In 2000, Blockbuster was the movie rental king with 9,000 stores and 60,000 employees. Reed Hastings and I, on the other hand, were just two Silicon Valley geeks with a DVD-rental-by-mail idea.
We’d been struggling since 1998 to find a way to make it work, and by the summer of 2000, we were finally seeing light at the end of the tunnel. Our no-due-dates, no-late-fees subscription model was a hit. Customers were pouring in and the company was growing like crazy.
Running a subscription business takes a lot of cash, since you pay acquisition costs up front while the revenue comes in over time. But it was the height of the internet boom. Cash was plentiful.
Until suddenly it wasn’t. Over a few short months, the internet bubble finally popped. The .com at the end of our name had been a badge of honor; now it was three scarlet letters. And with customers flooding in, cash was flying out. We’d spent more than $50 million getting to this point, and now it looked like our success was going to bankrupt us.
Luckily, there is a Silicon Valley play book for this. It’s called “pursue strategic alternatives”—code for “sell, and sell fast.”
The obvious strategic alternative for us was Blockbuster. Which is why, just a few weeks later, you’d have found me, Reed, and our CFO Barry McCarthy sitting at a giant conference table on the 37th floor of the Blockbuster headquarters in Dallas, getting ready to pitch Blockbuster.
The pitch was simple. We would join forces with Blockbuster. We would run the online business. They would run the stores. We would jointly develop a blended model. And everyone would live happily ever after.
And it was going great. They were leaning in. They asked good questions. Until they asked the most important question of all: “How much?”
Now, we had rehearsed this. We figured we were $50 million in the hole… so let’s go with that! Reed leaned forward confidently and told them: “Fifty Million Dollars.”
There was perfect silence. Their words were “we’ll consider it,” but we could tell they were fighting to suppress laughter. After that, the meeting went downhill fast.
Well, what doesn’t kill you makes you stronger. Or, as my father used to tell me, “sometimes, the only way out is through.” We knew there was no easy way out. We struggled for years. But we eventually did make it through. We had our IPO. We passed Blockbuster in revenue.
And today, the company that Blockbuster could have purchased in 2000 for $50 million, has a market cap exceeding $150 billion. And that company with 9000 stores? Now it’s got just one.
But what’s the lesson to take from this?
There’s certainly an inspiring one: It’s possible for a handful of people, with no prior experience in the video business, to take down a 6 billion dollar category-leading company.
But I think the more important lesson—one that Blockbuster learned too late—is simply this:
If you are unwilling to disrupt your business, there will always be someone willing to do it for you.
