Tech Brew Ride Home - (Bonus) The Rise And Fall Of Blockbuster Video

Episode Date: October 12, 2024

Why was Blockbuster so successful? Was it the DVD that killed Blockbuster? What was the deal with late fees? Is there any way Blockbuster, not Netflix, could have won out in the end? Special guest: Venture Capitalist and Writer MG Siegler! Subscribe to RAD! 80s90s History! Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Why did Blockbuster have late fees anyway? Why was the DVD the thing that probably really killed Blockbuster? And is there any scenario where Blockbuster, not Netflix, could have won? Be kind.

Rewind with us today. Rad 80s-90s history is visiting Blockbuster Video. Welcome to Rad in 80s-90s history podcast recounting. The last time things were relatively normal and chill. The last two decades of the 20th century, I'm your host, Brian McCullough. Today we're going to talk about a dearly departed landmark in both media and retail before the internet came around and changed everything. My amazing special guest is investor and tech writer, but just writer in general, I suppose. M.G. Siegler, M.G. Welcome to 80s, 90s history.

Thanks for having me, Brian. Good to be here. You strike me as a movie guy. So tell me your relationship with the dearly departed blockbuster video, or actually just the video rental store of your youth full stop. Yeah. Yeah, I have a pretty romantic and nostalgic past with regard to video stores. I grew up, grew up in Ohio and where I lived, they had a sort of a local mom and pop video shop for for many years that we would go to. This was the old school days of definitely VHS, but they even, they would do this fun little thing where they had like dog tags that they would make you take off of sort of the cover of the video because they would keep all the videos in the back so no one would steal them, I assume. And so if it had a dog tag, you knew that the video was available and you would walk that up to the counter and then go rent it.

And so that's where I sort of grew up and got my start going to video stores. That was replaced shortly thereafter, not by Blockbuster, by another video store, which I remember the name of because I was a little bit older and going to it called Flicks. which was also just a local video store in Ohio outside of Cleveland, Ohio. And that's the one where Blockbuster first came on my radar because there was a Blockbuster that moved about two or three blocks away from that store when I was, I think, maybe early teens. And that, you know, as we'll talk about, had all sorts of disruptive disruptive, you know, you know, areas in that, in, in that world. And so it was interesting, Flicks, the, again, the sort of more mom and pop like store ended up, I think, doing okay against Blockbuster once it

moved in, but largely because they were known to have rentals in the adult space. And so there would be, you know, an area that was behind sort of saloon doors, these, these doors that kids would try to peek into when they were swinging back and forth that, uh, that kept, them afloat. But yeah, that's that's sort of the early history that I recall of videos. And my parents renting VHS tapes that were, you know, probably a little bit too mature for my age, not the adult variety, of course. But I distinctly remember my mom once bringing home the movie Critters, which was like a horror movie from the, uh, the 19, late 80s, I think, maybe early 90s, which she brought home because she thought the, uh, the cover looked cute, sort of looked like a

a ET type thing, you know, aliens, this sort of weird looking green thing. Total, total massacre horror movie that did not go for well with me and my younger sister. That's funny because I think my parents liked to the video store because they could control it more. We were never allowed to have HBO or anything like that because they figured I would, that's how I would stumble on movies that they thought were inappropriate. So it's interesting that it's your mom that's bringing home the inappropriate. Yeah, she had, she had always had a knack to figure out the wrong movie to pick just by the cover of that VHS tape.

So I have similar memories. There were a couple hole in the wall mom and pop stores initially. Like I let's imagine that it's like 1985-ish that we get a VCR. And I too remember the adult section, which was in the back or, you know, behind curtains or something like that and and always being intrigued by that section that you're not allowed in. But I think it was. either like, let's call it 88, 89, Blockbuster first comes to town. And one of the things about

Blockbuster, we can talk about this a little bit in terms of the 90s context is, it generally when Blockbuster came to your town, they had a bigger selection than the hole in the wall, Mom and Pop Stores. However, my connection with that Blockbuster, which actually the other reason it was important was I could bike to it. It was right outside my neighborhood in Florida. And I also, that was essentially my first job. I started working at Blockbuster Video my sophomore year of college, or of high school. And then I think I was working there a couple summers in college. So let's let's say that I stopped working at that local Blockbuster video in 1999-ish. I'm actually wearing Make it a Blockbuster Night shirt.

I could find my uniform somewhere. I'm sure it wouldn't fit me. It wouldn't do me any good to find it. But I... So you were well into the DVD age then. Not well into, but a year into or something? You are stepping on something that we're going to discuss. I also, M.G., you should know that I rose so high as to be assistant manager.

So I can also speak to you a little bit about the business model of... of a blockbuster store and things like that. Is that the Michael Scott title or the Dwight Shrut title? That's probably the Dwight Shrew. And they only gave it to me because I was the only one that came back. I was probably one of the longest serving teenagers that they had at that store. And so for a dollar extra an hour, they just gave me the assistant manager title when the managers weren't there. So it wasn't even really, I kept money.

I didn't realize I was walking into your total wheelhouse, though, of having work there for all these years. Okay. So let's get into it a little bit. As I always do, I have some rabbit hole questions or facts that I found for you, so we're going to start getting into some of those. But just generally, you know, to frame things for non-80s and 90s kids, movies were sort of the last holdout in terms of media that you could consume at home. You know, going back to the phonograph, you had music that you could consume at home. Books, obviously, has always been a personal consumption thing. TV brought video into the house for the first time.

But the point is, is that as late as the 1980s, if a movie left movie theaters, that was it. You might not have a chance to see the Godfather again. They would do things like re-release certain movies in theaters, like Sound of Music. Right. Disney. And in the, in the 60s and 70s, they started to. do a thing where they would, you know, you would have the Sunday night movies. So like, again, I always think of sound of music coming out or being on TV every Easter or so. The, the thing that changes this is the technology of the video cassette. There were famously two standards, Betamax and

VHS that were introduced respectively in 1975 and 1976. And after Betamax was launched in the United States, magnetic video chief executive, Andre Blay, wrote letters to all the major film studios offering to license the rights to their films as a sort of, we will release these for you, or we, you know, we'll put them on video cassettes and sell them. But early on, they struck on the idea of maybe this could be not you buy something. Because think about it, again, the only media that you would have a sort of a history of consuming and having a collection of would-be books and music, no one at this point had the conception of, oh, I'll have a home movie library. Right. You would have had to have a giant film reel and a projector. Yeah, hundreds,

hundreds, thousands of dollars. You would be spending hundreds of thousands of dollars probably in order to do that. And space you would need. People had that. I knew people that had like real-to-reel stuff, you know, theater setups that way. So because of the costs and because of various other business impediments, essentially home video was born as a rental medium. The studios felt that virtually all sales of video cassettes would be to the rental market. And so they set their prices accordingly when today, well, to the degree that people still buy physical media, you can buy a movie for, you know, 10 bucks, 20 bucks, whatever. That was not the case. In the 70s and early 80s, if you wanted to purchase a film on video cassette, it would cost you

hundreds and hundreds of dollars. I remember that, yeah. Yeah, so. I think Flicks, the one store I was mentioning. They, they sold a few. It was usually only like Disney, right, because they would do like the discounted versions, like where they would sell. because they knew that kids, families wanted to watch those over and over again on VHS. But the other one's like, yeah, if you inquired about buying The Godfather or whatever, it's like over $100 to buy it on VHS. So actually, I mean, that's sort of the windowing thing that Hollywood, that is broken down for Hollywood. So in the golden era of video rentals, the way it works is a movie's released in theaters and then roughly what six months later, it goes to the rental. store first. You can't buy it, probably can't buy it for another six months, and in between that

period, it would go to HBO, Cinemax, those places. So the sort of windowing is theatrical release, home video rental release, pay TV, and also, I guess. Broadcast TV. Right. And possibly airline being seen an airplane too. But at the very end of that windowing is the idea that, wait, you really want to pay 20, 30 bucks for Jurassic Park. Okay, fine. A year later, you can. Yeah. So they, in 1977, when Magnetic Video originally priced the cassettes at 50 to 70 each,

they were only really selling them to wholesalers. And they're basically advertising to try to seed a market. And somebody that saw the, the advertisements for, hey, maybe start a video rental business is rabbit hole fact number one. The first, or I'll let you read it, sorry. Oh, yeah. So the first video rental stores, we know it launched in 1977 in Los Angeles. One of the people that sees the ad for magnetic video is someone named George Atkinson,

who died in 2005, by the way. So he saw the entire industry's rise and fall. instead of buying the films for himself, Atkinson jumped at the chance on this ad to purchase the videos and rent them out to other people. He had already been renting out camera equipment and film equipment to people who couldn't afford to buy it. So why not do it with the movies themselves as opposed to how you make the movies?

And to raise capital, Atkinson hit on the idea of a subscription fee, sort of a membership fee. and initially to just be able to rent videos from Atkinson, you had to pay a membership fee of $50 annually or $100 for a lifetime, after which you then had the right to rent videos for $10 a night, which is still incredibly expensive. Yeah. And this is at a time when VCRs and video players were found in less than 3% of households, but at the same time, the response was through the roof. When Atkinson himself placed ads in local LA papers, he had more than a thousand people registered in advance of even opening his store. Wow. So in late 1977, Atkinson opens a store called Video Station, puts the tapes on display.

The first rental, this might be apocryphal, is a Betamax copy of The Sound of Music. Again, the movie that I remember being on TV, one of the rare few. Now, as often happens when there's new technology, Hollywood is nervous at first. And initially, you know, there's a whole, you know, to this day history of AI now today. Now it's AI, right? And then we remember like Napster with the music industry. The video cassette technology itself, remember, Betamax and VHS, one of the things that the, that, that Hollywood is afraid of, is that, well, sure, if we put our movies on your video cassette, that's fine. We'll sell that to you. But also, you can record live TV and or you could,

you know, set it up so that you could record our movie and then maybe, you know, sell that yourself. So take your copy of Sound of Music, dub it, and sell it to 10 of your friends. Yeah. So in 1978, Hollywood threatens video station with legal action, claiming a violation of their copyright. They saw, also, you know, we got to figure that Hollywood sees this as a threat to their revenue stream in terms of people actually going to the movie. So, you know, again, this is not insane. If you're Hollywood, you think this is our cash cow.

If people can watch movies at home, why would they ever go to the theater? Which, funny enough, is still sort of something. Yeah, still the same story. Our wondering is true today. but it's interesting though that it's um it's sort of those are two distinct issues but they're both and they're both coming to a head at the same time right like so so just like you're talking about the notion that will it stop people from going to the movies which as you're as we're talking about is still something that causes so much consternation today like is at the end of of theaters

of the theatrical experience sort of exacerbated by covid times and whatnot but so that plays out to this day but the VHS part of it which I assume like part of the biggest part was as you're about and as we'll get to in the lawsuit of the ability to record because it was like one of the first mediums, if I'm right, that was actually read right at home versus just read only like records and because also, you know, think of the audio cassette came out at the same time and that was also the issue. If you had the boombox with what, that's why we made mixtapes in the 90s is because so it is, it is weird because I did do the research that tape technology as a, as a medium of storing things, you know, tape technology,

was important for early computers as well. Right. But that was invented all the way back in the 30s. So it's one of those weird technologies that took a surprising amount of time to come to market, I guess. But right, it's tape technology, I guess, was the thing that like you're saying was read write that wasn't possible with a phonograph

or anything like that before. We had a pretty early, I think it was, yeah, it was probably early to mid 80s that when we got our first, we had a VHS player. And one of the first, reasons why we had that particular one, which I to this day remember, it was so cumbersome to use. But it's because we also had a home camcorder that recorded directly to VHS. Right.

And so that was like a huge part of having that because we could both record home videos on, you know, a giant shoulder mounted VHS thing. At one point, I believe we had one where you had to like take the VHS player with you like in a pack on your shoulder because that was also the recorder for shooting the shooting to videotape. And so yeah, again, these things are so intertwined, like the recording and the playback element of it. You almost wonder, like, if they had just, if they had somehow figured out a way to just go down the path of it only being, you know, a medium from which you watch something and don't record it, would that have helped, you know, ease tensions a little bit. But then really not, because every time Hollywood's, Hollywood settles on a business model that makes sense. Any time that that gets disrupted even a little bit, they get nervous and

try to fight it initially. Yeah. Which this gets resolved with, as I said, rabbit hole fact number two. Yes. So the VCR as technology wasn't safe until Sony Corp of America versus Universal City Studios, also known as the Betamax case. So that was a legal case. Right. It was also Disney Sony created Betamax, right? Because this is, this goes, this comes back around later when there was, um, uh, Blu-ray versus HD DVD as well, right? Right, right. There's always these, these, uh, these groups that get together behind one of the formats.

And Sony was beta max one. Right. Yeah. And then it was like that consortium of what's the Dutch tech company that. Yeah. Yeah. Um, we could look it up, but, um, so the initial rule. were all in favor of Hollywood as they as they litigate this. And the heavy hitters behind it are

people like you would think, like Walt Disney apparently bankrolled a lot of the litigation as their want to do. And there were a bunch of rulings by, you know, like the Ninth Circuit Court of Appeals for years and years and years. And so the case makes its way all the way to the Supreme Court, which heard arguments in 1983, issued a decision. on January 17th, 1984, and in a five to four ruling, the Supreme Court reversed the Ninth Circuit's decision and held that the sale of home video recording devices to the general public did not constitute contributory infringement of copyrights. What I want to point out there and underline is that was a five to four ruling. That was a close call. Where would we be today if the precedent had been set

on the other side? Yeah, you know, there's like a world. in which you can't really record or mix anything on your own. And like, you know, obviously that was the era before personal computers were ubiquitous. But if you extrapolate that out to where that would be now, like all sorts of different ways, industries, all sorts of industries would have had to have gone if that's, you know, deemed to be illegal to have that type of technology. So I looked it up. VHS was introduced by the Victor Company of Japan, which is JVC, which is what I'm

That's right. Yeah, which is what I was thinking was a Dutch company, but yeah, confusing things. Now, you know those charts that you and I see on Twitter and social media all the time of like the adoption of technology? And the adoption of the VCR was until internet times held up as one of the technologies that was adopted the quickest. But when I'm looking at these numbers, it doesn't feel that quick to me. So you can buy a VCR in North America for the first time in 1975.

Five years later in 1980, only one point. 1% of people have a VCR in their home. Now, again, the technology is new, and as with all new technology, it's super expensive, so it is a luxury item for mostly rich people. But by 1985, the number's only up to 20%. And as late as 1990, only 66% of American households had VCRs. So it was 15 years to reach essentially 50% household penetration. The highest percentage that I saw, they reached about 90% of homes in North America had a VCR, I think, by like 2005.

Do you think was some of that held back by the Betamax versus VHS sort of war? Yes. Because people didn't know, you know, which one to get. It's a classic example of I have to go all in on one format. And also, that's something that the early video stores had to deal with. Like, imagine your mom and pop. This side of the, it's like when we used to go to Babbage's as a kid. and there would be all of the PC games over here and then one little shelf for Apple.

Yeah. So, I mean, I'm sure that one of the things that solved that was big chains like Blockbuster. One chain says, we're going all in on this format. That's the format that wins. Yeah. And it's because you sort of hit on it earlier where it's like one of the, you know, the reasons surely for Blockbuster success was just pure inventory. And they had the means to be able to buy both everything and multiple copies.

of things, whereas mom and pop video stores often just had one copy. And then, yeah, they would have to make the decision of should we get this on VHS and beta max. And if I recall, both of the local ones, the mom and pop ones that I grew up going to, they dominantly had VHS. They had some Betamax, but predominantly it was VHS. I also want to point out what the economics, speaking specifically of the mom and pop version of this here, because, again, this is sort of a golden era of mom and pop retail

in the sense that what would you you could get a bank loan throw together $30,000 to buy a bunch of video tapes and then all you need is some space in a strip mall. And so by 1985, there were about 15,000 individual video rental stores in the United States because any town of any size essentially could support one. That's a great entrepreneurial thing. If you're into movies at all, like why would you not set that up? That sounds great. The, so even as I'm saying, comparatively, the uptake of the VCR is slowish. The uptake of video rental is not because if you decide to go in on home video, this is the main thing that you're going to do with it is start, you know, having movie nights at home. It's helped by, obviously, prices coming down. The first VCR cost $1,400 in 1975. By 1985, the average price was down to $200 to $400 to $400.

dollars. It's not just mom and pops. I don't know if you remember this, but in the same way that in the 80s, everything had an arcade console, maybe in the back. Yeah. Gas stations, nail salons, anybody could buy a few, let's say you only have 50 titles, but, you know, in the back of your convenience store, whatever, you just throw some, some rentals in there. To bring it to Blockbuster, this is just a classic case then of there's a bunch of individual

entrepreneurs creating these rental firms and what's the play for Capital to do is like, let's roll these up and start chains. Blockbuster was actually late to this game because West Coast Video was founded in 1983 in Philadelphia, even though it's West Coast Video,

even though it's West Coast video. So that was maybe the first to start rolling up individual stores and turning them into chains. Hollywood Video was established in 1988 in Portland, Oregon. Movie Gallery, 1985 in Alabama. I don't have, what was your flicks? I don't see flicks in my reserve. At their peak, there may have had two stores, but I think it was mostly one. Blockbuster Video was founded in Dallas, Texas, in 1985 by an entrepreneur by David Cook.

His first store had an inventory of 8,000 VHS and 2,000 Betamax tapes. So it seems like he was going for, I want to have scale and more inventory than normal from the very beginning. And then this gets put on steroids by a true master of capital. Hit me with rabbit hole number three. The trash hauling business pointed the way to the rapid expansion of Blockbuster. In 1987, Waste Management co-founder Wayne Hizinga. who originally had reservations about entering the video rental industry, read to acquire several blockbuster stores at the time there were 19,

and he brings on associates from waste management. Waste management is thought of as the biggest name in trash hauling and things like that. But again, that was a hugely fragmented local town-by-town industry that waste management becomes waste management by essentially rolling up individuals. individuals and businesses. So Heisinga and his associates from waste management basically take the Ray Kroc model initially of franchising. The blockbuster that I worked for, I'm not going to mention the gentleman's name, but the story I had heard is he was friends with Heisinga, and he cut a deal so that there was a territory. Everything south of Tampa and over to Miami

in Southwest Florida was his, that he had the exclusive right to the franchise. And so So the Blockbuster I worked for was never corporate. He had the entrepreneur in question had cut this deal with Heisinga to have this territory. So they're franchising and a lot of those franchises gets bought up and rolled into corporate eventually. But they're just going around buying other chains. Did you say Flicks eventually got bought by somebody or not? That's a good question.

I actually don't recall. They were still, they managed to survive. you know, the infiltration of Blockbuster for a while, years and years, I believe they were eventually wound down. They may have been acquired, you know, and the assets went somewhere, but as far as I know, they sort of wound down operations eventually. All right. So I'm going to bring my first-hand knowledge of the business model of a blockbuster in Fort Myers, Florida in the 90s. Here's how it works. As we mentioned, with the earliest video stores, they hit on this sort of membership model. There's a reason for that because legally, by renting out property that the video store ostensibly owns, people sometimes don't bring your property back.

And so your membership was a way of getting you to sign a contract that essentially I can remember them every month having the list of people that they were sending to collections because you've had your video of again Jurassic Park for two years now and we want that back. That's also where the late fees come from, though, because as we established with the windowing method, if you buy a new movie that comes out, let's say it's the Tim Burton Batman in 1989, you're paying $100, $200 a copy for it. You need to rent it out a certain amount of times to break even on your investment. And if you cannot get people to bring the movies back, you can't turn them over and earn. your margins. Yep. So it's interesting how they dressed up the membership, you know, they give you a membership card and you feel like you're part of this club as a way to, um, to dress up the fact that

they, they are afraid you're a cheap skate and they needed to hold you accountable for returning. And then the late fees, you know, you would rent at my Blockbuster video in 1994, a video for $3 and you'd have it for two nights or 72 hours. I can't remember that exactly. But then if you keep it beyond that time period, it's $2 a day. So that can add up to if you're a week late, you know, you're talking about you're approaching $15. And so the as much as eventually people made fun of the whole concept of late fees.

And it was absolutely necessary for the business model of the video store to function. For sure. I remember at the local flicks. that I keep mentioning my mom going back to her. She would always do a great job for us kids of trying to get the inside information about when movies were due back that we wanted to see. So she would get friendly with the clerks working at Flicks. And actually the owners of Flicks say like they the so-and-so Batman or whatever is, you know,

is due back tonight by whatever it was 6 p.m. So if you come here, you know, at 601, we should have it. And sometimes it would work. Sometimes it wouldn't though because to your point, yeah, people would, keep them. And Flicks obviously had the concept of both late fees and the membership as well. Well, and for the people that say, well, the late fees were their real cash cow. That's why they went with it. We would do weekly calls. I was handed a list and I would get on the phone and I would notify you that, hey, you're five days late on this movie. The stores wouldn't do that if it was

more lucrative. If the late fees were more lucrative. Plus, you can't keep, people won't keep coming back if they can never see the movie that they want to see. which brings us to another thing that I'm sure you remember. So a video store would have the new release wall. Essentially 50% of the inventory real estate in a store is the new release wall, and the other 50% is sort of the older movies. But 85% of the actual inventory in terms of the cassettes themselves were the new releases.

So Jurassic Park comes out. and we would have had, what, 400 copies of that? And then it was always interesting. You could just walking down the new release aisle, you could see, well, that movie might not have, must not have done that well because it's only two rows of cassettes and things like that. It was entirely tied to the box offers performance and what the store thought the rental on that would be. But what this leads to, surely you can remember going to the video store to get Jurassic Park and Jurassic Park isn't there. You go back the next time, still not there.

There was a term for it which was managed disappointment. And isn't it interesting that we'll end by talking about how media now is unlimited selection, instant gratification. But how much the video stores were able to get away with, your entire family gets in the minivan, drives to the store. We've got popcorn. We've got our night planned. We just went to Jurassic Park. Now we're going to come back with that Steve Martin movie where he's an evangelist preacher. or something.

You know, the back catalog was the compensation. It's amazing in retrospect how forgiving we were with the fact that you might have, you probably had decent odds of 50% of the time going to the video store and not getting what you wanted. Yeah. And I do wonder how much, now that you bring that up, that's fascinating to think about, like, how much of our childhoods of what we actually watched was driven by exactly what you're talking about, by the fact that what the first choice was out.

So, you know, we're basically relying on. a recommendation, you know, maybe from from the store clerk, which I'm sure you did a lot of. And, you know, some people were great at that, but it's still like you were guided in a way. And that sort of sets, uh, sets you on a path to watching certain movies versus other movies. We're going to end with that because this question of, it has the internet killed serendipity is the case I'm going to make. But to just, again, for nostalgia purposes, but also for folks. that weren't there. I'm going to describe more of what the video store was. I will tell you this.

Working there in high school was great in the sense that everybody showed up. The only equipment I can think of is probably working at the movie theater. But like my junior year of high school on a Friday night, Saturday night, M.G., I would have seen you. I would have seen your girlfriend. I would have seen my, you know, my tea ball coach. Everybody would have come through. And so, yes, I did, I had Brian's recommendations and things like that. It is, weird in retrospect to realize the degree to which you were a quasi-local celebrity, because people like M.G, would say, hey, Brian, I really want to get my hands on this. Can you set it aside? Yes.

All sorts of stuff like that. But do you remember that as well that, like, going, you know, the weekends, going to the video store was a thing. And it was a social thing. It was the entire town coming to one centralized place. I do remember that very well. I remember that. I remember that. I remember that honestly more so at Blockbuster once Blockbuster sort of took over because a lot of, you know, the kids were driving at that point. And so, yeah, you'd go with your girlfriend or boyfriend and you'd run into other people there. And sometimes, you know, you'd end up, you know, leaving together to go watch a movie together because she's each other at that place. The other funny offshoot of what we talked about earlier, the adult area at the Flix. The people who worked at that store happened to know who was going in or out of those.

Yeah, yeah. Those rooms. And so that was often, you know, sort of relayed back to the children of what was going on. Let me make something very clear. Blockbuster did not have. I remember. Porn. Was it a religious stance or just a general moral stance or something?

It was a trying to be all things to all people stance. Okay. In fact, there were certain movies that the studios would allow to have Blockbuster only edits. This was probably towards the end of the 90s. I do remember that. Yeah. There was no NC17, too, if I remember. They would not do NC17.

I remember, like, the Scorsese's Passion of the Christ was not allowed to be rented at Blockbuster and stuff like that. So it was, I don't think it was like a moral religious stance. It was, we don't want to piss anybody off. And we want to be seen as the friendly, the place where the whole family can go to. So here's how it works, again, to just put you back there. A lot of stores had slot outside that you would drop. the movies off that you're returning, but then also you can come into the store and drop them at the counter where Brian and his coworkers will immediately open it up, see if it's been

rewound, and if not put it into the rewinder machine. I was going to ask you, the rewind thing, I remember, you know, please be kind rewind joke now, but the earlier video stores would actually fine us as well if we didn't rewind. Yeah, yeah. Yeah. Maybe because the automatic Rewinder was a late technology to come around. So Brian at the counter sorts it out, and initially what you do is you put them on the counter, the movies that have been returned, because the eagle eyes that are waiting there to get the hot movie will go ahead and grab it there. Otherwise, what Brian does, take a huge stack of them and walk around and put them back

on the new release wall. And people would follow you half the time to see what you were dropping off, to see what they missed. Yep, you're like the Pied Piper. There was also at the front counter, you know, tons of candy, bonus boxes, a lot of AOL DVDs. Do you remember, like, towards the end of the 90s and in the early 2000s? Like, Blockbuster became a place where you, you know, there would be a sample of a new fragrance in there or something like that. Because, again, this would be, this is a place where large majority of North Americans visited on a regular monthly, if not weekly basis. It's funny you say that now you're jogging my memory.

I remember one of the reasons actually Flicks, which, you know, it seems like this is sponsored by Flix, but I swear they're not even in existence anymore. So it doesn't matter. But one of the reasons why I think it actually did well for so long against, you know, the menacing Blockbuster was they also had a very fresh popcorn. They had a popcorn machine, like an old school one that they would make popcorn and put it in these great big giant tie bags that they would give to you with every rental. And so that alone, like Blockbuster obviously had popcorn as well, but it was, if I remember right, they would only sell the microwaveable bags. Right, yeah. That would then, you know, you would take home. I have to correct you.

Some Blockbuster stores did do the thing of having a popcorn machine in there and would pop it just for the smell. Yeah, that makes sense. As sort of the Pavlovian trigger for rental. I want to make room for you could rent video games at Blockbusters as well. I assume that was a big part of your world as well. Not only that. game consoles as a household that was never allowed to have our own Nintendo. We experienced Nintendo by going to other people's houses. Towards the tail end of high school, we were allowed to

rent, I remember renting the PlayStation 1 when it came out, the N64 when it came out, and you'd pay, you know, 20 bucks to have it for a weekend, and then you would rent the games to go along with it too. So that's how I had a lot of video game experiences in the 90s is renting the actual consoles and the games from Blockbuster. That was a big, that was a big, that was a thing when I was growing up because video games even after the price of individual movies to buy came down video games still cost $50 you know and as a teenager you didn't necessarily have that money and and the video game is a weird thing because unlike a movie where it's you know two hours long a video game you know can last you hours and hours on end but you don't know if it's any good

really aside from reading review magazine maybe rental renting a video game is something that we I guess a lot of games give you free, you know, try this level and that sort of thing. But the ability to really kick the tires on a game before being like, you know what, that is worth 50 bucks. That was a huge, huge thing. Yep. Let me end by pointing out that as best I could find, for Blockbuster, the late fees were only ever 16% of revenue. Now, at its height, that is $800 million a year, which is, you know, not nothing. They made blockbusters reportedly made more money in merchandise sales in selling,

you know, posters and and the popcorn and the candy than they did from the late fees. I just have this, I don't know why this is important to me, but the idea that the the late fee was such a stupid thing, that why did they, why did they hold on to it for so long? I don't think that was the case, really. It was, it was just something that served a purpose and earned money. That's super interesting. But you also understand, it's like, you know, it's a penalty, right? And you feel like, yeah, people are... You're penalizing your customer. You already have managed dissatisfaction, which is half the time you might not be able to get

the movie that you want. Yes. And if you forget to return it, you're paying literal fines. They called them fines. Yep, yep. Okay, hit me with rabbit hole number four. It was the coming of the DVD that screwed Blockbuster. This is the case I'm going to make.

And this is the real innovators dilemma because what I'm going to describe is I think there was a window in time where the DVD being a new technology, because it was adopted first by Netflix, that gives them their wedge for a key few years where it was important. So by the 90s, Blockbuster is a multi-billion dollar company. Hizenga, notably, was worried about how new technology could threaten the business long term. He's thinking at the time just the growth of cable, but also everyone can see video on demand will come eventually. And so this is why Hezenga cashes out. He tried to do things like maybe tie it to a cable company.

There was also the idea of a Blockbuster-themed Sports and Amusement Park in Florida. He eventually throws up his hands and sells Blockbuster to Viacom in 1994 for $8.4 billion. It's complicated, but later in the 90s, Blockbuster is spun out, also goes public. Sumner Redstone, this was one of his big purchases along with MTV that makes Viacom into the conglomerate that we remember from that time. Because he started owning movie theaters with national amusements, which is in the news all over again now because of that ownership of Paramount. But yeah, that's right. He also is the one that, you know, because he is creating a media conglomerate, he goes to Hollywood and says, listen, the way we're going to do it now is we're going to do a straight revenue share. No longer we're going to pay the $200 and then try to make it back.

Blockbuster obtained videos for a little above cost after Redstone takes over. And Blockbuster keeps 60% of the rental fees and the studios keep 40%. And that makes sense because that is, it's not exactly the same as theatrical distribution, but it's more similar to that, right? And so he knew that business, obviously being in that world. And so, yeah, that makes sense why he would try to strike that new deal. But the reason that I say that the DVD is the thing that upsets Blockbuster's Apple Card especially is because they had the experience in years prior of the laser disc. Right.

Obviously, you remember the laser disc. The laser disc was essentially. I do. I had one friend who had a laser disc predated the DVD, but it was the size of an old. It was like a giant dinner plate, yeah. Old LP. It was pretty close to the size of a, I. a record player record. It had, was digital, so the idea is you have better picture and stuff like that, but the compression technology was such that even on these huge laser disc players, to get through a full movie, you would have to flip it over like a record player.

I remember that. And the fingerprint problem on those things, people remember it, I'm sure, from CDs, music CDs when you would get smudges on it and you have to wipe it off. Imagine that on a record-sized CD effectively and having to flip it over, so you're like handling it. Well, this brings me back to Babbage's on the PC wall versus the Mac game wall. Do you remember in video stores there would be a tiny little corner that they were like the laser disc never took off except for the weirdos that went all in on the technology? And so you were shunted off into this corner, probably next to the porn corner. Yes. They had a few of them. They had a few laser discs. And so this was this was a technology that was.

recent enough that the video rental industry had experimented with and had burned them and was not a success, that they were gun-shy about this new technology. Okay, DVDs are smaller, but what's the difference that, you know, we already proven that people don't care enough about having a better visual quality to make it worth it. What they, I guess, didn't figure on was the rise of, you know, flat screen and HD TVs and things like that, where having a better picture actually was something you could notice. Exactly right. And I would just add one other thing that they, you know, may have come into play.

I also remember, you know, maybe it was a little bit earlier, but around the same time, they were also, and I think it was Sony, was trying to hype up mini discs for music. And that was another new format. Like it was a tiny disc inside of like a floppy disc almost to play music. And that didn't end up taking off as well. So I'm sure, yeah, the powers at B, look at these. different technologies that these companies are trying to hype and pass a new technology so you can so you can earn all sorts of money selling these things again and and just being like,

nah, it's not going to work. So DVDs start to become available in 1997. Also in 1997, on Antioco becomes the CEO of Blockbuster. He was formerly the president of Taco Bell. also that year Warner Brothers offers Blockbuster and Antioco a new rental deal for DVDs exclusively. Blockbuster was going to have the exclusive rights to rent new DVD releases for a period of time, exing out their competitors, but also this is the only place that you can see it at all before it goes on sale to the general public. The studio was going to receive 40% of the rental revenues in return again, which was the same deal already in place for VH. So it seems like a good deal. Blockbuster completely turns it down.

So I'm roughly, actually, an important thing here is the studios respond by lowering their DVD wholesale prices. Because since they're sort of boxed out of the biggest player in the rental market, they say screw it. And they make a deal with Walmart and other retailers to say, all right, let's go ahead. since they didn't take the bait on setting up this rental scheme, let's just sell them for 20 bucks and places like Walmart and Best Buy and Circuit City when they were still healthy, they jumped on this and this is where we get what you and I remember, the big box retailer like Best Buy, where DVDs at the front for 20 bucks is sort of the loss leader to get you in the store and maybe buy a TV. This is this is the world that I knew very well because I was the first person that I knew to buy a DVD player and I bought it because of that, right?

Like all of a sudden you can get access to movies for 20 bucks instead of the world we were talking about where it's 100, 100 plus dollars to buy VHS. It's back in the day. And I was, you know, I was in my late teens at that point. And so I was very into movies. I was going, you know, usually once a week, if not multiple times a week to theaters to go see a movie. And I remember very distinctly having I bought a deal. TV player, which also wasn't that expensive, relatively speaking. I want to say it was, it was like $150 to $200, which is, you know, a lot when you're a teenager,

but it wasn't thousands of dollars. And again, the movies themselves, I remember buying out of sight as one of the first ones at George Clooney and Jennifer Lopez movie. And it was just great. You could have these great new movies on DVD. So I have to underline, they could have had the. rental regime of the VHS era continued at least for a period of time. And they turn it down. And they turn it down in 1997. And in 1997, there is a startup called Netflix, which is formed.

Rabbit Hole number five is the legend of the late fee leading to the founding of Netflix is mostly apocryphal. Netflix was actually founded by a dude named Mark Randolph. He, he, he He came out with a book a couple years ago. I remember that. Yeah. Autobiography about this. He was in Silicon Valley working for a startup called Pure Altria, which was founded by a gentleman named Reed Hastings.

Randolph and some others, I think Pure Altria got acquired or something, so people have golden parachutes and something. So Randolph and some others from Pure Altria go off. And it's 1997. The internet is happening. The internet bubble is happening. And there was in the same. way that big box stores in the 90s were, well, you could have a big box store for home furnishings,

and that's bed, bath, and beyond, and for electronics. The idea of there's a big box retailer for each individual niche of retail, essentially, before everyone realized that Amazon was going to literally be the everything store, there was this movement to, well, what worked for big box stores should work for websites as well, which is why you had infamously, Pets.com, and all sorts of things like that. Netflix is formed as a sort of, we're going to do Amazon. If Amazon's only doing books, we'll do movies. There is a well-funded competitor called Real.com, which had a bunch of VC money and might have had a big IPO pop. I can't remember the details on that. But what Netflix realizes is the new technology that is on the up that you can't

can't really get anywhere is the DVD. Netflix.com goes live on April 14th, 1998. At that point, DVD players are starting to sell faster than VCRs. 400,000 units of DVD players were sold in the six months after their release in 1997. VCRs are still selling at 13 million a year, but on a sort of quarter by quarter basis, the uptake of the DVD is starting to happen. Netflix jumps opportunistically at this sort of new technology as a way to differentiate itself. Initially, they rented VHS tapes as well or tried to, but they were kind of at first a bespoke sort of like buy it or rent it thing in the same way that you would buy books from Amazon.

You'd try to buy movies from real.com or Netflix. But again, Blockbuster and Hollywood video for the entirety of 1998 still aren't renting DVDs. So Netflix, deciding to start to offer these as rentals, kind of has the market to itself. Then, as you're stating, the DVD players are relatively inexpensive. And so it's the chicken and egg problem. If I buy this, what can I do with it? Netflix starts early on, hey, here's a coupon inside the box for your new DVD player. This is what you do with your new DVD player.

Yep. Because, again, you can't go to Blockbuster to rent. DVDs for your brand new DVD player. In the first four months that they offer rentals, Netflix sends out and gets back 20,000 DVDs. They hit on the subscription model, keep it as long as you want, no late fees. But I'm going to come back to that in a second, because even that was sort of late in the timeline. They introduce things like keeping track of what you want to watch, you know, the Netflix queue. they're trying to replicate the IRL experience of a video store with recommendations.

Reed Hastings does not join Netflix full-time till 1999. This is the tail end of the dot-com bubble bursting. Hollywood Video buys real.com for $100 million. Hastings, one of his first acts, offers Netflix first to Hollywood Video. The idea is, hey, we have this DVD inventory that we've built out. You're going to have to transition to DVD. anyway. We've got all the DVDs. Essentially, the play is, let us, this is a quick and dirty way for you to build up your DVD inventory. Right.

And Hollywood Video turns them down. By the end of 1999, there are four million DVD players sold in North America so that this is starting to become a sizable market. Rabbit Hole number six, as I mentioned. Netflix didn't begin the no late fee thing until the fall of 1999. So again, they are founded in 97. They go live on the web April of 1998, and it is not until the tail end of 1999 that the thing that Netflix becomes most famous for, at least in marketing, the no late fees thing, isn't introduced till the tail end of that year. And it's an immediate success. Signups for Netflix go up 300% in the first three months that they offer the no late fees thing. if they had only done 20,000 DVDs mailed out and gotten back in the first four months,

they were shipping 100,000 discs a week for the first time after introducing no late fees. This must have been around when I signed up. I was pretty early signing up for Netflix because, as I mentioned, I was that person with the DVD player. I don't remember exactly the year it was. But I do recall very distinctly, you know, not even the late fee thing was interesting, but it's more that you couldn't even take out a new movie until you sent the other. one back, right? You would get three at a time, I think, was the play. And so you could send one back and then you'd get a new one. And then you'd send one back and then you'd get another one. And

that was, right, that's like a genius way to handle the no late fee thing. Right. And this, that is a classic innovator's dilemma thing because, well, why doesn't blockbuster just do something similar, which eventually they do, pay us a monthly fee and you can keep them? But there's two things that I think people should keep in mind is the video store was kind of the only sort of retailer, I mean, obviously Costco did this as well in Sam's Club, but the idea that you had a membership and you had to jump through hoops to actually even use the product, then if you, I don't think that subscriptions as a product were something that was that the American public was entirely comfortable with. Maybe you subscribe to the newspaper or a magazine, but.

And if you remember, there was, there was almost this weird situation that that sort of was indirectly tied to Netflix because you remember Columbia House and those CD sending a penny but then pay a monthly subscription and get them and it was all just a bait and switch to then pay a giant fee ongoing fee I think it cannot be underestimated the degree to which in the internet era Netflix got people comfortable with subscriptions as a product for sure for sure I think that's true so as I mentioned it's interesting that one of the first things that when Reed Hastings joins is he's like, I want to sell. I want to get out. Probably a smart move, seeing the, you know, dot-com bubble happening maybe.

But he tries it again. He offers to sell to Blockbuster. Same with Hollywood video. He says, look, we'll help you make the DVD transitions. Boom, instant inventory. Also, hey, keep doing what you're doing and we'll keep doing what we're doing, but we'll have access to your stores. There could be synergies here. He offers to sell for $50 million. Blockbuster turns them down flat. Why? Well, let's look at Blockbuster at this point. They IPO, as I said, in 1999, and so they spin out again and make a bunch of cash. And they have 6,500 stores worldwide at this point. At the same time, in April of 2000, Netflix only has 120,000 subscribers. They do revenue of only $5 million on losses of $30 million. So also, there's not necessarily proof yet that the unit economics of this work out. that charging a monthly fee will make up for the amount of money that you have to spend to acquire the inventory. Netflix has expected losses of $57 million in the year 2000.

Now, they've only raised $100 million in venture capital. The dot-com bubble is coming. Again, I think I can see why Reid was looking to shop this around. It makes a ton of sense. Yep. And potentially why Blockbuster doesn't want to take that on, like you're taking on a business that is bleeding money. I say this all the time. There was a period of time after the bubble burst where so many companies were almost you could hear them sigh with relief that, boy, that internet fat is over. Thank God. Back to business as usual, you know. But I also, I'm not saying that this is also apocryphal, but the idea that, well, we named it Netflix because we knew eventually we were going to do video streaming. On the one hand, everybody knew that video on demand was eventually going to be a thing, including Blockbuster. At the same time, if they really were going to. push through this, you know, long-term plan, they maybe wouldn't have tried to sell.

What year did they launch Blockbuster Online competitor? It is in my notes. We will get to 2007 is Blockbuster's total access. Wow. Let me do the timeline. Hit me with Rabbit Hole Fact number seven because this is timely and interesting. Enron is involved. So Blockbuster, as I said, is aware that video on demand is coming, could be a thing. Enron, if you'll remember, one of the things that caused them to blow up is they got into the fiber business. People might not remember. The dot-com bubble was not just about the dot-coms, the pets.com, and the e-tailors that blow up. There's also a bubble in infrastructure. Andron is ostensibly in the energy business. So if you can treat infrastructure as a marketplace

where you can, you know, sell futures contracts and like that's what Enron was going to do. agreement with Enron to create, to build out this video on-demand product was supposed to last for 20 years. Blockbuster gets lucky because Enron terminates the deal in March of 2001. For fears that Blockbuster would not be able to provide sufficient films for the service, Enron, of course, filed for bankruptcy that year. It's kind of a bullet missed there. In 2004, Blockbuster attempts a hostile takeover of Hollywood video. So if you're thinking that your lunch is getting eaten, I'm pointing that date out of December of 2004. As late as that, they're still almost doubling down on the existing market for this, where you have a real estate footprint, you have employees, you have actual inventory on shelves and things like that.

But they are renting DVDs at that point. Not yet? Not yet. Wow. Okay. In 2003, Netflix passes one million subscribers for the first time. Three years later, they will pass five million subscribers for the first time. So keep those years in your head.

2003, Netflix passes a million. 2006 passes five million. At the peak that, but I believe the absolute peak for Blockbuster was 2004 in terms of revenue and stores. They had more than 9,000 stores worldwide in 2004. There are consultants, the McKinsey's, who are always so brilliant, have studies that tell Netflix, or tell Blockbuster, that Netflix will never be a major threat. Netflix is by 2006 when they hit 5 million subscribers, but remember, they were founded in 2007. So it's almost a full decade where Netflix has been this-1997, yes, sorry. Netflix is like this little gnat or this yappy dog biting at Blockbuster.

But Blockbuster is absolutely at its peak in terms of earning money, in terms of footprint, in terms of clout in the industry. So they still feel like, you know, maybe this subscription thing is a thing, You know what we missed real quick, M.G, is also the fact that the DVDs were so thin. I don't think you could have done VHS cassettes by mail. You could have. It would have been more expensive. But the fact that you just.

For sure. The actual physical form factor of the media was an important thing here. Right. And the whole marketing angle of the red envelope, right? Like they did Netflix did a genius job. You know, however, that came about to just be synonymous with the delivery mechanism, literal delivery mechanism of the, of the, okay, here's the answer to your question.

Blockbuster buys something called DVD rental central for $1 million. This is their first foray into what would become Blockbuster online. It doesn't launch until 2004. Netflix formed in 1997, has a website 1998. It is not until 2004 that Blockbuster, in a meaningful way, tries to match at least the online component of this. 2005, they start to experiment Blockbuster with a no-late-feas policy. They're trying to ride the fence in a sort of weird hybrid way.

You can also, it's convenient. Yes, it's convenient to just return things by mail by putting in an envelope, but also you can return them to the store as well, too. So really, you want to go with us because we're the best of both worlds. Yeah. I think that that's, you know, it's kind of confused. using in terms of there's also there were certain stores that weren't corporate blockbuster stores so they couldn't do those deals i actually remember that really well because i did for a while sign up for

blockbusters um online uh DVD subscription because i live so close to one and so the timetable for me to turn around like and it was mostly it wasn't even movies at the time i was living alone i think in los angeles and i was churning through um television shows like i remember like 20 and shows like that where, you know, they would have like the whole season on like four or five different DVDs. So if you were using Netflix, which was only by mail, as you're noting, you know, you'd have to wait two days or whatever for the turnaround time. Whereas if you went to Blockbuster, they had a deal where you could drop it off there and pick up a new one, you know, right away. Their initial foray is called Blockbuster Online. And through that, customers could rent a

DVD online and receive a new movie for free when they either sent it back or returned it to a Blockbuster store. This was successful to a degree, but apparently it costs Blockbuster $2 every time they did this. So essentially, they've been forced into breaking up their business model. And so that's one of the reasons I read a piece that said when they started to experiment with this Carl Icon intervened in an activist way to stop. them from doing this because it was losing them so much money. Their last for a throwing in the towel in terms of competing with what Netflix is doing comes in 2007 with Blockbuster Total Access,

which is probably what you were just describing. I think that's right, yes. Where it's basically just Netflix. You're paying us a fee, but there's also a store you can go to if you want, which is kind of the worst of all worlds in a way. And you're exactly right. Again, I did it because I happened to live like a block away from one. So it was. super convenient, but there's no way it would have made economic sense compared to what, you know, the model that Blockbuster had before because, yeah, you could, it was almost like movie pass in a way, right? Like, where it's just like, oh, yeah, you can see as many movies as you want. Just please don't do that, because if you do that, we're going to go out of business. Right. BlackBuster sort of

stumbled into that. On the way out the door hit Rabbit Hole number eight. Blockbuster did kill HD DVD. As alluded to, just like with VHS versus Betamax, there was the HD DVD versus just the DVD format. There was two competing formats, right? Blockbuster, on their way out the door, kills the HD DVD format because they go with Blu-ray versus, I'm sorry, I said VHS DVD before. But this is into the Blu-Ray versus HD-DVD-D era. So on the way out the door, they settled that format war because

they still have enough scale at the time when they say, hey, listen, we're not buying HD DVD anymore. We're going all in on Blu-ray. That's enough to have Blu-ray win. Yeah, it was sort of wild. Like, after the whole Betamax and VHS thing, the same thing happened, you know, with all these studios trying to align behind one or the other. Because it's one of those classic tales of there were, the corporations made so much money on the licensing fees of the VHS technology. Like, that was a Harvard business school. Like, this is, pound it into your head, like, you know, if you can create a technology.

Right. Because for the next 30 years, you'll get a dollar for every unit that is sold or something. Right. Right. I can see why they tried to do it multiple times because if you win, it's a license to print money. All right. To bring this to a conclusion, but bring us back to our timeline here, Northwestern Total Access launches in 2007.

Do you know what else launched in 2000? 2007. Hit me. I don't remember. The very first Netflix streaming product, which is an experiment. How's cards? Well, not, I'm not saying that they had their own content yet. I'm saying the product itself where Netflix had always been, hey, send the DVDs back to us via mail. That's right. The first product that they roll out and say, hey, stream this was in 2007 the same time that Blackbuster is trying to basically go all in on the Netflix model of subscriptions and mail it back. That's when they jump to streaming their first experience. So the classic one step ahead.

Yeah. One step ahead. Blockbuster tries to copy this. They acquire something called Movie Link for $6.6 million. And they try to cut deals with the movie studios. They initially have the bigger library of over 6,000 films. But Netflix follows the playbook that, got them into all of the DVD boxes so that when you would buy a new DVD player,

do you remember when you got your first flat screen TV in the late aughts early teens? One of the things that would be in there would be again, hey, when you plug your smart TV in, make sure that you download the Netflix app because that's what you can do with this brand new TV that you got. That makes sense. And that reminds me, you know, this is a different rabbit hole that we won't have time to go down. But there was a whole story of like Roku rose out of Netflix, right? It was like a skunk works project. That was their hardware side. Their hardware streaming video that eventually was too early, right, for where it was at the time. And so it spun out. But now it all comes back around. And now Roku has, I think, what is the most popular streaming box,

even in the world of Apple and Amazon. And it's all built into the TV too, whereas Netflix, the content company has always sort of been the will be the app in your app store or on your home screen sort of model. Those watching on the YouTube version of this, you're going to see some charty, classic chart goodness that shows that in 2008, Blockbuster is still doing $5 billion in revenue. Netflix in 2008 is still doing less than $2 billion in revenue, as late as 2008. It is blockbuster is still ahead by metrics that maybe most people would think mattered. It wasn't until 2010 into 2011 that Netflix passes Blockbuster in revenue for the first time. It's not until 2010.

That's crazy. But that's like the famous example of even after the iPhone launched also in 2007, Blackberry was doing well and went to new records, right? It's an all-time new highs in terms of sales and revenue for a few years afterwards. Blockberry shares on the day the iPhone comes out, you still could have like four or five X your money as long as you got out at the right time. Exactly, yeah. So when they introduce, Netflix passes Blockbuster in revenue at the $3 billion mark. If you're seeing the chart on Netflix, you're seeing Netflix's revenue go hockey stick up.

and the precipitous decline in Blockbuster is almost, it's almost a mirror, a mirror image. Now, what's also happening at this point is the great financial crisis in 2008. So I think that quietly Netflix benefited from that because it was a cost-cutting measure as well. I would love to know the internal numbers in terms of did people take up Netflix to save money in the financial crisis because, well, we only have to pay $10 a month versus the $30. And also, I assume that Blockbuster's giant store footprint just became a giant albatross around their neck of having, yeah, like, $9,000 whatever stores you said. Same thing happened with Kmart as Kmart was bought to try to be a real estate play, but that didn't work out around the same time. So the inflection point is a $3 billion mark in around 2010 when Netflix becomes bigger than Blockbuster.

Guess what also is introduced for the first time in 2010? That, I assume, is the original streaming stuff? Streaming only plan. Streaming was originally when they're experimenting with it, sort of an add-on. Hey, you already have a Netflix membership. So if you put this on your TV, there's a certain amount of movies that also, gratis for your membership, you can also stream on your smart TV. They move in 2010 to the streaming-only plan at the exact point that Blockbuster

goes into free fall. At the beginning of 2010, Blackbuster had over 6,500 stores still, of which 4,000 were in the U.S. That number fell to 3,400 by late October that same year, and they try all sorts of experiments. They try to buy Circuit City as Circuit City goes out of business. Oh, wow. They try Blockbuster Express Video Rental kiosks. So like Redbox. Redbox, exactly. It's in August of 2010 that Blockbuster files for bankruptcy. for the first time. We don't have to go into all of the various machinations because people try to say Blockbuster, even as a brand, acquires it at some point. K-Telecom wanted to buy it at some point. By November 2013, there were only 300 remaining corporate-owned Blockbuster stores in the U.S.

As a cost-cutting measure, they shut down the DVD-by-mail program that year. As of 2014, there were only 51 franchise locations still operating in the U.S. in 2014. By 2018, they're down to nine stores. The very last one was in Bend, Oregon, and I think is still functioning, but mostly as a tourist destination. I think that's right. I think I saw something about it relatively recently, yeah. To go buy shirts like this. But at one time or another, more than 43 million U.S. households had Blockbuster memberships. sort of what's the number on prime today, something like 80% of American households or something like that. Yeah, so maybe not 80%, but, you know, maybe approaching half at some point, depending on when you count the numbers. So this is why I think we're doing shows like this, people remember this. Like this was something that was for a brief window of time,

absolutely central to American middle class household life. It was a right of passage to get a Blockbuster membership card. Your own is like a teenager. Yeah. Yeah. So the obvious sort of spitballing here is could Blockbuster have ever survived? I'm going to let you answer first and then I'll tell you what I think. So I do think, you know, for all the ragging on Blockbuster and rightfully so, like, and you sort of hit on this at the very end there, it did have a great name. It has a great name and a great brand, right? Like everyone remembers the yellow and blue. the icon, and again, a great name. And Netflix also has a great name. But it feels like there's a world in which those two could have been, you know, potential yin and yang foils to one another feels.

From a branding perspective, if nothing else, if they had made the right strategic decisions. But, you know, what, you know, I would have to say if I were just trying to extrapolate out everything that happened and the way that it would play out most of the time, I mean, it's not exactly 100% classic, innovative. to let him out, but it's not too dissimilar from, yeah, just what the high-level notions are there because they were directly incentivized not to do what Netflix was doing. And then to the point that we made earlier, when they started doing what Netflix was doing, it really ruined their business. And so that's what happens. I think Netflix wins because of two accidents of history.

The first one we have already discussed, they had this window of time when DVD as a technology is on the up and they have the they have almost the DVD market to themselves. But the second thing is that when if let's say that Blockbuster says, you know what, we're getting killed here with these DVD rental things. Instead of spending years trying to solve that problem, let's like you said, jump ahead. And let's go ahead and go into streaming before Netflix or somebody else does, they would have to be antagonistic to Hollywood. Hollywood, yeah, totally. In the way that Netflix was because they would have to, if you put out blockbuster.com

and you're streaming from this studio and that studio or whatever, you have to cut deals. And those deals would be cutting into the profits that they're already trying to make from you from physical rental or, you know. And long term, as we. seen every studio is going to want to own this. Why are they going to want a middleman called blockbuster.com to rent their movies? Two offshoots of that that I think are interesting. One is that so much of it is dependent on timing as so much of the world is, right? Like it's like Netflix really lucked out in that they were able to ride the DVDs, the fact that we talked

about earlier, the DVDs were much more accessible via mail. And so their mechanism of delivery was like perfect timing with the rise of the DVD. And then basically made the exact right call on the timing to move into streaming when broadband was fast enough to be able to do that. We didn't even talk about the fact that they had Quixter and they tried to spin off. And that was a total disaster and a bad strategic move. But they were able to survive that because of their great timing and because they've, they made other smart decisions beyond that one, which almost doomed.

the company at one point. But also another big accident of history and window that Netflix took advantage of was the fact that they weren't blockbuster in the way that why after Napster did the music studios cut a deal with Steve Jobs for iTunes is because they were assuming it's only going to be on max, which is a small percentage of the market. So we'll be willing to, oh, this is just extra money for us. When it's Netflix that goes to Hollywood and says, hey, can we have some of your old movies that you haven't monetized in a while, we'll do sweetheart deals. And this is just found money for the studios. Never have been able to do that. Never been able to do that. That's right. So they, by being the little guy, by being sort of like the Albanian army,

they were able to get a wedge at a, at a perfect period in time when that mattered, I think. Yes. And one other thing that your point reminded me of is talking through it. It's sort of like, in a way it reminds me of what many of the media companies, but Disney in particular, has to go through right now with, you know, the demise of cable, right? Where it's like they're trying to figure out how to move everything over to streaming. And obviously they've done a pretty good job of that with Disney Plus. But at the same time, a huge part of their business and a huge part of their profits are still residing on cable television and affiliate fees and ESPN in particular is now, you know, the forefront of that because of the sports rights and how lucrative and expensive those

are. And so Disney has had to do this thing where they're like grinding out over years, very slowly moving everything in the sports capacity online to the point where I think it's next fall. They're finally saying they're going to move to ESPN fully streaming. But it's been so long in the making. And it's to your exact point. Like they know what they need to do and they have the technology to do it. But they can't piss off their partners in the same way that that Blockbuster had they tried to do some these moves, it just would have been a non-starter. And it would have taken years and years. And while Disney does have competition, they also have the strength of IP. They're able to ride their theme parks. You know, they have other businesses that are, that are, allow them to leverage those

revenues and profits to allow them to give them time to basically do this. Blockbuster had none of that, of course. Right, right. And also, piss poor management. I didn't go into much detail about that. Yeah. Let's end with this, which is the, we mentioned it briefly at the beginning. The way media works now and sort of what the internet gave us, or at least the digital delivery of media gave us, is infinite selection, instant gratification. I remember the first time, I've said this before, I came to New York City. The thing I wanted to do the most was go to Tower Records because I knew I could find albums that I couldn't buy at my local record store. We, it's, it's insane. If I said to you right now, M.G., there's a new TV show or did you see that movie and you couldn't immediately check it out yourself. You think it was insane. Right. And we talked about how Blockbuster was a business built on managed dissatisfaction.

But in a way, that's what media always was because with windowing with, you know, if you don't see the Godfather in the theater, you might never get a chance again in your lifetime. media was always like that, but that made it more precious. Because what is managed dissatisfaction? Another word for it is serendipity. You said, how many movies did I fall in love with because I went to Blockbuster or the video store because I wanted to rent something and I didn't get it. And so I got my second choice. And that movie became a, you know, Bill Simmons and the rewatchables is predicated on the idea of if something plays on cable enough, even if it did terrible at the box. office, it can get a second life.

Yep. So have we lost something in the current model of how we get media? And is that something called serendipity? I absolutely think that we have. I think about this a lot, or I have historically thought about this lot, just in the music side, right, where it's like, I just remember so distinctly when I was a teenager, like you just talked about going to Tower Records, just going to any music store to find, I was very into Pearl Jam, which I still am, I'm going to see them soon.

tour. I was so into just finding bootlegs, right? And going to these stores that had specific ones because they weren't mass produced and they were literal bootlegs. And so you would find them in certain stores and it would be like the greatest treasure hunt in the world when you're that age. And because you could only, you know, find certain media that way and only afford, you know, for a $20 CD, you could only afford a few of them every so often. You would just listen to them nonstop, right? And it's the same idea, though, with what you're talking about with Sarin. and movies and TV shows. It's basically now when you have access to everything, the problem of abundance and, you know, sort of the problem of the paradox of choice at that point of like, what do I watch? And even to this day, like last night, my wife and I are deciding what we should watch. And it's like, we could pick literally anything. And so what do you pick? And so of course, like it sort of goes back to the notion of recommendations from people you trust,

which is, which is nice. but you're still, you know, missing exactly what you're talking about, sort of those, the second order effects of not, something not being available because everything is always available. And so you're not going to just have this, like, random choice unless you happen to sort of stumble upon it on, like, I don't know, online and you click on a link and you start watching something. Right. The counter argument would be that's what social media functions as is the discovery mechanism for new artists, especially in music, right? So you could say that there's still serendipity there. But I think also more important than the, well, I just stumbled on this movie that I didn't know I would like and it became my favorite movie is what you said, remembering being in college and I can afford one new CD a week, one new album week. And so if I wait that long and saved up that money, I'm going to listen to that album. Absolutely.

Versus even bands that I love, a new album comes out, I go check it out on streaming. I play it once or twice. And I don't allow myself the luxury of falling in love with it because it can just go back to something else that I know is immediate gratification. And that and you brought up, yeah, the Bill Simmons, the rewatchable point of like, that's, that's just totally gone. It feels like for the most part because even with music, you know, it's a shorter time duration thing. So you might put in some time to listen to something and you can do other things while you're doing it. With a movie or show, you know, if you're not paying. attention, you're just going to miss the whole thing. And so, yeah, there used to be movies that came on

cable when we were watching them. And because we only had, you know, whatever 10, 20 channels, even in the cable days, you would watch something because it was on. And you're just not going to do that anymore. And so that is, that is totally gone in a way that's a little bit sad because, yeah, I just, you know, the younger generations will never be able to fall in love with something that's not served up to them, you know, in a much more projected way that's being sent by something rather than it just being total serendipity. So I think that's probably a good philosophical note to end on. Thank you, M.G, for getting nostalgic on Blockbuster with me. Is there anything that you want to plug or at least tell people where to find you and you're writing online?

Yeah, so I'm mainly writing these days at a site called spyglass, spyglass.org. is where I set up shop and have been writing for the past several months, trying to get back into that habit and write a lot about, you know, sort of the stuff we're talking about. So hopefully people enjoy that. But, yeah, it was great chatting with you, Brian. Great going down this nostalgic trip. I had not thought about flicks in a long time.

And I feel like that's now. I'm going to go tell one of my daughters about that because I think she'll get a kick out of the idea that there used to be these giant videotapes that you would have to bring home to watch a movie. A quick reminder from me that I do a daily tech news podcast called the TechMeme Ride Home approaching 2,000 episodes of that now. 15-minute news round up every day. Search TechMeme Ride Home and give that a try.

But thank you for joining us for this episode of Rad, the 80s-90s history podcast. If you are watching this on YouTube, hit subscribe and like all that stuff. If you are on Spotify, Apple Podcasts, follow, whatever it is on your favorite podcast app that you do to make sure that you get every new episode. that we release. These 90s history on YouTube, 80s history on Spotify, all the socials. As always, yo, Holmes, smell you later.