In 2000, when Netflix was still a small and fledgling company, it offered itself to Blockbuster, the world’s largest video, DVD, and game rental company for $50 million. Blockbuster passed. Netflix was barely a blip on the radar with mounting losses and a very uncertain future. Meanwhile, Blockbuster’s revenues topped more than $5 billion in 2000—$800 million collected in late fees alone. Understandably, Netflix was inconsequential. Today, Netflix is worth more than $197 billion, and Blockbuster filed for bankruptcy in 2010. What happened to the behemoth with more than 9,000 stores and 60,000 employees?
Netflix’s disruption of Blockbuster is a classic illustration of how an under-resourced new entrant can take on and beat an industry leader. While Netflix lacked the ability for customers to immediately drive to a store to rent a movie on the same day, it allowed customers outside of core geographic regions to cheaply access a wide library of DVDs by mail. As Netflix’s offering gained traction with customers, Blockbuster’s business model proved a stumbling block to responding to its new competitor. This is another classic hallmark of disruption. Like many retailers who have tried to respond to disruptors, Blockbuster was never able to detach itself from a desire to leverage its existing (and expensive) physical locations. As a result of clinging to aspects of its existing business, Blockbuster couldn’t also operate its version of a DVD-by-mail service at the scale of Netflix.
Netflix’s disruptive components:
Enabling technologies: Mail & Internet
Innovative business model: Mail order and distribution center only, no late fees, no physical locations
Coherent value network: Leverage postal service and direct-to-consumer sales on the internet
