Aug 31, 2023
Built to Fail: The Inside Story of Blockbuster's Inevitable Bust w/ Alan Payne
BRT S04 EP34 (197) 8-27-2023
What We Learned This Week:
· Blockbuster started in 1985, and scaled quickly after Wayne Huizenga purchased it in 1987, 10,000 stores at its height, dominant video rental co.
· Alan Payne instituted the Video Rental model of HEB to the Blockbuster franchises he ran – segmented movies to rent new ones for more
· Wayne Huizenga was a stellar Founder who built 3 fortune 500 companies – Waste Mgmt, Blockbuster, and Auto Nation
· Viacom purchased Blockbuster in 1994 for $8.4 billion, and went on to lose 75% of the value over the next decade +
· Competition was fierce from Hollywood Video, Redbox and then in 1997 by a new DVD rental by mail company called Netflix
· Netflix scaled into the internet company it always wanted to be with streaming in 2009
Guest: Alan Payne
Alan Payne spent thirty-one years in the movie rental business, the last twenty-five of those as a Blockbuster retail franchisee. He took over a small group of Blockbuster stores in 1993 and grew it into one of the largest and most successful chains in the company. He finally closed his last store in 2018, more than eight years after Blockbuster filed for bankruptcy.
Book: Built to Fail: The Inside Story of Blockbuster's Inevitable Bust
From the Back Cover
Blockbuster was phenomenally successful in its early years and made thousands rich beyond their wildest dreams. But it was consistently outsmarted and outmanaged by smaller companies. And the challenges began earlier than you think--long before Netflix was even an idea in the minds of founders Reed Hastings and Marc Randolph. Blockbuster became one of the most iconic brands in the history of American business, but it cracked at the first sign of a challenge. From its founding, Blockbuster was a company built to fail.
Link: HERE
Alan Payne Bio:
Border Entertainment, LLC - 2000
to 2018
Founded a $34.2M franchise group with 41 independently owned
Blockbuster stores.
President & Chief Executive Officer
Held
complete P&L responsibility while managing executive team (CFO,
VP of Product Management, VP and GM Alaska Division, VP and GM El
Paso Division, VP and GM South Texas Division) with 750
employees.
· Grew revenue to $34.2M with 41 stores located in Texas and Alaska.
· Capitalized business with $14M debt and $3M in private equity investment. Investors received over 35% internal rate of return. Fully retired debt in 2012.
· Grew sales 140% and profitability 190% during industry decline from 2000 to 2007. Expanded through same store sales increases, new store openings, relocations, and acquisitions.
· Created proprietary management systems by gathering and analyzing data around financial and inventory performance.
· Developed and implemented an aggressive real estate strategy, identifying heavily trafficked, high-volume locations.
· Cultivated culture of loyalty, retaining employees during wind down.
Alan Full Bio: HERE
Blockbuster Video[5] was an American video rental store chain. It was founded by David Cook in 1985 as a stand-alone mom-and-pop home video rental shop, but later grew into a national store chain featuring video game rentals, DVD-by-mail, streaming, video on demand, and cinema theater.[6] The company expanded internationally throughout the 1990s. At its peak in 2004, Blockbuster consisted of 9,094 stores and employed approximately 84,300 people: 58,500 in the United States and 25,800 in other countries.
Blockbuster – c/o Wikipedia: HERE
Harry Wayne Huizenga Sr.[1] (/haɪˈzɛŋɡə/; December 29, 1937 – March 22, 2018) was an American businessman. He founded AutoNation and Waste Management Inc., and was the owner or co-owner of Blockbuster Video, the Miami Dolphins of the National Football League (NFL), the Florida Panthers of the National Hockey League (NHL), and the Florida Marlins (now Miami Marlins) of Major League Baseball (MLB).
Wayne Huizenga – c/o Wikipedia: HERE
Notes:
Seg 1
Blockbuster was the premier video rental company in the 1990s. To put it in perspective how big they were, they brought in more revenue than theater ticket sales.
To add to that, if a movie bombed in the theater, it could be saved by video rental. Also with the introduction of DVDs in the late 1990s, movie studios started doing direct to video movies that would be released in rental stores like Blockbuster.
Pre-Internet was a different era for retail sales. In the 1990s you had huge retail companies like Blockbuster for rental movies, Tower records for CDs and music, and Borders for books. In the 2000s with the rise of the Internet, these businesses were all under attack. Netflix was growing with streaming, iTunes add streaming music, and Amazon was out selling borders with book sales.
In the mid-1990s Blockbuster at its height was the dominant video rental store with 40% market share. Hollywood Video is their main competitor with 20% market share.
Per Alan, half the weekly rental business was done on Friday and Saturday night from 7 to 10 PM. Blockbuster on weekends was the place to be, where the community was literally gathering for family night in movie rentals. There were new releases that came out every week and this section of the store was usually the most popular.
With the introduction of the VCR circa 1985 the video rental business took off. There were tons of small mom and pop video rental stores. The business didn’t really have to be run that well as the industry was exploding.
Prior to this it was very difficult to see old movies. You had to have seen them in the past in the theater or wait for Network TV to air them. There was no control and very limited choices.
With the onset of Blockbuster in 1985, the video industry became more organized and professional. Blockbuster also had 6000 movie titles to rent, and scaled fast, opening stores by the dozen+.
Cost for Blockbuster to buy a movie was $70 per movie. They needed to rent the movie 20 times just to break even.
Blockbuster stores count were 5500 stores in the US, 1000 were franchisees and then corporate owned 4500. Corporate stores were typically in the larger markets, while the franchises were in the mid and smaller markets.
Seg 2
Alan bio, in the 1980s straight out of school he went to work for HEB grocery, the second largest grocery company in Texas and privately held. It was a $25 billion company run by CEO Charles Burt
In 1986, with the rise of Blockbuster started with just 30 to 40 stores. In 1987 HEB grocery started in the video business using Blockbuster as a model. They would own single location stores that were about 5 to 7000 ft.² in size.
H-E-B eventually opened 35 stores and was beating Blockbuster in sales had to head in the markets in Texas like San Antonio for example. A few years later HEB sold out to Hollywood Video and Hollywood Video went public.
In 1993 Alan got into franchises of Blockbuster working with Prime Cable. The business was struggling as Prime was not a retail company. They had 8 stores in Alaska and 10 stores in El Paso, Texas. Alan instituted the H-E-B model and was able to turn the stores around.
Blockbuster Business Model -
Blockbuster legitimized the video business, and made it more professional than the original mom and pop stores that were not run well. Wayne Huizenga had bought Blockbuster early on when it just had 20 stores and he grew it fast.
The formula was simple - all movies regardless of whether they were new or old or rented for three day at $3. The demand for new movies was huge. Blockbuster could’ve charged more renting new movies.
Alan used the H-E-B grocery video model that was developed. Rent movies by the day and charge more for new releases. Older movie you could charge a $1 a day and people could keep the movie for 3 to 5 days.
There was actually a lot of demand for older movies, and they were 15,000 movie titles of older movies in demand.
Seg 3
Wayne Huizenga is a great CEO and businessman. He was the only man to build three fortune 500 companies, Waste Management, Blockbuster, and Auto Nation. Auto Nation was run by CEO Mark Jackson, and is the premier car dealership.
Wayne admitted he was more interested in building the thing, not running things. He also went on to buy the Miami Dolphins in football in the 1990s, and start the Florida Marlins baseball franchise.
Blockbuster stores were well run, attractive, and demand was high. Their franchise colors of blue black background and yellow Blockbuster writing on the sign were easily visible. They also picked very good real estate locations for their stores.
In 1994, Wayne sold Blockbuster to Viacom for $8.4 billion. In just seven years, built valuation from 1987 to 1994 when built up the business for a return of hundreds of percent. He paid $15 million, and sold it for $8.4 billion.
Viacom rolled the business into its total corporate structure and six years later they spun it off at a $1.5 billion valuation in six years, they lost 75% of the value of the business, it was poorly run.
Viacom was a TV company with major networks like Nickelodeon run by Sumner Redstone. He wanted to get involved in the movie business and use the Blockbuster purchase eventually to get Paramont studios.
Blockbuster when purchased was cash flowing $1 billion a year, it was making lots of money.
Steve Berrard was named the CEO of Blockbuster after the Viacom purchase, and only lasted one year. Then Bill Fields was brought in as the second Viacom CEO of Blockbuster.
Fields had a Walmart background, so he was hired for his experience in retail. He had no clue though how to run the video business. He also lasted less than one year, and the cash flow was starting to go negative.
Seg 4
1997 the DVD was introduced and this would change the movie and rental business. DVDs were created to be sold direct to consumer. 1997 is also the year that Netflix started with their DVD rental business through the mail. In 1999, the video rental business peaked at $10 billion a year in revenues. Post 1999 thru 2006 sales were flat to small growth.
1997 Blockbuster got their 3rd CEO, John Antioco, who served as Blockbuster CEO from 1997 through 2007. He also had a retail background and marketing. He had been at Taco Bell briefly, and prior to that he spent 20 years at 7-Eleven.
7-Eleven is a huge retail store that’s really about location and real estate. They sell gas soda beer and cigarettes. They are not known for being great in retail. One thing John did as the new blockbuster CEO which was good, he started to engage with the franchisees.
In the late 1990s you were starting to see technology in the Internet slowly affect new businesses. When Netflix was created they always intended to be an Internet company, it just took them 10 years to get where they wanted to be.
John running Blockbuster that stable to slow growth. He doubled top line revenue and doubled the amount of stores blockbuster had but the profit margins went down. Had its height in the early 2000s blockbuster at 5500 US stores and 3 to 4000 stores outside the US.
Blockbuster at the typical business fix cost of rent labor and taxes, which were slowly increasing year after year. Gross margin is just the rental revenue minus the cost of the product.
The cost of the DVD product have been cut in half by the early 2000s. DVDs were made cheaper as the movie business was trying to sell direct to consumer, and kill the rental business if possible.
The rental business revenues started flattening out post 2005. Sell through business for DVDs from movie studios was increasing every year, and had tripled in just a few years in sales.
In theory, Blockbusters gross margin should’ve gone up but instead was declining. They had the Proto typical business math problem of high costs and not enough sales.
The Great Recession of 2008 was really the beginning of the end for Blockbuster. By 2010 blockbuster and filed bankruptcy. It was the end of an era of a very strong stable business at one point for video sales rental.
Seg 5 – Bonus
Netflix started in 1997, with a business model of DVD rental via the mail. Even though Netflix only had a small portion of market share, by 2004 blockbuster felt compelled to compete with Netflix on the video rental via sales but failed.
Netflix originally did not have their subscription model. That model was added a few years in, circa 2007. In 2010, Netflix started adjusting their business model and experimenting heavily with streaming. The streaming business model for Netflix really didn’t take off until post 2010.
Netflix created their AI recommendation model. This taught their subscriber base how to enjoy titles. Netflix overall model was customer centric. If a customer liked comedy Netflix could recommend 10 more comedies to them.
Another thing the customers loved was Netflix would release the full season of the TV series at one time. This created the streaming binge watch phenomenon. By contrast Blockbuster had tons of customer data but never did anything with that data. In theory Blockbuster could’ve been Netflix, and at one point almost bought Netflix.
Netflix original niche was renting older movies with the recommendation model. Netflix also created the queue system. Netflix sent titles in a customer’s queue of 20 movies and would control what movies the customer would get sent in the mail.
In 1998, Blockbuster had to start a revenue sharing of profits with movie studios and this really hurt gross margin in the video rental business. Unit volume sales were not stable as time went on. Overall top line volume sounds was inconsistent.
Blockbuster at one point tried the subscription model, but physically in stores. It failed for it did not work in an actual brick and mortar retail store. Blockbuster in the mid-2000s used gimmick solutions which never really addressed the fundamental problems that were happening.
Reed Hastings of Netflix offered to sell the company to Blockbuster in 2000 for $50 million. Netflix wanted to join forces. Reed Hastings goal from day one, was to be an Internet company. Blockbuster was not able to work out the deal, so it never materialized.
Reed Hastings of Netflix was a true founder and original. He had vision. Founders may not be the best operators all the time, but they must have vision. There are some founders though who not only have vision, but also can be an operator. Examples are Reed Hastings of Netflix, Steve Jobs of Apple, Mark Zuckerberg with Facebook.
Wayne Huizenga was a founder, but not an operator. You go from the founder mentality to the operator mentality, but this never materialized in the history of Blockbuster.
Overall, Blockbuster management never really understood the business they were in. They were in the customer business, but never really focused on the customer. This is how over the long term they were beat out by companies like Netflix, and even Amazon.
Peter Drucker (famous business consultant) would ask the important question: ‘What business are you in?’ – to understand who your customers are, what they need, and how to market and sell to your customer
Postscript:
Alan Payne closed his last blockbuster store in 2018, and then wrote the Built to Fail Blockbuster book. He does not know what his next endeavor is….
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