflix avoided stores by using the mail (and building relatively few distribution centers). Similarly pay-TV operators have invested billions in their networks, but over-the-top players like Netflix are simply using the open Internet to deliver their content. While physical infrastructure often helps, pay-TV operators shouldn't consider it a rock-solid defense.
4. What appears inferior may actually be superior - It may be a distant memory now, but when Netflix started it was actually less convenient than Blockbuster, because you had to wait to receive the DVDs a few days out, whereas with Blockbuster you could drive down the street and get something immediately (even if it wasn't always your top pick). But Netflix turned that disadvantage into an advantage by developing sophisticated inventory software and the ability for subscribers to create/manage queues. The result was subscribers disproportionately watched older movies, largely avoiding the stockout phenomenon and financial burden that plagued Blockbuster's hits-driven business. Similarly, today Netflix offers no live programming, making it an inferior offering to pay-TV. But with consumers shifting to on-demand viewing, not having live is becoming less important.
5. DNA and focus matter, a lot - Like human beings and leopards, it's awfully hard for companies to "change their spots." Blockbuster succeeded by operating a store-based model. When they tried to overlay DVDs-by-mail and online they couldn't execute. Netflix started as DVD-by-mail only and relentlessly refined that model. It's been extraordinary to see how seamlessly they've evolved to online delivery. Pay-TV operators have struggled to evolve from linear delivery to anywhere/anytime/any device delivery. Pay-TV operators mustn't let their DNA disadvantage them.
6. Technology is a friend and must be embraced - A huge part of Netflix's success is due to advanced technology deployed in every aspect of its business. I have a hunch that that's because Reed Hastings is a tech guy himself, who respects and understands technology's critical role. It's unlikely that anyone who walked into a Blockbuster store ever felt it was high tech. My memories of being in stores are about seeing low-paid, apathetic teenagers staffing the whole operation. With pay-TV operators, many have made huge strides in how they use technology in their operations, yet too often deficiencies are obvious to their subscribers. Things that are a given on the web like self-service ordering are still rare, requiring tedious phone calls.
So there are 6 things pay-TV operators can learn from Blockbuster. No doubt there are many others as well. Netflix's fingerprints are all over Blockbuster's demise. Pay-TV operators need to be vigilant because they are next in Netflix's cross-hairs.
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