Blockbuster is a loser of digitalization because it was unable to cope with the changing market environment: It sticked far too long to an outdated strategy and failed to understand market changes that others eagerly exploited.
Pre-Digitalization – the video rental business
The original video rental business was pretty straight forward: On the one side you had a high demand for home videos which still account for for 45% of the revenue for the movie industry (2009). Yet the prizes for tapes were very high. Rental stores like Blockbuster came in who rent you the tapes and after several rents they yielded 100% profits. The main value creation were costs.
Digitalization – New opportunities for value creation
The digitalization did not only change the distributions channels but also the value creation of the movie rental space. Looking at the value video rentals create, you can clearly see why Blockbuster lost that game to Netflix&Co:
- Costs: Due to digitalization the physical products (e.g.DVDs), distributions channels and retailing operations have gone digital and Blockbusters stores and inventories became expensive liabilities rather than competitive resources. —>Blockbuster´s commitment to their vast retail network made them unable to compete in pricing and profitability overall. In 2008, Blockbuster had been in the red for ten of the previous eleven years.
- Convenience: Early the development from customers going to a rental store to going online was obvious. In 2005 66% of movie industry rental revenues came from in-store rentals, but already in 2009 this dropped to less than 50%. —> Again, Blockbuster was to slow and committed to the old strategy. As late as in November, 2013 Blockbuster´s CEO Joseph P. Clayton said, “This is not an easy decision, yet consumer demand is clearly moving to digital distribution of video entertainment.” to justify the closing of physical distribution elements. This quote reveals that Blockbuster continued to struggle with digitalization until the end and that digital distribution with its many folded advantages have not been fully understood.
- „Consultation“:Already before ranking and suggestion systems were widely used in e-commerce, Blockbuster could have seen the signs: For years Blockbuster´s movie rentals were driven by box office popularity of movies and not by store experience. People went to Blockbuster to rent a movie they have missed watching in the theatre but not because they want get inspired by new movies they might not know. Instead of introducing pre-digitalized suggestion systems (e.g. store associates suggesting movies, rating websites) they introduced impulsive buying items (e.g. toys and candy) to increase money spent per customer but not number of customers/movies rented. Digitalization of the movie library and algorithms make it easier than ever to rate movies and receive recommendation for movies we did not know, bringing the customer a greater experience and many more movies watched per customer. —> Blockbuster has failed to create nor exploit any of the values which come with a digitalized recommendation systems.