Blockbuster Case Study

Blockbuster started in 1985 as a video rental chain company. The company had presence in more than a dozen countries around the world, all of which operated as different business holdings. Blockbuster reached its peak in 2004, as it dominated the movie rental market with 9000 stores, 60,000 employees worldwide, and a market value of $5 billion (Lewis, 2013). The company was launched by David Cook in 1985 with a single store in Dallas Texas, followed shortly after with the opening of a $6 million warehouse (also in Texas). That same year, Blockbuster won a court case against Nintendo that paved the way for the rental of video games. In 1992, the company started running 24-hour store operations and acquired the British video rental chain Ritz

and the U.S. chains Major Video and Erol’s. With these acquisitions, Blockbuster grew to more than 2,800 stores that year. During its rise, Blockbuster began experiencing a steady stream of failures caused by ineffective management, dated business models, and rising competition. Blockbuster was sold in 1994 for $8.4 Billion to Viacom, Inc. Following the buyout by Viacom, Inc. Blockbuster began a pattern of rapid turnover of management averaging a new CEO every year for three consecutive? years (Poggi, 2010). This undermined the foundation and security of Blockbuster’s employees and its future. Additionally, Blockbuster earned much of its revenue from charging customers late fees. This practice of penalizing its own customers created a feeling of dissatisfaction and resulted in negative reviews and the customers seeking alternatives to satisfy their movie rental needs. Also that year, the company took in a staggering $800 million in late fees, which made up 16 percent of revenue for that year.
In 1997, Blockbuster inadvertently triggered a series of events that would eventually lead to its own downfall. Customer Reed Hastings was charged $40 for being late in returning the movie “Apollo 13.” Out of frustration, Hastings went on to create Netflix, the company that would eventually lead to Blockbuster’s demise. Netflix was launched as an online DVD subscription service. Unlike Blockbuster, Netflix operated with no timeframe on when movies had to be returned (provided the customer’s subscription account remained active) and hence no late fees. This provided a welcome alternative for Blockbuster customers frustrated with paying exorbitant late fees. Ironically, in 2000 Netflix had provided Blockbuster with the opportunity to prevent its demise, but the company declined. In 2000, Netflix – then still a small upstart company – offered to sell its DVD subscription service to to Blockbuster for $50 million. However, the company declined the offer. Blockbuster’s inability to adapt to a quickly changing market and unwillingness to change its business model allowed its competition to provide the cheaper alternatives that customers had been seeking. According to Forbes, “from 2003 to 2005 Blockbuster lost 75% of its market value as competition increased from Netflix and Redbox” (Marcus and Schaefer, 2011).
Eventually, Blockbuster attempted to regain its competitive edge in the market by copying the business model of Netflix and providing an online mail-based DVD subscription service to its customers. However, it ultimately failed in this endeavor due to its rising prices for rentals and its unwillingness to eliminate its late fees. Their reluctance to diverge from their business model despite the fact that it had become antiquated was likely due to how large they had become using the model as well as being concerned more about the bottom line than about their customers or employees. By not adapting to the changing market and creating new innovative ways to stay relevant they ultimately failed.
In 2010, Blockbuster filed for bankruptcy in an attempt to wipe out $1 billion in debt. Its only rival in the United States, Movie Gallery, was also liquidated, leaving Blockbuster as the only remaining national video rental chain. The company is now delisted from the New York Stock Exchange. In 2011, the U.S.-based company Dish Network purchased Blockbuster's remaining assets for $320 million at an auction with the intention to close many of its branches over time. Dish Network said it would keep only 600 branches open. By 2012, Dish Network had scrapped its plans to make Blockbuster into a Netflix rival. In January 2013, Dish Network claimed that it will continue to operate Blockbuster as it still had good brand value. However, by August plans were in place to shut all remaining stores in the U.S. and cease the rent-by-mail service by November. CBS News reports that the last film to be rented at a Blockbuster store was “This Is the End,” at a store in Hawaii.
One business that is still thriving in the brick and mortar movie rental market is Family Video. Their continued success uses a new model that separates them from Netflix and other online movie rentals market. They have combined dinner and a movie into one business to reach its customers in a new way. Customers can browse their website for the newest releases and then order a pizza from their partner, Marco’s Pizza, which is set up under the same roof. One delivery driver will then bring both the movie and the pizza to the customer’s doorstep. Using new ideas instead of copying the model of another business has helped them carve out a niche for themselves in this market at least for the foreseeable future.
The circumstances surrounding Blockbuster’s ultimate demise and bankruptcy filing have led to some allegations of fraud within the company.

For instance, one of the company’s shareholders Jasbir Sandhu claimed that the CEO Jim Keyes and another investor – Carl Icahn who happens to be a billionaire – conspired together to stymie the company’s recapitalization efforts in order to boost the return on investment for Icahn and some other shareholders. Such allegations are somewhat understandable given the questionable nature of some of Ichan’s action during Blockbuster’s financial crisis. Icahn stepped down from the company’s board of directors and sold off close to 80% of his stake in the company. Another action that could possible suggests an element of fraud was that shortly before the bankruptcy filling Icahn bought $100 million of the company’s debt. And he continued selling off its shares, thus technically dragging down the prices of the bond. In addition, there were other claims that the CEO Jim Keyes kept Blockbuster Express Kiosks operations, Blockbuster Canada and other international assets from bankruptcy in order to downplay the portfolio value of Blockbuster. However, there is really no evidence to the fact connecting any of the parties to the bankruptcy of Blockbuster, but I have a strong opinion that it could be possible.
Looking at the breakdown of the company’s financials from the 10k of 2005 below, I can surmise that there was no fraud, but a huge mismanagement of the business.
Return on Assets
The ROA increased from -15.36% in 2005 to -1.54% in 2007 and the management’s effectiveness is questionable since the ousting of CEO John Antioco.
Gross Profit Margin
They acquire Movie link to better increase the hope that sales would increase their Gross profits without scorching the bottom line. The gross profit margin went up from 50.92 in 2005 to 51.4 in

2006.
Operating Profit Margin
The operating profit margin increased from -1.00 to 1.86, showing that the company is effectively controlling costs and expenses associated with their normal business operations. It is essential that the company focus on lowering normal business operation expenses to control costs.
Net Margin
Net margin increased from -10.035 to 0.99 from 2005 to 2006. This indicates the company’s return on every dollar. As compared with the industry’s net margin of -0.307 Blockbuster comes in at -2.837. This indicates that Blockbuster’s return on assets per dollar is lower than the industry average.