Why Change Doesn’t Really Come From The Top: The True Story of Blockbuster & Netflix

In early 2000, with their company on the brink of failure, Netflix founders Reed Hastings and Marc Randolph flew to Dallas to meet with Blockbuster executives. As the story is told, they offered to sell their company for $50 million and got laughed out of the room. Humiliated, but determined, they built a business that toppled the industry giant.

That version of the story is almost certainly not accurate, but it remains popular with pundits who like to tell it at fancy conferences. It gets told and retold because it reinforces how we like to imagine things. Everybody loves a good “David vs. Goliath” story, and the idea of wily young entrepreneurs outsmarting big corporate fat cats fits the bill exactly.

Yet beyond the shaky facts, the underlying assumption of the fable—that Blockbuster’s fate rested solely, or even mostly, on a strategic decision made in a conference room in 2000, ten years before it went bankrupt in 2010—is absurd. A business’s fate rarely depends on a single decision made at the top, but rather on how stakeholders are aligned around change.

What Was Netflix Really Worth In 2000?

Looking back now, with Netflix worth more than $400 billion, it seems incredible that Blockbuster had the opportunity to buy it for less than pennies on the dollar and passed up the chance. You can imagine them kicking themselves for having blown the opportunity. Yet Netflix in 2000 was not the business we know today.

First, the reason Hastings and Randolph had flown to Dallas in the first place was that the company was hemorrhaging money—more than $50 million that year. They still had not cracked the code on their subscription model, their algorithm to match customers with movies, or how to turn a profit. The only real asset they had was themselves, and given that they had just exited a startup recently, no one would expect them to stay on for long.

Their original intention in going to Blockbuster wasn’t to sell the company, but to strike a deal to make Netflix Blockbuster’s Internet brand. The logic was that Netflix would get access to Blockbuster’s customer base and Blockbuster would be spared the trouble and expense of starting up their own online operation. To them, it seemed like a win-win proposition.

Yet from Blockbuster’s perspective, the deal wasn’t at all attractive. Handing over the online business to Netflix would close off opportunities Blockbuster was already pursuing. In fact, that summer Blockbuster signed a deal with Enron to develop an online streaming service. Their fears were well founded. When Toys-R-Us forged a similar partnership with Amazon, it proved to be a disaster for them.

So when, out of desperation, Hastings offered to sell the company, the Blockbuster executives didn’t reject it because they didn’t see the potential, but because they judged that they could build their own operation much more cheaply than taking on huge losses for the foreseeable future and paying some Silicon Valley guys $50 million for the trouble.

And, as it turned out, they were right.

The Road To Total Access—And Near Dominance

In early 2004, Viacom announced it would spin off Blockbuster Video, leaving CEO John Antioco master of his own fate. He moved quickly to meet the threat posed by Netflix head-on, launching Blockbuster Online in 2004 and, after successfully testing the concept in a few markets, ending late fees in early 2005.

Still, not satisfied with playing catch-up, Antioco searched for a model that would return his company to dominance. He found it in 2006 with the Total Access program, a hybrid offering that combined the convenience of online rentals with Blockbuster’s enormous network of retail locations. Customers could rent in stores or online for one monthly price.

It was a masterstroke—an offer that Netflix couldn’t match.

As Gina Keating reported in her book, Netflixed, before Total Access, Netflix was winning 70% of new subscribers and Blockbuster 30%. Within weeks of the launch, that had flipped: Blockbuster was now winning 70% to the startup’s 30%. Now Netflix was on the ropes. If it couldn’t maintain its growth, its stock price would drop and put its financing in jeopardy.

It seemed that Antioco, who had established an impressive track record for turning around retail operations, had done it again. It was strategic jujitsu, turning what was perceived as a weakness—its brick-and-mortar stores—into a sustainable competitive advantage. Blockbuster was heading into 2007 poised to regain dominance in the video rental industry.

How It All Unravelled

Despite the progress, not everybody was thrilled with the moves Antioco and his team  made. Franchisees, many of whom had their life savings invested in their businesses, were suspicious of Blockbuster Online. They only owned 20% of the stores, but could still cause a stir. The moves were also expensive, costing roughly $400 million to implement, and investors balked.

So while Blockbuster was making progress against the Netflix threat, as earnings turned to losses, its stock took a beating. The low price attracted corporate raider Carl Icahn, whose heavy-handed style made managing the company difficult. Things came to a head in late 2006 when Icahn demanded that Antioco accept only half of the bonus he was owed.

“I was at a point, both personally and financially, that I had little desire to fight it out anymore,” Antioco told me. He negotiated his exit and left the company in July 2007. His successor, Jim Keyes, was determined to reverse Antioco’s strategy, cut investment in the subscription model, reinstate late fees, and shift the focus back to the retail stores.

When Blockbuster declared bankruptcy in 2010, the event was portrayed as corporate America’s inability to navigate digital disruption. Yet, as we have seen, nothing could be further from the truth. The management team came up with a viable strategy, executed it well, and proved they could compete, yet still were unable to survive that victory.

As it turns out, change from the top can fail just as easily as anything else.

Leveraging Power For Change

We like to think of the big guys at the top getting fat and lazy. The story of Netflix upending Blockbuster is so appealing because it plays to those biases. It’s reassuring to believe that people get disrupted by not paying attention and making poor decisions because that means that we can avoid their fate with a modicum of awareness and intelligence.

Yet the far more disturbing reality is that the Blockbuster leadership team was neither stupid nor lazy. In fact, they were innovative, made good strategic decisions, and executed them skillfully. If not for a seemingly minor compensation dispute, things could very easily have turned out very differently. I think the key to understanding what happened is something Antioco told me about an earlier initiative when I interviewed him for my book, Cascades.

“The experienced video executives were skeptical. In fact, they thought that the revenue-sharing agreement would kill the company. But throughout my career, I had learned that whenever you set out to do anything big, some people aren’t going to like it. I’d been successful by defying the status quo at important junctures, and that’s what I thought had to be done in this case.”

In other words, over the years he had been put in positions of authority and was able to implement changes and deliver results fast enough that he was able to overpower any resistance. Yet in Blockbuster’s battle for survival with Netflix, key stakeholders—namely franchisees and shareholders—defected, and the floor fell out from under him.

Antioco had all the formal authority he needed to deliver genuine transformation. But it was the difficulty of  managing and aligning stakeholders that led to Blockbuster’s demise. The truth is that change isn’t top-down, nor is it bottom-up. It goes side-to-side as it propagates through networks.

Greg Satell is Co-Founder of ChangeOS, a transformation & change advisory, a lecturer at Wharton, an international keynote speaker, host of the Changemaker Mindset podcast, bestselling author of Cascades: How to Create a Movement that Drives Transformational Change and Mapping Innovation, as well as over 50 articles in Harvard Business Review. You can learn more about Greg on his website, GregSatell.com, follow him on Twitter @DigitalTonto, watch his YouTube Channel and connect on LinkedIn.

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