For more than two decades, Blockbuster Video was America’s favorite way to watch movies. Millions of customers visited more than 8,000 stores around the globe every week, providing more data about movie audiences than anyone in history had ever owned. How does an iconic brand like this die?
Alan Payne’s new book Built to Fail, tells a complete inside story of Blockbuster’s meteoric rise and catastrophic fall. Beneath the surface of explosive growth, lay a shaky foundation of financial difficulty, tunnel vision, and missed opportunities.
The book is a cautionary tale for today’s disruptive marketplace and explains why Blockbuster was a broken company long before Netflix ever streamed a single movie.
Drew Appelbaum: Hey Listeners, my name is Drew Applebaum and I’m excited to be here today with Alan Payne, author of Built to Fail: The Inside Story of Blockbuster’s Inevitable Bust. Alan, thank you for joining, welcome to The Author Hour Podcast.
Alan Payne: Happy to be here.
Drew Appelbaum: Let’s kick this off. Can you give us a rundown of your professional background?
Alan Payne: I spent 31 years in the video rental business, which is longer than just about anybody. I spent the first seven years of that with a grocery company called H-E-B that was very heavily into it back in the 80s and 90s when the business was starting. They decided to sell the video rental business they were in and I left in 1993 to join a Blockbuster franchisee and was there for 25 years, which I think is the longest anybody was with Blockbuster.
I closed my last store in August of 2018, which was almost five years after Blockbuster had filed for bankruptcy.
Drew Appelbaum: Now, this was a while ago, why is now the time to share these stories in the book? Did you have an “aha moment,” did you have something inspiring that happened to you lately, or something as simple as you have a lot of time in your hands because of COVID?
Alan Payne: A lot of it was timing because I was busy running the business until 2018, and then even after that, it was some time to wrap things up. I started thinking about it, I guess, probably around 2017. I knew the end was near and I started thinking about it then.
A lot of it is just based on the time that I have. I was wrapped up in the business, I knew I wanted to tell the story, but until you take time to step back and really think about it, I didn’t really know how I was going to tell it or even if I was going to tell it.
When we closed the last store and the fog cleared, and I really started thinking about it and visiting with friends and family about what the concepts could be and how the story should be told, it kind of started coming together.
Of course, since I’m not an author, I didn’t know how to go about it, and that’s where the Scribe people came in. They were great help in helping me figure out how to do this, and that’s how it happened. I wanted to tell the story, I just didn’t know when and how. As we write things up, it became clear that this was the time to do it.
The Full Story
Drew Appelbaum: Now, along those lines, a lot of authors have the idea of a book rattling around in their head. Sometimes even have an outline of the story you want to tell, but during the writing process and by digging deeper into some of the subjects you’re writing about, you’ll come through some major breakthroughs and learnings. Did you have any of these along your writing journey?
Alan Payne: I think the main driving factor behind this was that Blockbuster’s demise has been dissected over and over again. It was such an iconic brand and even though it’s been gone for a while, we still hear about Blockbuster all the time. When failed companies are spoken of–in fact, it just happened a couple of weeks ago in the GameStop thing on Wall Street–the big deal was, is GameStop going to be the next Blockbuster?
The name gets kicked around a lot. I didn’t feel like the correct story had been told about Blockbuster. The common narrative is that it failed because it didn’t make the transition from physical media, which at the time was DVD, to streaming on the Internet.
That was just not true. There was hardly anything true about that because Blockbuster failed long before Netflix became the streaming company we know today. Blockbuster competed against Netflix that mailed DVDs in the mail.
Blockbuster was pretty much done financially by the time Netflix became a significant streaming player. More than anything, that probably drove my desire to tell the story because there are reasons for that, and I didn’t think they’d ever been fully explored.
Drew Appelbaum: Now, in your mind, who did you write this book for? Is this for, as you mentioned before, people who are just really nostalgic about Blockbuster, or is this more of a business book about the story behind-the-scenes of Blockbuster?
Alan Payne: That was one of the big challenges in trying to decide what the book was going to be about and who the audience was going to be. You know, a lot of people, when I would tell them I was thinking about writing it, they had these nostalgic thoughts of Blockbuster. How wonderful it was to go to a Blockbuster every Friday and take the kids and the family and see friends and everything.
I understand that but that’s not what the book is about. The book is about the business side of it and yes, it tells the story of the beginning of the video rental industry, as well as the beginning of Blockbuster, and there is clearly some nostalgia in there. But it’s primarily from a business perspective and how Blockbuster was founded, how they seized on an unbelievable opportunity and made thousands rich beyond their wildest dreams.
Yet, it was never founded as a company that was built to last. That’s what the book is about. Yes, there’s some nostalgia in there, and I hope that people who don’t typically read business books will find it interesting because I don’t think it’s a particularly complicated industry.
Drew Appelbaum: Now, you mentioned GameStop before, and do you see any companies out there now that are following a similar path of Blockbuster, the next big conglomerate to fall?
Alan Payne: I’ve been asked that before and no business comes to mind, because I think, all businesses have the potential to succeed and they have the potential to transition to whatever comes next. There’s plenty of businesses out there right now that are in industries that are going to drastically change. It happens in any business.
The ones that have positioned themselves to make those transitions are the ones that will succeed and frankly, I don’t have enough understanding of the inner workings of a GameStop or the other businesses that are out there that might be threatened by technology and whether or not they’re prepared to make the change.
I could point out one that I think a lot of people thought would be gone by now and it’s not, which is BestBuy. They thrived in this environment, they reinvented themselves. There are lots of examples of companies that have done that, it’s very, very difficult to do, but it’s possible.
I don’t think there are any businesses out there, regardless of the industry they’re in, that they couldn’t make the transition if they planned for it. Blockbuster never planned for it and that was the problem.
Drew Appelbaum: I want to dive into the book, you just mentioned you don’t have any experience in the back office of some of the bigger companies, but what you do know I think better than anybody is the video store business.
Video Store History
There are a lot of facts in the book that were really, really interesting that I never knew. Can you just give us the ground floor–tell us about the video store business and maybe some nuggets of information that you think people should know that they might not know?
Alan Payne: The video store business, wow, that’s a big question. Because it changed so much from the beginning to the business that we knew in the 2000s that eventually failed. The business as it was founded, first, was never intended to exist because the studios tried to kill it and it went all the way to the supreme court.
The video cassette recorder, the VCR, which was a predecessor to the DVD player, was the format when the video rental store was kind of invented in the mid-80s and the studios immediately went to war to stop it. The first surprise is that the studios tried to stop it before it ever began, but about five or six years into it, the video rental business was Hollywood’s largest source of revenue.
It turned out to be a giant windfall of money to the studios that they tried to stop. It was the first time that people could actually watch something when they wanted to watch it and where they wanted to watch it.
It’s funny as I talked to some people that don’t remember those days. Before the video store, you were subject to whatever was on television and on their schedule. The video store changed that and because of the way they priced movies, the studios established a business model that was not perfect. It became the way that people spent their weekends most of the time.
I’ll just jump forward because the business that most people are familiar with is the DVD rental business, and that’s where it changed so dramatically because the cost of DVDs changed. That meant that they were available at Walmart and every other retailer in the country, we were seeing DVDs everywhere, that was not the case in the early days of the video rental business.
The small size of DVDs gave rise to Netflix. Netflix would have never existed without DVDs because mailing VHS cassettes was not feasible. DVDs gave rise to Redbox and other vending machines which did not exist with or in any kind of size when VHS was the business.
That changed everything and really, that began in 1997, and by 2005, VHS was gone, and DVD had completely taken over the business and it completely changed the business. That’s where Blockbuster’s final fall began because they didn’t make the adjustment to DVD the way they should have.
Drew Appelbaum: Fun fact in the book, video stores ended up becoming so profitable for the movie studios that they actually started greenlighting more movies than they used to because they knew they would get a lot of the production costs back just from the rentals alone.
Alan Payne: That is absolutely true, and the reason was, is that there was a huge demand for just about anything that was in a video rental store and it always amazed us at what would rent. The good, bad, ugly, everything. Everything would rent. Therefore, studios started making all kinds of movies that they would have never made before because they knew they had a built-in revenue stream when it got to video.
Of course, that led to a lot of movies being made strictly for video, they never went to the theaters, they went straight to the stores. They were enormously profitable.
Drew Appelbaum: Now, going into Blockbuster, why exactly was Blockbuster so popular? Because everyone had their local video stores in almost every town. Why Blockbuster and what did the early days of Blockbuster look like?
Alan Payne: Well, you kind of have to talk about the early days of the video business. The first stores opened in the early 1980s and Blockbuster as we know it today, opened its first store in 1985. Because the video rental industry had been challenged legally, it didn’t attract traditional retailers.
The industry got built by a lot of entrepreneurs that in many cases were not well-capitalized. In many cases, they had very little experience in business. A lot of the early video stores, even though they filled a row, were not very well-run businesses.
By the time Blockbuster got into the business, it was already about a three or four-billion-dollar industry, but it had been built by largely undercapitalized entrepreneurs that didn’t really understand the full potential of the business. Enter Wayne Huizenga, who didn’t actually found Blockbuster, but he bought it when it was very small.
He saw the opportunity, and you mentioned the profitability of it, that’s what attracted him to it. A well-run video store cost about half a million dollars to open and could pay that back in, most of the time, in two years. It was still growing in sales and profits at the time, so it was an enormously profitable business, it was a really relatively clean business. It was not particularly difficult to run in its early days and Blockbuster just seized on the opportunity and within five years into the business, it had doubled its size of the industry all by itself and had completely taken it over.
There were some small players out there, H-E-B being one of them, that were very successful against Blockbuster but none of them were large enough to stop their dominance until Hollywood Video came along.
That’s a name that most people probably don’t remember but they were the number two player and they caused Blockbuster a lot of problems in the mid, late-1990s.
Drew Appelbaum: How long did the good times last for Blockbuster and was Hollywood the start of the decline?
Alan Payne: This is what I think most people will find fascinating is that Blockbuster was an independent, publicly owned company and sold itself to Viacom, a very large entertainment conglomerate, in 1994. They sold the company to Viacom for $8.4 billion. That was in 1994 and that was the most the business was ever worth. Six years later, when Viacom spun it off to the public in 2000, it was valued at about $2.5 billion. That was before Netflix was even a factor. Maybe more than any statistic I can cite, that is very revealing about what Blockbuster was all about.
The company had lost almost 75% of its value before Netflix was even a factor. Hollywood Video was the company that did a lot of that damage by very effectively targeting Blockbuster’s weaknesses and there were many of them. That was Blockbuster’s biggest problem is they had weaknesses but they didn’t understand what they were because they were so close-minded to ideas outside of their own company.
Hollywood was targeting Blockbuster stores all over the country and within two or three years of their start already had a thousand stores all over the country and would eventually grow to almost 2,000. They were large enough to significantly impact Blockbuster’s profit and it sent them into a tailspin in the mid-1990s, much earlier than most people realize.
Drew Appelbaum: Now is this rise and fall that happened so fast, is this unique for such a large business?
Alan Payne: You know, I think the unique thing about Blockbuster is it went from nothing to probably one of the most iconic brands in American history and within 10 years was in financial difficulty and another 10 years later was virtually gone. It happened in an extremely short timeframe. Of course, the life of a video rental store was relatively short. It was about 30 years because they are virtually gone and have been virtually gone now–there’s still a few scattered around but not very many. The business as we remember it has been gone for several years, so it only lasted about 25 or 30 years.
I think it’s unique that an industry like that gets that dominant and then goes away that fast and Blockbuster was a part of it. The whole question was, “Should Blockbuster have been able to make a transition to electronic delivery of movies based on their knowledge of the business?” My answer to that would be it’s obvious that yes, they should have but they didn’t.
Drew Appelbaum: Now, did all competitors basically face the same fate? You talk about the chain you worked for, you started in those video-central stores within the H-E-B grocery stores, did those also close up shop pretty quickly in the same way Blockbuster did?
Alan Payne: Well, you know, it wasn’t H-E-B’s primary business, and they chose to get out of it very early on for different reasons. It was extremely successful and the stores that I ran for H-E-B, were free-standing video stores that were just essentially a Blockbuster with a different name on it. We ran them much differently, but they looked much the same and H-E-B sold those stores for over 900,000 apiece. They were very, very profitable and they were sold to Hollywood Video and that’s what gave rise to Hollywood Videos’ rapid ascension in the mid-1990s.
Yeah, all video stores met the same fate as Blockbuster. The question was, was Blockbuster large enough, and did they have enough information and understanding of the business to the transition? They were the only ones really that were in the position to make that change because they had the scale and the financial clout to do it.
None of the other video rental store chains had that. So yeah, I think Blockbuster, had they been managed differently, could have made that leap but they really never had much of a chance because they didn’t understand their own business very well.
Drew Appelbaum: Let’s dig into that a bit more. I mean nobody had a better view than you did. You were a franchise store owner, owned many stores, so how did you feel being a store owner about the decisions they were making at the executive level?
Alan Payne: I think that could best be told by when I joined Blockbuster as a franchisee in 1993, my first experience was a meeting in Fort Lauderdale, Florida where their offices were at the time. I thought that given my background and having competed so successfully with Blockbuster–yes, we were a small company compared to them–but the thing is, we operated our stores in some major markets that were fast-growing–Austin, Texas, San Antonio, Texas and several other cities in central and south Texas.
We were extremely successful against Blockbuster. We knew that their stores were doing about half the volume of their average and our stores were doing two to three times the sales of theirs were. We knew we had a very successful business model. I thought that Blockbuster would want to know what that was about. They had no interest at all. In fact, they told me to just not talk about it and go away. I would say that that set the table for what the next 25 years would be like.
That was Blockbuster’s attitude. I don’t know if that gets to your question but that attitude of not having any interest outside of their own, that’s what I experienced the entire time I was there, even through management changes and ownership changes, essentially that state of mind never went away. It never did.
As I watched them do things that to me made no sense at all, and everybody’s got an opinion, but the thing is, they didn’t want to discuss other people’s opinions. When I would bring those opinions to them of my side of it, and what we were doing successfully in our stores, they had no interest in talking about it. It was that way with competitors. It was that way with other franchisees. Blockbuster never had much interest in talking to franchisees about how their businesses were run. There were polite discussions, and actually, we always had a pretty good working relationship with Blockbuster. There was just not much of an in-depth discussion about how the business operated and how we could all be working together to make it better.
Drew Appelbaum: There were few moments though where they almost made a comeback. What happened in those moments, but then ultimately made it still fail?
Alan Payne: Well, when John Antioco joined the company in 1997, Blockbuster was in real financial difficulty. John came from Taco Bell. He was already kind of a superstar turnaround CEO, and we all had high expectations. When he got there, he made some fundamental changes to the Blockbuster business model that produced a very quick turnaround. He did things that we always thought needed to be done like getting prices in line, getting better availability, new releases in the stores. He did some of those things and the company turned around immediately.
But I think because Blockbuster was never really founded on a firm foundation of who they were and who they felt like they needed to be, they very quickly fell back to some of the same mistakes. Within just a few years after John took charge of the company in 1997, their prices were higher than ever, so some of the fundamental changes that he made didn’t seem to register.
They didn’t stick with the fundamentals that they needed to stick with in order to keep the business going. Then what happened is Netflix started growing with their by-mail business just a few years after John got there, and instead of capitalizing on the strings of what a Blockbuster store was, and certainly, there were many, they started trying to be Netflix, which they couldn’t be.
Netflix was a completely different business. It had a completely different business model, they had their own share of weaknesses, but instead of exploiting those weaknesses, Blockbuster tried to become Netflix in a store, which was impossible, and it only made things worse.
Be the Best
Drew Appelbaum: Now, at the end of the book, you list seven of the big takeaways from the whole Blockbuster story. Can you recall a few of those for us?
Alan Payne: The most important that I think is–well, I just addressed some of it, knowing who you are and being the best at it. I go back to Blockbuster’s inability and unwillingness to recognize strengths and competition and fully understand who they were. To me, that speaks to the lack of intellectual curiosity about what the business is about.
You know, maybe this is a good time to talk about, if you think about it, Blockbuster, very early on, had accumulated more data about movie watching than anybody in the history of the world. People watched more movies from Blockbuster than they did in theaters. That’s how big it was, and Blockbuster had all the knowledge about who those people were, where they lived, what their ages were, their gender, a lot of information about them, yet they never were able to use that in a meaningful way.
That was the foundation of all of it, in my view, and that’s how Netflix capitalized on it because Netflix was obsessed with understanding what customers wanted and managed to rent the movies that Blockbuster didn’t think people wanted to see. Netflix used that to beat them with movies that Blockbuster didn’t even start because they didn’t think their customers wanted to see them.
It’s those kinds of results that come from not having a really deep understanding of the business you’re in, and then not understanding how other people are exploiting that.
Drew Appelbaum: People are still very nostalgic about Blockbuster though. You will see it pop-up in the news that the last remaining Blockbuster just closed, and there is one in Alaska you can do an overnight sleepover in. These pop culture pop-ups happen all the time. Do you think they can ever come back in some way if somebody buys the name and changes the business up?
Alan Payne: I don’t think so. I think had Blockbuster run the business differently, there might still be and I believe there could be some stores still out there but it would have to be in conjunction with a streaming business. There might have been some way to combine those two but people have moved toward electronic delivery of movies and I think we always knew that was going to happen. That was considered the threat even going back to the 80s.
A lot of people didn’t think that the video business would last more than five, 10 years. As it turned out, it took over 30 years for the electronic delivery of movies to actually make a significant impact and when it did, it took over. So no, I know that the franchise owner in Bend, Oregon that owns the last Blockbuster store, he has no plans to close, and he’ll probably be there a while but that is a unique situation.
They’ve done a good job of becoming the last Blockbuster on the planet and that’s what keeps them going. But no, I don’t think there is a place in the market for video stores on any scale. There might be some isolated situations but not on any kind of scale.
Drew Appelbaum: Well Alan, you know we just touched on the surface of the book but I want to say, writing a book like this, which is really in-depth in the business case of Blockbuster and also, if you are just a Blockbuster fan, it’s incredibly nostalgic, it’s no small feat. Congratulations on publishing your book.
Alan Payne: Thank you.
Drew Appelbaum: Now, I have one last question. If readers could take away only one thing from the book, what would you want it to be?
Alan Payne: Wow, one thing. I hate to keep falling back into this, I think maybe the best way to state it would be if you are in a business, commit to being the best at it because if you are not, somebody else will. That’s what, coming from the culture of H-E-B, and for listeners that are not familiar with H-E-B, H-E-B is widely considered one of the best retailers in the world. That’s where I learned the business and that’s a company that is committed with all its might to be the absolute best at everything it does. They don’t always succeed but they’re always trying to be the best.
That’s what I never found at Blockbuster. I never got the sense that Blockbuster wanted to be the absolute best it could be, and I think to succeed long-term, you have to have that mentality or somebody else will. I think that is the number one thing I would take away from it. It speaks to, as powerful as Blockbuster brand was and as large as they got, you would think that that would carry a lot of weight, and it did for a while. But eventually, their lack of commitment to being the absolute best they could be is what did them in.
Drew Appelbaum: Well Alan, this has been a pleasure and I’m really excited for people to check out this book. Everyone, the book is called, Built to Fail, and you can find it on Amazon. Alan, besides checking out the book, where can people connect with you?
Alan Payne: I’m on LinkedIn and that is still in process and getting that ready to talk about the book.
Drew Appelbaum: Great. Alan, again, thank you for writing this book. I think it is such a fun read and best of luck with it being published and thank you for coming on the show today.
Alan Payne: Thanks so much.