Motley Fool Hidden Gems Investing - Change Equals Opportunity

Episode Date: February 17, 2024

Did Netflix kill the video star? James Keyes is the former CEO of Blockbuster and 7-Eleven, and the author of “Education is Freedom: The Future Is in Your Hands.” Deidre Woollard caught up Keyes to discuss: - What it is like to be a CEO at a company facing bankruptcy. - 7-Eleven and the American Dream. - Blockbuster’s early streaming play - How AI is changing education. Company discussed: NFLX Host: Deidre Woollard Guest: James Keyes Producer: Ricky Mulvey Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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In fact, people don't even know this, but Blockbuster partnered with Enron in the early 2000s, like 2004 or something, to try to come up with the first streaming video capability. I'm Ricky Mulvey, and that's James Keyes. He's the former CEO of Blockbuster and 7-Eleven, also got a book out called Education is Freedom, The Future is in Your Hands. My colleague Deidre Woolard caught up with Keyes to talk about what he learned from 7-Eleven franchisees, how micro rewards could transform education, and the less discussed parts of the blockbuster story. Well, Jim, you have had this really varied career. It's led you through top organizations, very important positions. How has education been a through line for you? It was by far the most important enabler for me. And, you know, interestingly, I grew up

first generation to attend college, none of my family, brothers, sisters, father, mother. So I had no idea. I was a very typical young person who doesn't really know how or believe that it's possible. And it made all of the difference in the world. I was fortunate enough to go through a four-year school, College of the Holy Cross, Massachusetts, was able to attend business school at Columbia Graduate School of Business. And it provided a platform really for opportunity. And I think that's the big difference. A lot of question about college today. But what it gave me is breath that gave me so many different doors that I could go through. In fact, gone through many of those doors.

Yeah. And one of them led you to 7-Eleven. And your career there is interesting because you had to deal with so much change so quickly. So you have this phrase that I love in the book, change equals opportunity. I think that's interesting because most of us, when we're hit with change, we go, oh, no. So, you know, as an individual, as an investor, we have this attitude that change isn't going to be good. It's going to be disruptive.

It's going to be negative. So how did you embrace change when everything was shifting at 7-Eleven? Exactly. Well, you know, it's funny. I woke up one day and said, you know, change equals opportunity. In fact, it was in the course of writing the book. And I said, well, that acronym CEO is really the job of every CEO, you know. So it was a wonderful fit.

And it also made me realize that growing up, I faced a lot of adversity. You know, we all do. Families are, you know, a mess and broken homes and, you know, poverty, all kinds of challenges as a kid. And I realized that, you know, those things that I had to deal with actually made me stronger and made me more able to deal with change. So when I got to 7-Eleven, here I thought my career was on a fast trajectory and I was with this fabulous company.

They were doing great, New York Stock Exchange Company. And then they did an LBO, and in 1987, the market crashed, and they had $4 billion of debt at 17%. But interestingly, while some people would look at that and say, well, this is devastating. I'm a young guy. I started my career. The company's bankrupt. They're saying it's going to go away. Instead of having my head down, I said, well, what have I got to lose?

I'm going to work harder. We'll come out the other side of this. And it turned out that not only did the company come out better for having to have to restructure with a whole new business plan, et cetera, but I came out better as an individual and an employee of the company with far greater opportunity than I had going into that crisis. So it was really a great lesson for me. Change doesn't mean bad. A lot of times we think it. It's really a response to change rather than the change itself that makes all the difference in the world. Yeah.

Yeah. Yeah. I think, I think that's so true. I think, I think that's something we all have to, we all have to learn over time. And I'm interested because at 7-Eleven, you learned about this idea of Kaizen from your Japanese business partners. And you've got this story about how this led to a better Slurpee. We all, we all, we all have affection for the Slurpee. Tell us a little bit about this. Well, I, you know, I was armed with a graduate degree in business and I had all of these skills. And I thought I knew, you know, basically how to turn around a company from, you know, classic business training. But then I got to Japan and I was astounded at the success of my Japanese partners with 7-Eleven. They had completely transformed the business. We were in

the United States having trouble selling a quality hot dog and they were selling fresh sushi, delivered three times a day to the store, restaurant quality sushi. And, you know, I was shocked at that. And I started to really try to understand, learn from them what they had done, what were their business principles that helped them be so successful. And it came down to something that I was shocked to learn, originated all the way back with Edward Deming, you know, post-World War II, an American that was over there trying to help with reconstruction of the of the of the country following world war ii and and he came up you know he presented a simple principle called plan do see or you know i i refer to it as the scientific method in other words

have a hypothesis i think this is going to happen you put an action in place and then you step back and measure it and then you modify the the action to based on the results based on the data this is so ridiculously simple but they took that principle to the nth degree incorporated into all their virtually all their business decisions and created as a result a far better business model that came right down to individual products they would take every individual product have a hypothesis for how to make it better put an action in place put it in front of the customer measure the results and then come back and reinvent it. You know, the whole Kaizen concept of continuous improvement, they were actually putting in place. And so I learned a lot from them about that. And

I've tried to incorporate it into every business that I've had since. Interesting. Yeah, I wish we got sushi here at the 7-Eleven. It would be awesome. Someday, someday. Someday, I hope so. Well, and another thing with 7-Eleven that you talk about in the book, which is the diversity of 7-Eleven franchisees, you know, it's been the butt of jokes sometimes, but you also talk about how it's the source really of the brand strength. So you sort of, you really got into learning about those franchisees and what this, what owning a 7-Eleven franchise meant to them. So what lessons did you learn from those franchisees? I did. It was fascinating. It actually occurred post 9-Eleven when, you know, we started having some problems at 7-Eleven because people

saw us as majority minority and they saw the people behind the counter and they started taking out their aggression right after 9-11 with our stores. So I tried to understand and began to talk with franchisees about why did you decide on 7-11? And I discovered that what they were practicing is the American dream. I mean, they would come here with 500 bucks in a suitcase and then they would work in a store, save up enough money to buy a franchise and then turn that into opportunity bring relatives and put them to work and and i i began to realize that this is really the strength of 7-eleven we ended up with 135 different countries represented and it taught me a lesson about diversity and in the book i don't use the word diversity because it's

been such a polarizing word lately you know it's getting attacked from all directions and you know really what it comes down to and my learning from my 7-Eleven franchisees is it's really cultural literacy it's it's understanding other cultures and recognizing that you know I have more to learn from them and if I collect the learnings from all of these different cultures that I have exposure to I'm going to be a patchwork quilt of their strengths and it's going to make me a better person overall. And so I've re-purposed the idea of diversity into what I call cultural literacy in the book and encourage everybody to pursue that. And it was really the lesson that I learned from my own 7-Eleven franchisees. I love that. Well, let's move on,

talk a little bit about Blockbuster because you had this very successful 21-year career at 7-Eleven. You come into Blockbuster as CEO at this critical time. What do you think people get wrong about the stories that we tell now about Blockbuster and what really happened? Well, unfortunately, like everything else, people are looking for the simple answer. So the simple answer is, well, Netflix must have beat Blockbuster and Blockbuster didn't keep up with technology. There is far more learning in the Blockbuster story if people would dig in and understand

it a little bit better because really what happened was not blockbuster's failure to keep up with technology in fact people don't even know this but blockbuster partnered with enron in the early 2000 like 2004 or something to try to come up with the first streaming video capability that was way too early there's a rumor that netflix tried to offer themselves to Blockbuster, that was in the year 2000. That was before streaming was even a thing or even on anyone's radar screen. And so really what ultimately happened was Blockbuster spun out of Viacom as an IPO. Viacom used to own the company. They spun them out in the year 2004 with a billion dollars of debt on the balance sheet. No problem. Blockbuster was a cash flow

machine, could handle that debt, and they were going on down the road. When I arrived in 2007, first thing i did was to buy a streaming video company called movie link so we were well positioned we had new releases movie link had 3 000 digitized movies largest assortment of anybody in the industry at the time and we renamed that product blockbuster on demand very well positioned to compete we doubled ebita earnings before interest tax depreciation etc And we tripled net in our earnings release for the third quarter of 2008. So you might say, well, what happened? Perfectly well positioned.

Well, if you remember what happened in September of 2008, Lehman Brothers collapsed. The banking industry basically was on edge and virtually all lending was shut down. Well, a third of our debt was due in the year 2009. That is the story of Blockbuster. that we were unable to refinance that debt at a reasonable interest rate. We were forced ultimately into a restructuring of the company, and we sold the company to a strategic partner, Dish Networks. That's fascinating about being ahead of the game with streaming,

because I think that happens so often. We see it over and over with products that come out before the audience is ready. And I'm wondering what's going to happen with things like Apple's Vision Pro. Is this the right time for it? Is it too early? We don't know. exactly exactly you know and that's the unique thing about technology and about embracing change i mean you you have to see it coming you do have to embrace it but the timing is critical and really it wasn't that we were too early as much as it was you know because we were well positioned we knew we were early kids were still basically streaming on their xbox tvs weren't smart yet

for frame of reference the ipad didn't launch until 2009 so this was very very early in the game but it was really the cash flow and the lesson here for all businesses is that you know remember the old expression cash is king well particularly in a time of crisis and there's a lesson right now because if i go back in my history all the way back to 1987 when i joined 7-Eleven, they ran into the financial market collapse of 1987 and had to restructure the company. Then again, I experienced it in 2008 when interest rates went from 5% or 6% all the way up to 12% for challenged companies or more. Here we are in that same environment today where companies may have borrowed at 2% or 3% a few years ago and now all of a sudden they're having

to pay 7% or 8%. So the lesson is there from the past. If you're careful about cash management, you can weather the storm, but that debt can be a killer and cause a company to have to step back and restructure. Yeah, yeah, absolutely. And so you were the CEO of two big companies and certainly with Blockbuster, not an easy time. You talk in the book about kind of being tried in the media in relation to the things that the blockbuster was doing. Some of that was clearly out of your control. But as a CEO, when you're facing that heat, what are some of the challenges of kind of tuning out everyone saying, what are you doing and staying focused on what you need to do? Yeah, I had an interesting experience. I started getting calls from my buddies in New York

because I didn't take the New York Post living in Dallas, Texas, but the New York Post printed a half-page color picture of me with a Pinocchio nose. Oh! Yeah, it was not a pretty sight. And the reason they did it is that they had been challenging me about this balance sheet and were we going to be able to refinance our debt. But Blockbuster had such a cash flow advantage that I really didn't anticipate filing for Chapter 11 for restructuring. Well, we put out a 10K and we gave the warning that that could happen.

And certainly when Moody's gave us an increase in our debt rating but declared us a potential default risk, the New York Post went crazy with it and said, you know, Blockbusted was the headline, I believe. I know. It was brutal. It was brutal. But the learning from that really and from all of the false information about Blockbuster and people assuming that Netflix crushed the company, et cetera, et cetera, you realize it's not personal. It's business. And it's such an important learning because confidence is critically important for a leader in any environment that they can't take these things personally. It's going to happen.

and you're going to get attacked from all sides at times. But if you know you're doing the right thing, if you have the confidence to continue leading and doing the right thing, then you can recognize this isn't personal. It's just business. And, you know, sometimes there are motives that people have behind these attacks that they're making. And you recognize that and you move on. Well, I want to get your take on AI because I've been talking to people about it for a while. And one of the things that I've heard from younger people is that traditional education isn't necessarily working for them anymore, partly because they're like, why do I have to stuff my brain with all of this stuff if the computer can do it faster and better? So how are you sort

of thinking about AI and how it relates to traditional education? I am super excited about AI. As you can tell, I'm excited about technology in general. When Starlink lights up entire continents like Africa and enables technology to provide learning in places that we could never even get books to historically. I mean, the opportunity is amazing. And you look at AI, and again, there's a lot of fear and probably natural that we should be cautious about these new technologies. But think about the good that AI can do. So we have taught in school the same way for a hundred years, blackboards, books, right? Teacher standing in front of the class, standardized test, bell curve, and a lot of people that doesn't fit. And with AI,

we have the opportunity to tailor, literally curate that lesson to the way somebody learns. So some of us learn better with videos. We can curate that training to have them watch videos and others respond better to the written word. Others to a teacher or a professor. We can find the best algebra professor in the world and pipe them into the classroom. So the teacher then becomes almost a concierge to let someone who really knows how to teach, teach. And then we measure the performance of the students and the best way they learn based on their results. And we can keep modifying and keep improving. So think about this is not artificial intelligence. This is maximizing human intelligence. It's doing the same thing. It's not machine learning. It's

human learning and improving human learning over and over and over again by using the technology to enable it. Yeah. But one of the things I worry about with technology, though, is, you know, we've seen since the pandemic, students have done worse because of remote learning. So what do you think about how we still bring in that human connection so that people are still taking in the information? Yeah. Again, I'm not worried about it because I did a lot of work on digital learning during the pandemic. And I was excited about it because we moved forward as much as 20 years in providing access to digital learning just by lighting up cities with Wi-Fi capabilities and hotspots and giving kids laptops etc what we are in this in the early stages it's almost like the

early stages of digital streaming right it was a horrible experience and everybody said oh this is never going to work right not true technology will over time integrate the platforms make them better here's some examples linkedin learning it's a wonderful thing but it basically takes textbooks and turns them into video digital well with the next generation you'll be able to instead of showing a biology class you'll be able to take somebody into an operating room and watch a live operation going on that's a whole different level of learning the best example i can give you is all the kids that hated digital learning would put away their homework and then play video games for eight hours right why it was engaging and the the the graphics were eye-popping another really

important difference they had incentives so why not provide incentives in fact i'm working on a thing i call micro finance it's like micro finance but micro scholarships so instead of giving kids scholarships at the end we should be working on incentivizing them up front i've encouraged friends and friends children use khan academy to learn math but khan academy is a little dull but if you got every time you pass the test you get 20 cents for it buy american airlines because they want people to learn math and science then you might have the incentive and have more fun doing it and staying in and engaged in those programs so again it's it's early the technology is going to bring these things that improve engagement so

I am super confident that we're going to find education is transformed in the same way that we've transformed retail with Amazon or automobiles with Tesla. We're going to find when education works its magic on teaching and learning, phenomenal what can occur. As always, people on the program may have interests in the stocks they talk about, And The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.