Blockbuster: the latest victim of e-commerce avoidance

Video rental chain Blockbuster has become the latest casualty of the high street, announcing it was going into administration yesterday after failing to meet profit targets at the end of last year. We recently covered the demise of once-popular music store HMV, and it seems that Blockbuster has fallen victim to the same fate – by not recognising the potential of e-commerce until it was too late.

The death of DVD

“It’s the tail end of a long story,” Benedict Evans, an analyst at Enders Analysis, explained in an article by the Financial Times. “The DVD business in western markets is in long-term decline and the rental business has been replaced partly by Lovefilm and streaming and also partly by Amazon and supermarkets as DVDs have become so cheap.”

Evans is correct in identifying Blockbuster’s failure to adapt to changing consumer preferences. The profits of the business had been declining for the last few years, but the launch of postal and streaming services like Lovefilm put the final nail in the coffin.

Streaming from strength to strength

Lovefilm posts around 250,000 DVDs a day to their postal customers, and has offered a successful online streaming service since 2009. Netflix, something of a latecomer to the UK scene, only launched their streaming service in early 2012, but already boasts more than a million subscribers. Blockbuster’s UK online business is miniscule in comparison, with around 35,000 users, no streaming available, and a significant annual loss of around £1m. The company still has 2m rental customers, but still only broke even at the end of last year.

In an interview with Wired.co.uk earlier this month, Netflix CEO Reed Hastings was asked about his decision not to offer postal service to the UK market, and commented: “DVD is declining and streaming is growing. It was an easy choice. DVD’s are a declining business, that’s definitely true. But it’ll be a long tail; there’ll be people who like DVDs in five or ten years’ time.”

This is true – the DVD market still exists, and probably won’t dissolve completely for many years. But as Evans explains, the rental market is almost impossible to maintain in a world where DVDs are just as cheap to buy or stream online. Online retailers like Amazon offer DVDs for as little as £2 – in a Blockbuster store, just renting a new release would often cost the consumer double the price. Online services offer even better value for those not bothered about keeping their disks – as Ian Maude, also from Enders Analysis, summarised, “Why would you go to a store for a frankly limited selection of films when you can browse Netflix for any film that’s ever been released, or watch it on Sky or Virgin?”

Late to the party?

It’s unfair to say that Blockbuster didn’t attempt to take on the online market – their online DVD rental service was launched in 2002, and initially was very successful. However, as the years went by, the market become crowded with competitors, seemingly offering a superior service. As with HMV, online review sites are littered with criticism for poor customer service, citing everything from late delivery to scratched disks, and Blockbuster’s site wasn’t updated frequently enough to remain modern and user friendly.

Professor Ajay Bhalla of Cass Business School compared the two businesses: “The company, like HMV, failed to transform its business model early enough. When it did, it found a fundamentally altered competitive landscape where the platform model had destroyed the traditional retail one. Firms like Blockbuster failed to face up to the enormity of the change and altered their business model on the fringes (e.g. selling second hand products) rather than coming up with an innovative offering.”

The cases of these companies both provide a cautionary tale to surviving businesses about the importance of prioritising their online offering, as more and more consumers head for the web. For Blockbuster, however, it seems it’s a case of too little, too late.