Evolution of an Industry: Blockbuster's Bankruptcy

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by: DayOnBay

By Artin Memar

Kakuzo Okakaur said:

The art of life is a constant readjustment to our surroundings.

In the realm of science, the theory of natural selection is fundamental to the understanding of evolution. Darwin’s now universally esteemed theory provides an explanation for the survival of certain organisms and the demise of others throughout time. In the interest of brevity, the central assertion he makes is that while it is competition for finite resources that forces some organisms to perish, the pattern by which this phenomenon manifests itself is not totally random. In fact, Darwin’s notoriety can largely be attributed to his claim on the following discovery: it is those organisms most suited to their environment that are most likely to survive.

Coincidentally, the applicability of the principles of natural selection extends far beyond the natural world and serves as a reliable guideline for the operation of successful, modern-day businesses. Stated differently, it is those firms that are able to best forecast consumer behaviour and adapt themselves to industry-level changes that experience ongoing profitability. And, as a second coincidence, it is here, precisely, that Blockbuster has failed.

Blockbuster Inc. (OTC:BLOAQ), the once dominant movie rental company in the US, experienced the height of its success in the late 1990s. The company’s stock price was soaring, as were revenues, and its profits were setting records with each passing quarter. Current competitors, such as Netflix Inc. (NASDAQ:NFLX) and Coinstar Inc.’s (NASDAQ:CSTR) Redbox, were either nonexistent or inconsequential at the time, and there was little concern over other forms of rental distribution.

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It took less than a decade, however, to transform a seemingly promising (and profitable) future to one of incredibly bleak prospects. Since 2002, Blockbuster has seen its stock price plummet from $29 per share to almost nothing in July, 2010, when it suffered the embarrassment of being delisted from the New York Stock Exchange. This was, of course, no surprise, as the company had lost more than $4 billion since 2002 and, in the past year alone, reported a revenue drop of 20%. This downward spiral culminated recently with Blockbuster’s filing for Chapter 11 bankruptcy protection on September 23, 2010, in an attempt to reorganize its finances. Currently, the company faces debts amounting to $1.46 billion.

Blockbuster’s decade-long downfall from video-rental powerhouse to has-been is a cautionary tale of how short-sighted management and corporate arrogance can turn a couple of brazen upstarts into the new stars of an industry. In this instance, it was Netflix and Redbox DVD rentals that possessed the foresight that Blockbuster lacked. In understanding the imperativeness of responding to changing consumer needs, Netflix allows its subscribers to stream movies over the Internet or receive DVDs by mail, while Redbox specializes in the vending of rental DVDs via self-service kiosks. And while its competitors steadily gained market share through novel and innovative approaches, Blockbuster remained defiantly steadfast in its profound reliance on a brick-and-mortar business. In other words, Blockbuster was neither proactive nor reactive in its strategy, and an obviously failing business model was never materially adapted to sweeping environmental changes.

Blockbuster is hardly the first retail giant to find itself in such a situation. In fact, it was due to similar problems that Hollywood Video parent Movie Gallery Inc. (OTC:MVGRQ) – once the second largest US movie rental chain behind Blockbuster – filed for bankruptcy protection in February of this year, before liquidating in August. In a more wide-reaching context, the underlying issues affecting Blockbuster are not unique to the video industry. Countless retail segments have been disrupted by changing channels of media consumption. Namely, Amazon.com (NASDAQ:AMZN) has challenged traditional booksellers, while iTunes can be blamed for the disappearance of many record and CD stores. It is important to note here, then, that the music and film industries are not dying, as many uniformed observers believe, but simply changing.

And, hence, it is amidst this fury of change that the relevance of Blockbuster and similar retail businesses comes under serious scrutiny. In a world of profuse digitization, one must question the necessity of physical intermediaries that link content and consumer. Amazon.com Inc., Apple Inc. (NASDAQ:AAPL), Google Inc. (NASDAQ:GOOG), and Netflix Inc. are a mere fragment of the innumerable companies that represent the future of media consumption. It is also no coincidence that each of these corporations has accurately forecasted the future and adapted its business model in response.

And so, in a world governed by a concept of “survival of the fittest,” Blockbuster finds itself among the dangerously unfit. Consumers have selected against the once king of movie rentals, opting instead for firms that are responsive to their changing needs. And while the company will surely attempt a late adaptation if or when granted the opportunity, the evolutionary disadvantage that it faces relative to its peers will almost certainly act as an insurmountable hindrance. It is for this simple reason that the former titan’s obsolescence is likely imminent and unavoidable.

Disclosure: No positions