Speaker 1: Get in touch with technology with tech Stuff from how
Speaker 1: stuff works dot com. Hey there, and welcome to tech Stuff.
Speaker 1: I'm your host, Jonathan Strickland. I'm an executive producer with
Speaker 1: how Stuff Works in a love all things tech, and
Speaker 1: it's time to start a new short series series by
Speaker 1: two episodes. That's not really a series, I guess. Tech
Speaker 1: Stuff listener Paul asked that I would do if I
Speaker 1: would do an episode about Blockbuster, the mega chain video
Speaker 1: rental store that at one point had more than nine
Speaker 1: thousand locations worldwide. I'm instead gonna do two episodes on
Speaker 1: the company. This episode is called the Birth of Blockbuster,
Speaker 1: and spoiler alert, the title of the next episode is
Speaker 1: the Death of Blockbuster. So this is gonna be all
Speaker 1: about the founding of Blockbuster and its rise to dominate
Speaker 1: the video rental industry. And the next one is what
Speaker 1: the heck happened? Right? How did it? How did things
Speaker 1: go so wrong for Blockbuster that today only one Blockbuster
Speaker 1: video store exists in the United States, though I should
Speaker 1: say there are a few others that are actually an
Speaker 1: overseas locations, but only one US Blockbuster remains. So we're
Speaker 1: going to find out together. Let's dive right in and
Speaker 1: stop delaying. Wow, what a difference. Well, to understand the
Speaker 1: rise of Blockbuster, we need to look back at the
Speaker 1: development of the rise of the VCR. Sony's Beta Max
Speaker 1: and j VCS VHS standards debuted in the nineteen seventies,
Speaker 1: and both formats used magnetic tape to store video content,
Speaker 1: and they were incompatible with one another, so you could
Speaker 1: not put a Beta Max tape in a VHS VCR.
Speaker 1: They also were enormous disruptors. You know, we talked about
Speaker 1: disruptive technology. Videotapes were huge and disruptive. Media companies hated
Speaker 1: the idea of video tapes. They tried to stop the technology.
Speaker 1: They were worried that people would have the ability to
Speaker 1: tape content right off their televisions and then that would
Speaker 1: somehow eat up into their revenue, maybe there'd be piracy issues.
Speaker 1: It was just a big scare. And in fact, we
Speaker 1: see this all the time. Whenever there was a new
Speaker 1: media format that would allow people to put media onto
Speaker 1: some sort of storage device, we've seen companies react negatively,
Speaker 1: whether it's CDs, DVDs, whatever, And the same was true
Speaker 1: way back in the seventies with VHS and Beta Max.
Speaker 1: The first film to be released on VHS, meaning you
Speaker 1: could go and purchase a copy of the movie on
Speaker 1: VHS in the store would be a South Korean movie
Speaker 1: called The Young Teacher that became available way back in
Speaker 1: nineteen seventy six, but America wouldn't start having access to
Speaker 1: VHS tapes until nine. A company called Magnetic Video had
Speaker 1: a great idea. Well, the owner of Magnetic Video, Andre Blair,
Speaker 1: he had a great idea. He said, I'm gonna license movies.
Speaker 1: I'm gonna go to a movie studio. I'm going to
Speaker 1: pay a licensing fee and UH in return, I will
Speaker 1: end up producing videotapes of that studio's library of content.
Speaker 1: And ZI lands a deal with twentieth Century Fox, and
Speaker 1: the agreement was that Blay would pay a licensing fee
Speaker 1: of seven dollars and fifty cents per video that he
Speaker 1: sold and also give a three dred thousand dollar upfront
Speaker 1: advance to twentie century Fox. Magnetic Video had an organization
Speaker 1: called the Video Club of America that had a membership
Speaker 1: fee of ten dollars, and through that club you could
Speaker 1: purchase movies like Patent Mash, Hello Dolly, The Sound of Music,
Speaker 1: and The French Connection, among others. But the cost of
Speaker 1: every video was forty cents. Parently, some seven dollars and
Speaker 1: fifty cents would go to twenty century Fox and the
Speaker 1: rest would be divvied up between you know, Andrea Blay
Speaker 1: and whatever the expenses were. By the December of nineteen,
Speaker 1: an entrepreneur named George Atkinson got a crazy idea. He
Speaker 1: had already run a home theater system business, but now
Speaker 1: he thought, what if I bought copies of these movies
Speaker 1: and then offered them as rentals to people who own
Speaker 1: VCRs and Beta Max machines. I could get a lot
Speaker 1: of money. This way, I can generate a lot of revenue.
Speaker 1: It's gonna take a big upfront cost because you have
Speaker 1: to build out the inventory. You have to pay for
Speaker 1: all those videotapes. But then over uh sequence of rentals,
Speaker 1: for a low amount per rental, you can start making
Speaker 1: that money back. You you make back your investment and
Speaker 1: you start making a profit. Atkinson opened up a six
Speaker 1: d square foot storefront he called Video Cassette Rentals and
Speaker 1: he would later rename the Video Station. It was on
Speaker 1: Wilshire Boulevard in Los Angeles, California, and that's when the
Speaker 1: video rental business was born. Atkinson was a pioneer in
Speaker 1: this space, and he would even franchise his idea. He
Speaker 1: would license that out to other small business owners. Now,
Speaker 1: the media companies again hated this idea, but the license
Speaker 1: agreements they had made for videotapes they were intended for
Speaker 1: home sale, right, they were meant for the home theater
Speaker 1: enthusiast to go out and purchase a fifty dollar videotape
Speaker 1: of a movie. But copyright law was pretty clear there
Speaker 1: was nothing illegal about what Atkinson was doing. He was
Speaker 1: his rental business did not violate any laws. So while
Speaker 1: the movie studios didn't like the idea, they couldn't legally
Speaker 1: stop it. Later on, those same studios would totally come
Speaker 1: around to this rental industry. It would become an lucrative
Speaker 1: revenue source. But of course, at first it was brand new,
Speaker 1: and as we all know, big companies hate new things.
Speaker 1: They're scary. And across the United States, other entrepreneurs would
Speaker 1: follow Atkinson's lead. Some of them were independent mom and
Speaker 1: pop stores, so little, local neighborhood video rental facilities. And
Speaker 1: then one guy would start up a business that would
Speaker 1: become the giant of this burgeoning industry. Now that one
Speaker 1: guy's name might surprise you, because when you talk about Blockbuster,
Speaker 1: one name tends to pop up more frequently than others.
Speaker 1: There was a billionaire named Wayne Huizenga, and he made
Speaker 1: his fortune growing Blockbuster and then ultimately sold it to
Speaker 1: Viacom in the nineties, which I will cover in our
Speaker 1: next episode, and we will get to him. He is
Speaker 1: a crucial part of Blockbusters history, but he was not
Speaker 1: the person who started the chain. That honor goes to
Speaker 1: a guy named David Cook of Dallas, Texas. David Cook
Speaker 1: was a programmer and an entrepreneur, and in nineteen eighty
Speaker 1: two he founded a company called Cook Data Services, and
Speaker 1: this company built databases and software and some hardware tools
Speaker 1: for the petroleum industry. His company, UH was doing pretty well,
Speaker 1: but then the oil business as a whole, the whole
Speaker 1: industry took a huge hit in the early nineteen eighties,
Speaker 1: and so Cook started to look around for other opportunities.
Speaker 1: It was clear that the oil industry was not going
Speaker 1: to be a reliable source of revenue. His wife, Sandy,
Speaker 1: loved film, and she said, maybe you should look into
Speaker 1: video rental operations because we're starting to see these businesses
Speaker 1: pop up, and I think you could probably do a
Speaker 1: really good job with it. So Cook began to do research.
Speaker 1: He began to look into the business of video rentals,
Speaker 1: and he saw that most video stores were actually pretty
Speaker 1: small operations. They were limited to an inventory that represented
Speaker 1: some of the biggest move be titles because the cost
Speaker 1: per video was pretty high, so it was prohibitively expensive
Speaker 1: to aim for a really large inventory spanning niche genres
Speaker 1: and interests. Right, Like, if you sit there and say
Speaker 1: to yourself, well, E T is going to be huge,
Speaker 1: so I want to make sure that we have plenty
Speaker 1: of copies of ET. That's a bad example because of
Speaker 1: how long it took a t to get to the
Speaker 1: home video Marcord. But just assume that we're talking about
Speaker 1: something that was available in so you say, I want
Speaker 1: to have a whole bunch of copies of that because
Speaker 1: it's a big, big name. But there's this other smaller film.
Speaker 1: Maybe let's say it's a racer head. You know, it's
Speaker 1: a David Lynch movie and people have heard about it,
Speaker 1: but most people think of it, Oh, that's that weird
Speaker 1: art house kind of film, and I don't understand it.
Speaker 1: It's very independent and strange and surreal and absurd, and
Speaker 1: I don't. That's not for me. And so a lot
Speaker 1: of these video rental stores would ignore those other titles
Speaker 1: and just focus on the really big, most recent ones.
Speaker 1: But Cook thought there might be a way of appealing
Speaker 1: to a broader audience by including those titles. He also
Speaker 1: knowed that a lot of video stores had a pretty
Speaker 1: clunky way of actually renting titles. Movies typically would not
Speaker 1: be kept on shelves because there was a very legitimate
Speaker 1: fear that customers might come in, see a video tape
Speaker 1: on the shelf, get some sticky fingers, slip that video
Speaker 1: cassette into a bag, and just walk right on out.
Speaker 1: And then next thing you know, they have the latest
Speaker 1: copy of the most recent releases. And so that was
Speaker 1: something that you typically wouldn't see in your normal video
Speaker 1: rental stores. You would you might see cases, but there'd
Speaker 1: be no videotapes inside. You would have to take it
Speaker 1: out to the desk and then they would have to
Speaker 1: go find a copy of that movie and they would
Speaker 1: have to do the whole checkout process, which typically was
Speaker 1: not automated. It was laborious. It was slow. It was
Speaker 1: not good customer experience. So David Cook asides, He's going
Speaker 1: to take a stab at this, and he opens up
Speaker 1: what would become the first Blockbuster video rental store. This
Speaker 1: was still under the umbrella of his company, Cook Data Systems.
Speaker 1: He bought an inventory of movies and opened a store space,
Speaker 1: and that inventory included eight thousand tapes, which represented six thousand,
Speaker 1: five hundred different titles. And remember each of those is
Speaker 1: costing quite a bit of money per go. We're talking
Speaker 1: like around fifty bucks per tape, sometimes sixty depends on
Speaker 1: the title in the movie studio. But you multiply that
Speaker 1: by eight thousand, that's a lot of money. But he
Speaker 1: gave his store a much larger selection than most other
Speaker 1: stores and was significantly bigger to the competitor that was
Speaker 1: geographically closest to him, So he had an incredible advantage
Speaker 1: just from an inventory perspective. Cook also would outfit every
Speaker 1: single tape with a special magnetic strip, and he mounted
Speaker 1: sensors near the door of his shop to discourage theft.
Speaker 1: So if you took the tape through the sensors, an
Speaker 1: alarm would go off and Cook would know, or his
Speaker 1: employees would know that someone was trying to lift one
Speaker 1: of those videotapes. And I remember this set up vividly
Speaker 1: because I remember you would go to rent the tapes
Speaker 1: and the process would have the clerk actually put the
Speaker 1: video tape on the other side of the sensors, on
Speaker 1: their side of the counter, so you'd have to, you know,
Speaker 1: you'd have to complete your transaction, walk through the sensors,
Speaker 1: pick up your movie, and then you could leave. So
Speaker 1: good times that still it was still in in uh
Speaker 1: in place when I was renting movies or when my
Speaker 1: family was renting movies in the late eighties. He also
Speaker 1: incorporated a database that could actually keep track of all
Speaker 1: the rental titles, so pulling a title up on the
Speaker 1: system would tell you immediately where it was, whether it
Speaker 1: was out for rent, or if it should be in
Speaker 1: the store, so he could keep track of where everything
Speaker 1: was at any given time. It also meant that he
Speaker 1: could see which titles were getting rented more frequently, and
Speaker 1: if necessary, he could order another copy of a title
Speaker 1: if it was proving to be incredibly popular and consistently
Speaker 1: checked out. Checking out titles was actually computerized and automated
Speaker 1: as well. That was a huge advantage over other video
Speaker 1: rental stores. So a customer would first have to become
Speaker 1: a member of the store. You couldn't just rent anything.
Speaker 1: You had to first apply for a membership card, and
Speaker 1: you would get a membership card for you'd pay a
Speaker 1: fee get a membership card has a unique barcode on
Speaker 1: it that's tied to your account, so you have a
Speaker 1: customer profile, and whenever you scan your membership card, it
Speaker 1: links whatever transaction you are doing to your customer profile
Speaker 1: in Cook's computer system. And every videotape would also have
Speaker 1: its own barcode. So if you wanted to check out
Speaker 1: a video, you bring it up to the front, the
Speaker 1: clerk would scan your card, they would scan the video.
Speaker 1: This links the video to your profile. It tells the system, hey,
Speaker 1: Jonathan has rented Big Trouble in Little China for the
Speaker 1: eightieth time. So Jonathan's got Big Trouble in Little China
Speaker 1: on rent, and we know what's going to be due
Speaker 1: in X number of days. So that way they could
Speaker 1: actually keep track of all that information to and it
Speaker 1: meant that if you kept the movie longer than what
Speaker 1: the membership agreement allowed you to, you'd end up having
Speaker 1: to pay late fees which would become a very important
Speaker 1: part of Blockbusters revenue model. As it turns out, the
Speaker 1: business was a smash success. According to Cook, the night
Speaker 1: they opened, they had to close off and lock the
Speaker 1: doors to limit the number of people who are coming
Speaker 1: in and overcrowding the store. Cook found that people were
Speaker 1: really eager to rent all sorts of movies, not just
Speaker 1: the big titles, but other ones as well. So he
Speaker 1: discovered that that prevailing wisdom that you should really focus
Speaker 1: on the latest releases didn't really hold true. That a
Speaker 1: lot of people were interested in watching older films, things
Speaker 1: that they had heard about but never seen, or maybe
Speaker 1: they had seen it years ago but it hadn't seen
Speaker 1: it since, he found that those smaller titles had real value,
Speaker 1: so it turned out that his approach was more effective.
Speaker 1: The following summer, in x Cook would open three more stores.
Speaker 1: Not even a year had gone by since he had
Speaker 1: opened the first one, and already he was ready to expand.
Speaker 1: He also changed the company over to become Blockbuster Entertainment Corporation.
Speaker 1: In June. Things were looking up and Cook was seeking
Speaker 1: investment in the form of an I p O to
Speaker 1: fund this expansion because it was expensive but Just a
Speaker 1: few days before the offering was to take place, a
Speaker 1: financial reporter did a piece on Cook. That piece was
Speaker 1: kind of a hatchet job. It highlighted how the oil
Speaker 1: industry failure nearly tanked his company just a few years earlier,
Speaker 1: and it questioned whether Cook had the expertise in the
Speaker 1: video field to make his business a real success. And
Speaker 1: it was such a damaging piece that it tanked that
Speaker 1: equity offering that was planned, and due to that expansion
Speaker 1: and the high upfront costs, the company ended six with
Speaker 1: a three point two million dollar shortfall. But the story
Speaker 1: obviously doesn't end there. It could have this could have
Speaker 1: been the end of Blockbuster, and we never would have
Speaker 1: talked about it. The name never would have risen beyond Dallas, Texas,
Speaker 1: and we would just be ignorant of it. But of
Speaker 1: course things did not go that way. I'll talk more
Speaker 1: about what happened in just a second, but first let's
Speaker 1: take a quick break to thank our sponsor. So here's
Speaker 1: Cook with a business he knows can be successful, but
Speaker 1: he's got a huge cash flow crisis on his hands.
Speaker 1: In February, Cook sells off one third of the company
Speaker 1: to a group of three investors, and all three were
Speaker 1: from another big company that Cook had some experience with
Speaker 1: in the past. It was a garbage disposal business of
Speaker 1: all things, and it was called Waste Management. Side note,
Speaker 1: I once tried to launch a fitness company called waste
Speaker 1: Management spelled slightly differently, but it never did very well.
Speaker 1: But the other Waste Management was a different story, had
Speaker 1: done really well, and one of their co founders was
Speaker 1: was the guy named Wayne Wizinga, and Waizinga had retired
Speaker 1: from Waste Management in four He and John Milk, who
Speaker 1: was the president of Waste Management's international division, and Donald Flynn,
Speaker 1: who was the CFO of Waste Management, all went in
Speaker 1: to invest in Blockbuster, pouring more than eighteen million dollars
Speaker 1: into the company. Cook ended up handing over control to
Speaker 1: the company to Whaizinga later on that year that it
Speaker 1: just was clear that he was not going to be
Speaker 1: able to hold onto the company and Cook's business strategy
Speaker 1: was not the way that Oizinga and his his partners
Speaker 1: wanted to go. Cook wanted to create a franchise system.
Speaker 1: He wanted to license his computer system he had created
Speaker 1: the database system and Blockbuster's name to independent entrepreneurs and
Speaker 1: that way, he wouldn't have to oversee all the operations.
Speaker 1: He could benefit from the licensing fees, and these small
Speaker 1: independent video store owners could benefit from the work he
Speaker 1: had done building out the database. But wa Zinga had
Speaker 1: a different idea. He wanted the company to maintain ownership
Speaker 1: of as many stores as possible with direct control. Cook
Speaker 1: reportedly had issues with the new leaders of Blockbuster, and
Speaker 1: by one report I saw, he had a hearty disagreement
Speaker 1: with one of Zinga's direct reports. I believe the piece
Speaker 1: I read called it one of Whizinga's lieutenants. So Cook
Speaker 1: decides he's going to get out of the game, the
Speaker 1: guy who founded the company. So in April, Cook sells
Speaker 1: off his shares of the company he founded and he
Speaker 1: goes to work on other businesses. Has pailed amounted to
Speaker 1: something in the area of around twenty million dollars, somewhere
Speaker 1: between eighteen and twenty million, which isn't bad. Obviously, that's
Speaker 1: a lot of money. I mean, it makes you a millionaire,
Speaker 1: a multimillionaire, But that was a fraction of what he
Speaker 1: could have made had he stuck around. However, based on
Speaker 1: a little bit of information I can find about Cook,
Speaker 1: who is a pretty private person overall. He did not
Speaker 1: regret his decision to leave when he did. For one thing,
Speaker 1: it didn't sound like money was of a super high
Speaker 1: priority in his life. Like sure, money is nice, it's
Speaker 1: good to have it, but he's not consumed with the
Speaker 1: idea of constantly making more money. He's appears to have
Speaker 1: more of an engineering bent, where he likes to recognize
Speaker 1: problems and find ways to solve them. So he leaves
Speaker 1: the company behind, and the founder has gone. By April seven,
Speaker 1: not quite two years after the company started in the
Speaker 1: first place, the new leadership decides to pick up stakes
Speaker 1: from Dallas and relocate to a new headquarters. The new
Speaker 1: home base of operations for Blockbuster would then be Fort Lauderdale, Florida,
Speaker 1: so they move out from Dallas to Fort Lauderdale. By
Speaker 1: the summer of nine seven, Blockbuster had grown into a
Speaker 1: company with fifteen of its own stores and twenty franchised stores.
Speaker 1: Some things would remain the same as when Cook ran things.
Speaker 1: The standard rental period was three days, which is what
Speaker 1: Cook had established. Stores would open at ten am, they
Speaker 1: would close at midnight. There was another thing that Cook
Speaker 1: had established, and people could rent more than one film
Speaker 1: at a time. Other interesting things that Cook had learned
Speaker 1: and that the new owners were able to leverage to
Speaker 1: greater effect held some surprising data. For one thing, seventy
Speaker 1: percent of rentals were of non hit films. There were
Speaker 1: movies that didn't receive a wide release, or some that
Speaker 1: received no theatrical release at all, and that encouraged the
Speaker 1: company to follow Cook's example and make sure that new
Speaker 1: video stores, whenever they would open one up, would have
Speaker 1: a broad spectrum of titles across all genres. To capitalize
Speaker 1: on that trend, the company also made it a practice
Speaker 1: to choose its locations very carefully. They would scout out
Speaker 1: potential neighborhoods, not just to find a good storefront space,
Speaker 1: you know, not just to say, oh, well, this this
Speaker 1: land real estate here is ideal for us. But also
Speaker 1: they wanted to get a really good understanding of the
Speaker 1: demographics of the neighborhood because that would influence the choices
Speaker 1: the company would make for the inventory held by that store.
Speaker 1: So if you go to a location and has a
Speaker 1: really large immigrant population, then you might include more foreign
Speaker 1: films that represent the demographics of that area better, so
Speaker 1: that if there's let's say there's a large Russian population
Speaker 1: in a town, you might want to try and get
Speaker 1: as much Russian cinema as possible because you're going to
Speaker 1: appeal to the folks who live in that area. And
Speaker 1: one of their big decision the company directors made was
Speaker 1: that the video store would not carry X rated films. Uh.
Speaker 1: They decided they definitely wanted a family friendly company, a
Speaker 1: family oriented business, so that was right out. And in
Speaker 1: the video rental days, there frequently were video rental stores
Speaker 1: that would have a a surreptitious curtain hung up in
Speaker 1: the store and behind that was where all the the
Speaker 1: X rated material was. Blockbuster said, we're not doing that
Speaker 1: at all. That's totally against what we're gonna stand for,
Speaker 1: so we won't even entertain that thought. And then Wazinga
Speaker 1: directed his new company to expand in that old, tried
Speaker 1: and true way by buying up competition. Why open new
Speaker 1: stores if you can buy existing ones. Although to be fair,
Speaker 1: Blockbuster did both. They didn't just go out and acquire
Speaker 1: other companies. They also opened up new stores of their own,
Speaker 1: but they did do quite a bit of acquisitions. So
Speaker 1: one thing that they started to do under Wazinga was
Speaker 1: to try and buy back franchised stores. So the goal
Speaker 1: was to reduce the number of franchises to of all
Speaker 1: Blockbuster stores, so the company would operate the other six directly.
Speaker 1: Wasazinga started acquiring regional chains of video rental stores, so
Speaker 1: he would look for chains that held a strong position
Speaker 1: in their local markets and then he would go out
Speaker 1: and buy those So that way, instead of having to
Speaker 1: go into a market and compete against an established uh rival,
Speaker 1: they buy out the potential rival from the beginning and
Speaker 1: then just take their place. So in March seven, Blockbuster
Speaker 1: bought out a chain called Southern Video Partnership. In May
Speaker 1: of that same year, they acquired Movies to Go Incorporated.
Speaker 1: And that was just the beginning. By the end of
Speaker 1: nineteen eight seven, Blockbuster had risen to become the fifth
Speaker 1: largest video chain by revenue and they operated one hundred
Speaker 1: thirty three stores. Wasazinga also planned for the future. Blow
Speaker 1: Buster built an enormous distribution center in Dallas. This huge
Speaker 1: warehouse building, and it was essentially a videotape warehouse. It
Speaker 1: held industry so that a store would be able to
Speaker 1: ramp up almost instantaneously. Essentially, Blockbuster would be able to
Speaker 1: choose a location for a new store, secure that location
Speaker 1: to a build out for the store, and as soon
Speaker 1: as it was ready they could stock it. They could
Speaker 1: fill the shelves because they had this big distribution center
Speaker 1: that held massive numbers of tapes that were representative of
Speaker 1: multiple stores worth of inventory. In March was Zinga led
Speaker 1: the charge to acquire another video rental company called Video
Speaker 1: Library Incorporated, which was based out of San Diego, California,
Speaker 1: and had forty three locations at the time of the acquisition.
Speaker 1: Blockbuster paid six point for million dollars in cash plus
Speaker 1: some stock, and then in April night Blockbuster partnered with
Speaker 1: a company called the United Cable Television Corporation or U
Speaker 1: See t C, and you See TC would help Blockbuster
Speaker 1: open one hundred franchised stores over the course of nearly
Speaker 1: three years. You See t C also purchased twenty percent
Speaker 1: of ownership and Blockbuster, although they would not retain all
Speaker 1: of that percentage that stake over the years. By the
Speaker 1: end of Night, Blockbuster Video had more than four hundred
Speaker 1: stores and was already the largest video chain rental company
Speaker 1: in the United States. So it hit number one status
Speaker 1: just three years after it launched, and just really just
Speaker 1: one year after Whazinga took over, and it was still
Speaker 1: getting bigger. To celebrate the new year, in nine nine,
Speaker 1: Blockbuster made another big move. They made a bid for
Speaker 1: a company called Major Video, which was based out of
Speaker 1: Las Vegas, Nevada. Major Video was the fourth largest video
Speaker 1: rental company in the United States, and the deal was
Speaker 1: made official for ninety two and a half million dollars.
Speaker 1: Blockbuster kept buying up competitors and company is that we're
Speaker 1: running Blockbuster franchises and brought those stores back under the
Speaker 1: direct control of Blockbuster Corporate. By the end of nine
Speaker 1: just two years after Wazinga and his crew took over operations,
Speaker 1: Blockbuster had grown to more than seven stores, sales had tripled,
Speaker 1: and profits were almost four times larger than they had
Speaker 1: been before Wazinga came on board. The company's market value
Speaker 1: was seven times more than it had been before he
Speaker 1: came on board. And then the company hit a little roadblock.
Speaker 1: This is what we call a cliffhanger. I'll tell you
Speaker 1: what that roadblock was in just a second, but first
Speaker 1: let's take another quick break to thank our sponsors. So
Speaker 1: that roadblock came in the form of a financial analysis
Speaker 1: report which accused Blockbuster management of engaging in some misleading
Speaker 1: or maybe even shady accounting. According to the report, Blockbuster
Speaker 1: was hiding its expenses by spreading them out over long
Speaker 1: time frames. The company would end up spreading out the
Speaker 1: cost of acquiring and building stores over a forty year period.
Speaker 1: The implication there was that the company was planning on
Speaker 1: operating those businesses for at least forty years to generate
Speaker 1: revenue to cover those costs. And Blockbuster was also spreading
Speaker 1: out the cost of actual video tapes. They said, well,
Speaker 1: we're paying for video tapes over a three year period,
Speaker 1: so when we make a big purchase, we are giving
Speaker 1: ourselves three years to recover that. Now, according to the
Speaker 1: analyst who wrote this report, that was not realistic because
Speaker 1: a three year old tape would not hold the same
Speaker 1: value as a new tape and not generate as much revenue,
Speaker 1: So you would see a decreased or diminished returns on rentals. Right,
Speaker 1: you make a video of allable, and if it's a
Speaker 1: new film, it might be very much sought after over
Speaker 1: the course of the first couple of months of it
Speaker 1: being out, but that would start to taper off. And
Speaker 1: it was true that a large percentage of rentals were
Speaker 1: coming from smaller films, but it didn't mean that the
Speaker 1: same smaller film was constantly being rented, right. A single
Speaker 1: title might only get rented once or twice a month.
Speaker 1: It's just collectively across all of those small films, there
Speaker 1: was a lot of rentals going on. So the analyst
Speaker 1: was saying, you can't just spread the cost of a
Speaker 1: video over the course of three years, because it's making
Speaker 1: too many assumptions. And you would say, you know, this
Speaker 1: three year old tape is not going to have the
Speaker 1: same value as a brand new tape, unless, of course,
Speaker 1: the old tape was some sort of classic like I
Speaker 1: don't know, Barry Gordy's The Last Dragon, and the brand
Speaker 1: new tape was something not so classic, like Ernest goes
Speaker 1: to Amp because that's an easy call. Right. But on
Speaker 1: top of those charges that the analyst made against Blockbuster,
Speaker 1: the report also stated that Blockbuster was relying heavily upon
Speaker 1: the initial franchise fee for way too much of its revenue.
Speaker 1: The report found that twenty eight percent of blockbusters revenues
Speaker 1: came from these one time fees, so nearly a third
Speaker 1: of all revenue that Blockbuster was making came from this
Speaker 1: franchise fee that would be paid one time by each franchise.
Speaker 1: In other words, in order to keep that amount of
Speaker 1: revenue steady, you would have to open at least as
Speaker 1: many franchises the next year. Right if you make of
Speaker 1: your revenue from these one time fees. If you don't make,
Speaker 1: if you don't open as many franchises or more the
Speaker 1: following year, you're going to have a decrease in that
Speaker 1: percentage of revenue and you need to make it up
Speaker 1: somewhere else. So this would create a business plan that
Speaker 1: was incredibly aggressive and probably unsustainable because at some point
Speaker 1: you're gonna hit maximum market penetration. You're not going to
Speaker 1: be able to open up more franchises because the market
Speaker 1: would be saturated. There would already be enough franchises in
Speaker 1: various regions, and there wouldn't be enough demand to open
Speaker 1: up another one. So you can't count on one time
Speaker 1: franchise fees to be a third of your revenue. It
Speaker 1: was a short term strategy, according to this analyst, and
Speaker 1: because it was making up such a significant percentage of revenue,
Speaker 1: it was a big warning flag. Blockbuster had a prompt
Speaker 1: response to this. Well. First of all, their stocks took
Speaker 1: a hit their stock price debt because this report was
Speaker 1: pretty damaging, but their swift response was this, I don't
Speaker 1: care up. Management remained defiant. They refused to change the
Speaker 1: way they operated. They said, this is how we do business,
Speaker 1: and we're seeing a lot of success, So go for
Speaker 1: a long walk off a short pier. Gradually, the stock
Speaker 1: price recovered because sustainable or not, Blockbuster strategy was inflating
Speaker 1: the company's value. So the company's value was increasing, even
Speaker 1: if on the long term this strategy could not sustain itself.
Speaker 1: Maybe someday that would all come crashing down, but in
Speaker 1: the short term, Blockbuster stock look like a surefire ticket
Speaker 1: to profits. The company was dominating the home video space,
Speaker 1: and home video itself was performing like gangbusters. Not only
Speaker 1: were people eager to get their hands on movies that
Speaker 1: they might have missed during initial release, it also opened
Speaker 1: up a new industry where studios could either choose to
Speaker 1: offload titles to home video instead of going the theatrical
Speaker 1: release route, or even purposefully make movies with the intent
Speaker 1: of making them direct to video titles. Blockbuster had another
Speaker 1: hiccup in November. That's so I got a backtrack a
Speaker 1: little bit I mentioned earlier that they or at a
Speaker 1: partnership with United Cable Television Corporation. Well in, United Cable
Speaker 1: Television Corporation merged with United Artists Communications, Incorporated, and they
Speaker 1: formed a new company called United Artists Entertainment, Incorporated, and
Speaker 1: now United Artists was the largest shareholder of Blockbuster. Following
Speaker 1: the merger between those two companies, United Cable Television Corporation
Speaker 1: and United Artists Communications, United Artists wanted to restructure, right
Speaker 1: they had just merged two companies together, and I said,
Speaker 1: we need the streamline. We need to get rid of
Speaker 1: any redundant departments or systems and find out what works
Speaker 1: best for us as an entertainment company and streamline stuff.
Speaker 1: Part of that meant selling off the twenty eight Blockbuster
Speaker 1: franchises that the company owned and operated, and also divesting
Speaker 1: itself of the shares it had of Blockbuster, which by
Speaker 1: that time made up about twelve percent of all shares
Speaker 1: in the company. That again raised questions about Blockbusters business plans.
Speaker 1: Would the company be able to operate the way it
Speaker 1: had been indefinitely or was this the tipping point? Managements
Speaker 1: all one surefire solution to the challenges they were facing
Speaker 1: because expansion in the United States was slowing quite a bit,
Speaker 1: in part due to saturation. Right, there are a lot
Speaker 1: of markets that already had enough video rental stores to
Speaker 1: support that population. So growth in the United States was
Speaker 1: getting increasingly challenging. But overseas markets presented huge opportunities. And
Speaker 1: I've seen this happen with other companies, including companies I've
Speaker 1: worked for, where a company reaches a really big size
Speaker 1: within one country and then growth is just really hard
Speaker 1: to do because you've already grown so much in your
Speaker 1: home country you get you don't really have room to
Speaker 1: get bigger. So investors still want to return on their investment, right,
Speaker 1: they still want to make a profit from investing in
Speaker 1: the company. That means that the company has to not
Speaker 1: just do well in needs to grow year over year
Speaker 1: in order for investors to get a return on that investment.
Speaker 1: This is why we see so much emphasis on growth,
Speaker 1: not just performance, but how much did you grow this
Speaker 1: year compared to last year. So you are left with
Speaker 1: some hard choices. You can try to create more customers
Speaker 1: in your home country, but that gets more challenging the
Speaker 1: longer you go, because the larger you get, the fewer
Speaker 1: the smaller the pool is right, the fewer number of
Speaker 1: non customers you have, and it gets harder and harder
Speaker 1: to convince those to become customers. Sometimes it's impossible. Your
Speaker 1: other choice is to try and expand into other countries,
Speaker 1: and Blockbuster chose the foreign market strategy. John Melk, one
Speaker 1: of the three investors who came over from Waste Management
Speaker 1: back in n seven, traveled to the United Kingdom and
Speaker 1: he opened up a British subsidiary of Blockbuster. The store
Speaker 1: that he opened up in South London was called the Ritz,
Speaker 1: and once again Blockbuster went on a really aggressive path
Speaker 1: to open his many stores as possible. Before nine had ended,
Speaker 1: Blockbuster had more than one thousand stores, and by June
Speaker 1: they would have more than one thousand, two hundred stores
Speaker 1: in the United States alone. So they were still opening
Speaker 1: up locations very very quickly, and even though the United
Speaker 1: States was a tougher market, they were still opening up
Speaker 1: more stores there. The company also created ad campaign partnerships
Speaker 1: with fast food restaurants, you know, make a night of it,
Speaker 1: dinner in a movie, that kind of thing, And they
Speaker 1: continued reaching out to new markets like Japan, while continuing
Speaker 1: the old practice of gobbling up other video store chains,
Speaker 1: particularly big ones that were struggling to compete with Blockbuster.
Speaker 1: But while the company was growing in size, it was
Speaker 1: seeing earnings growth decrease year over year, So it was growing,
Speaker 1: but it was growing at a less accelerated rate. It's
Speaker 1: hard to say, you know, you're you're not getting smaller,
Speaker 1: You're just not getting as big as quickly. So the
Speaker 1: video rental business look like it was losing some team.
Speaker 1: In ninety eight, Blockbusters earnings were up one percent from
Speaker 1: the nineteen eight seven numbers, so seven earnings increased by
Speaker 1: one From eight to eighty nine earnings increased ninety three percent,
Speaker 1: so a drop in the growth rate. They're still growing,
Speaker 1: just not as fast. The numbers were even more dramatic,
Speaker 1: so from eighty nine to ninety it was a forty
Speaker 1: eight percent growth rate, So I went from one fourteen
Speaker 1: to ninety three to forty eight. So each year that
Speaker 1: was going by, the company was getting bigger by the
Speaker 1: number of stores and the amount of money it was making,
Speaker 1: but the earnings growth wasn't really keeping pace with the
Speaker 1: expansion of the company, like they were opening up more
Speaker 1: stores and more franchises, but it was a diminishing returns
Speaker 1: on the amount of earnings. Wazinga had an interesting explanation
Speaker 1: for the decline and growth. He said the Gulf War
Speaker 1: was to blame. Specifically, he said people were watching the
Speaker 1: news more frequently rather than watching movies, and so television
Speaker 1: was sapping his customer base, at least that was his
Speaker 1: take on it. So he's saying, no one's coming out
Speaker 1: to rent a movie because they are glued to the
Speaker 1: television to see what's going on with the Gulf. For
Speaker 1: Blockbuster was starting to see some new competition. To pay
Speaker 1: per view had been around for a bit, and on
Speaker 1: demand content was just kind of getting started around this time,
Speaker 1: but they were starting to gain traction. And these were
Speaker 1: very convenient offerings because there was no need to leave
Speaker 1: the house to go get a tape or to return one,
Speaker 1: and you didn't have to worry about late fee and
Speaker 1: you didn't even have to rewind a videotape at the end.
Speaker 1: Uh In the early days pay per view, you had
Speaker 1: to tune in at a specific time. It wasn't on
Speaker 1: demand early early on, but on demand was starting to
Speaker 1: come out with things like satellite television. Management noticed this
Speaker 1: and so some Blockbuster stores began offering new services beyond
Speaker 1: video rental. You know, it wanted to so fi a
Speaker 1: bit appeal to a broader audience, a broader customer base.
Speaker 1: So they started renting out video games and even video
Speaker 1: game consoles like the Sega Genesis, and if You began
Speaker 1: to sell music, mostly in the form of audio cassettes
Speaker 1: and then CDs. The company also changed its rental policies
Speaker 1: for new movies, and this was an effort to increase
Speaker 1: volume or increase the rate of rentals. So for brand
Speaker 1: new movies, the idea was, we're gonna reduce the rental fee.
Speaker 1: It's going to be cheaper to rent a brand new
Speaker 1: movie than it is other films. However, the do date
Speaker 1: is earlier, so you can rent a movie, a brand
Speaker 1: new film that's just come out, and it's going to
Speaker 1: be less money than it would be for something else,
Speaker 1: but you have to return it to the store earlier.
Speaker 1: And the idea here was that they would be able
Speaker 1: to rent the same films out more frequently and keep
Speaker 1: that revenue stream coming in. Blockbuster also began to look
Speaker 1: around in the retail world for senior level executives with
Speaker 1: a lot of experience in retail to bring them on board.
Speaker 1: And enhance company leadership because you know, the guys who
Speaker 1: were in charge, they all came from waste management. They
Speaker 1: wanted to find other people who had this bigger, big
Speaker 1: experience with bigger retail companies to help advise UH the
Speaker 1: senior level of management. By Blockbuster head stores, numerous countries
Speaker 1: including Spain, Venezuela, Japan, New Zealand, and more. Phillips Electronics
Speaker 1: would invest more than sixty million dollars in Blockbuster in
Speaker 1: and across the company. Blockbuster made one point five billion
Speaker 1: dollars in sales. Now, that is a phenomenal amount of money.
Speaker 1: One and a half billion dollars in sales. However, when
Speaker 1: you look at earnings, while they sold one and a
Speaker 1: half billion dollars worth of product, they earned only eighty
Speaker 1: nine million dollars out of one point five billion in sales.
Speaker 1: That's amazing. You know, to to have a one point
Speaker 1: five billion in sales, but you're earnings are eighty nine
Speaker 1: million dollars. That shows that this was a very expensive
Speaker 1: business to be in. The those upfront costs of opening
Speaker 1: up those stores. The acquisition cost was incredibly high, so
Speaker 1: was Zinga and Company. They were really growing very quickly
Speaker 1: but they weren't making that much money once you factored
Speaker 1: in all the costs. Compared comparatively speaking, I mean a
Speaker 1: nine million dollars is still a huge amount of money,
Speaker 1: it's just dwarfed by one point five billion dollars in sales.
Speaker 1: Blockbuster would make more acquisitions and video rental stores. No surprise,
Speaker 1: they're same as it ever was. But the company also
Speaker 1: entered a new phase. It acquired companies called Music Plus
Speaker 1: and Sound Warehouse. This warehouse is spelled w H E
Speaker 1: R E. And this was an effort to expand Blockbuster
Speaker 1: into a multimedia company that not only rented videos but
Speaker 1: also would act as a music store, so expanding that
Speaker 1: cassette tape and CD business they had started earlier. Blockbuster
Speaker 1: also foreigned a partnership with Virgin Group. That's the UK
Speaker 1: company that uh, it's a big media company over in England.
Speaker 1: And the goal was to create mega stores. Was Zinga
Speaker 1: had a vision of these huge box stores that you
Speaker 1: would go into, kind of like the big electronics or
Speaker 1: big media stores things like think about Best Buy or
Speaker 1: Circuit City something like that, but really big store and
Speaker 1: it would offer not just video rentals, but it would
Speaker 1: also sell stuff like that might sell movies, computer software,
Speaker 1: video games, music, and even have like an an Arcade
Speaker 1: type experience with virtual reality attractions. That was his idea,
Speaker 1: and he had sort of a prototype open up in Florida,
Speaker 1: but it never really took off the way he had
Speaker 1: planned the way. Zinga also had a interesting idea that
Speaker 1: foreshadowed the digital media age. He ended up starting a
Speaker 1: project with IBM. He worked with folks over at IBM.
Speaker 1: He wanted them to develop a system that would burn
Speaker 1: music tracks to a CD very very fast. And the
Speaker 1: idea he had was that customers would come into his store,
Speaker 1: they would be able to go to up to this
Speaker 1: machine and they would be able to browse through a
Speaker 1: huge digital database of songs, and then they'd be able
Speaker 1: to select songs from that digital database, which would then
Speaker 1: get burned to this c D. You would get a
Speaker 1: custom mixed c D made up of the tracks that
Speaker 1: you had chosen from all these different albums. As it
Speaker 1: turned out, music studios were not too keen on that idea,
Speaker 1: just as they would heartily resist the digital revolution in
Speaker 1: music a couple of years later. Uh So, there was
Speaker 1: a lot of of disagreement on that particular approach in
Speaker 1: Blockbuster had more than three thousand, four hundred stores around
Speaker 1: the world, and about the thousand of those were in
Speaker 1: international markets. Wazinga purchased controlling shares in a movie and
Speaker 1: television production studio called Republic Pictures. That one owned a
Speaker 1: large library of films and TV series, and they also
Speaker 1: bought nearly fifty of the shares in Spelling Entertainment. That's
Speaker 1: a television production company. And that's set the ground for
Speaker 1: what would happen in which we could call the beginning
Speaker 1: of the end. In the next episode we will cover that.
Speaker 1: We will talk about the death of Blockbuster, how it
Speaker 1: went from this enormous peak, and we haven't hit peak
Speaker 1: Blockbuster yet. It continues to grow unsteadily, but it continues
Speaker 1: to grow until things kind of come to a crashing halt.
Speaker 1: That will be in our next episode. If you have
Speaker 1: any suggestions for future episodes of tech Stuff, whether it's
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