Frankie this is the story of Blockbuster. We know how you like to watch DVD's. Well actually, you don't so much watch DVD's as you sleep on the couch while we watch them. But the amazing thing is as soon as a dog appears in the movie you wake up, you jump off the couch, and you get down and start barking at the television set hoping that he will come and play with you. Well we still get DVD's, I don't know for how much longer but they come in the mail now, they don't come from blockbuster and therein lies a sad tale. It's how a company managed to define a new industry, yes, you don't like that at all. How company managed to define an industry and still fail. And so we have the familiar Blockbuster store that many of us remember well from just a few year ago. Blockbuster opened in Dallas in 1985. A man named David Cook thought there was a market for a family-friendly video rental store. He wouldn't stock X rated or NC-17 films. Instead, he provided 8,000 video cassettes in the average store with appealing displays. He built a warehouse for fulfillment which eventually became a highly automated distribution center. So you would have a warehouse, and then the problem was to get the videos to the stores. So that's a lot of videos 8,000 store 8,000 videos in a store with new ones coming out every week you have to distribute them to make sure they are available to your customers. He customized the stores with films that were geared for the, the, the makeup of the neighborhood. And he franchised, and expanded to some 19 stores. But he wanted to do more, and he needed capital to expand, so he went to Wayne Huizenga of Waste Management, who was skeptical about video rentals. In fact, he did not own a VCR, but he became convinced after studying the business model and bought 50% of the company for 18-and-a-half million dollars. Now, it went through a period of rapid expansion from 1997 to 2004. The company grew to be worth $4 billion, 3700 stores in 11 countries, and a revenue of $2.2 billion. The market capital, capitalization growing by over 100% a year at peak, it opened one store every 17 hours. Well, there was further expansion. Huizenga pushed them into television studios, music stores, Discovery Zone. He said, at one point we'll be able to make a movie, put it in theaters, rent it in a video store, sell on pay-per-view, show it on cable, and play it in TV stations all owned by Blockbuster, and will publish the book and release the soundtrack, and sell all of this in Blockbuster stores. Unfortunately, he was never able to realize all of this. Well, now we're into the Viacom years, by 1994, Blockbuster stock was what the analysts call, under performing. Huizenga thought new technologies were years away, they wouldn't affect Blockbuster at any time soon. in the past we've called this denial. However, investors didn't buy that and they were depressing the value of the stock. So Huizenga approached Sumner Redstone of Viacom, and Viacom paid $8 billion for Blockbuster. It slimmed the company down and used the very nice cash flow from renting videos to pay down Viacom's $10 billion debt from buying Paramount. So you can see, Viacom wasn't terribly interested in investing in Blockbuster. It was interested in using the cash that Blockbuster generated. Well, that didn't last very long. Redstone had buyer's remorse, he called it the deal from hell because satellite movie services were impacting the business. He felt there was a lack of product, and he was seeing a 4% decline in movie rentals, rather than an increase in movie rentals. So Viacom sold part of Blockbuster in an IPO, even though it kept 80%. Well, they needed a new CEO. So in 1997, John Antioco, from Taco Bell, became the CEO. And he said, hey, we're going to rent video games, he expanded. By 2001, they had 8,000 stores in 27 countries, 89,000 employees, with 5 billion dollars in revenue. And remember, the company hadn't been in business all that long. In 2005, Carl Icahn bought 10 million shares, okay? Antioco lost a proxy fight with Icahn, and left. So now we move towards bankruptcy. In 2010, Blockbuster threw in the towel. It was bought at an auction by Dish Networks for 233 million dollars, plus assuming 7 million dollars in liabilities. About 1,000 stores remained. In January of 2013, Dish announced that it was closing another 300 stores, leaving fewer than a third of the stores it acquired in 2011. And as a result, 3,000 of the 7,300 remaining employees would be let go. We can see what's happened to Blockbuster in terms of both it's sales and the stock cratering here before they declared bankruptcy. So what went wrong? At first Blockbuster had some really good ideas, in the cassette days Blockbuster had to pay $65 per movie. What do you think happened then? You're right, they could not afford to have as many copies in the stores as people wanted to rent. So what they did, was to push the studios for a revenue sharing agreement, so they could buy the initial cassette for $1 and give 40% of the rentals to the studios. So it could now afford to have enough copies in the store to give you a guarantee that you would always find the movie you were looking for. Well, what are the disruptions that came along to help them get into bankruptcy? On-demand, cable providers started scheduling premium movie showings, you didn't have to get in your car and go to the Blockbuster store to get them, Pay-per-view, they could stream the movie to the viewer, and of course the illegal file sharing and streaming impacted Blockbuster too. Antioco has a different idea, that it wasn't streaming on the Internet. He thinks it was DVDs, because Best Buy and Wal-mart want to sell them for under $20, and a number of people would be willing to pay that for a DVD to own it, rather than to have to pay $4 or so to rent it. And of course, then there were movies by mail. Antioco was skeptical of the Netflix model. Okay, here we go folks, denial, again. In 2004, Blockbuster did start a mail order business, but they could never make it work. Interesting, they eliminated late fees, because those were a real annoyance, and that cost them $200 million. And Antioco wanted to start an online business, but that required another $200 million. And my question here is, why? Certainly Netflix didn't spend $200 million starting up an online business. Why would, why would blockbuster have to spend that much? Well Viacom remember was looking at the cash in blockbuster and they said, we don't like the idea of $400 million hit right now. So they sold their shares to the public, which allowed Icahn who is a corporate raider to buy in and that was the end of Antioco. A man named Jim Keyes succeeded Antioco, he dropped the strategy for online sales by mail and through the stores. So, we had a series of management changes, which I would say created a lot of turmoil and we had an inability to execute. When they decided finally to try movies by mail to try an online streaming business, they could not get it to work. So let's pause for a moment while you take a short quiz to see what you think are the main reasons that Blockbuster ended up in bankruptcy and is almost gone at the present time. Oh, by the way, Icahn thinks it was his worst purchase. So, he has something in common with Redstone. So, applause now for the quiz. Well I think a lot went wrong here, major management turmoil, okay? Different owners turned capital for investment on and off. All of senior management denied that the technology would disrupt their business model, okay. So, to me the major story here is one of denial when Blockbuster tried to respond, it failed to execute. So, if you deny and you can't execute then there's not much left. And so, Blockbuster, as Kodak, as Borders, ended up in bankruptcy. A large number of people have lost their jobs. A service that many of us used is gone. And yet there are many substitutes out there now to replace it.
