CASE
STUDY
The
Demise
of
Blockbuster
After struggling with debt and strong competition from
Netf
li
x and R
ed
box, Blockbuster, Inc. fil
ed
for bank-
ruptcy in September 2010. This was a sad
end
for
a
com-
pany that bad dominated the movie rental business in the
1990s. Blockbuster Inc. was founded by
Da
vid
Coo
k
in
1985 with
it
s first rental outlet in Dalla
s.
Cook
planned
to take advantage
of
a
hi
ghly fragmented video rental
market, in w
hi
ch most
of
the stores
we
re relatively mod-
est family operations that
ca
rried a small selection
of
former big hit movies mainly due to the high cost di
s-
tributors typically c
har
ged (about
$65
per
tape). With
8,000 tapes covering 6,500
ti
lles,
Blockbuster
had a
much broader and deeper inventory
com
pared with that
of
its nearest competitor. The store
op
erations
we
re al
so
greatly streamlined by a computerized system for inven-
tory
co
ntrol and checkout.
The
store was a huge success,
w
hi
ch
prompted the addition
of
three more locations by
mid–1986.
In 1986, because
of
Liquidity problems,
Cook
was
forced
to
turn over the whole
company
to a group
of
investors led by Wayne Huizenga.
Between
1987 and
Cha
pter 2 + Achieving Strategic Fit in a Supply Chain
51
offered unlimited mail-order rentals for $9, the cost
of
two rentals at a Blockbuster store.
Meanwhile, Redbo
x,
a unit
of
Co
in
star
1n
c., oper-
ated vending machines that rented DVDs for as little as
$1 a night. Desp
it
e its best efforts, Blockbuster’s bri
ck
–
and–mortar stores could not match the
lo
w-cost oper
at
–
ing models
of
Ne
tflix and
Redb
ox,
leading
to
its
bankruptcy (see financial results in Ta
bl
e 2–5).
Netflix
Netflix was founded in 1997 by Reed Hastings as a pay-
per-rental mail-order video rental company. After exper-
im
enting with both
pa
y-per-rental and subscription, the
company settled on a s
ub
sc
ription-based strategy by the
end
of
1999. By 2
010
,
Ne
tflix had
13
million members
and was the world
‘s
largest sub
scr
iption service, send
in
g
DYDs by mail and streaming movies and television epi-
so
d
es
over
the Internet.
Fo
r
$8
.99 a month,
Ne
tf
li
x
member
s could have any
of
more than 100,000 DVD
titles delivered to their homes and could instantly watch
