In September 2000, three men from Netflix rode an elevator to the 23rd floor of the Renaissance Tower in Dallas: Reed Hastings, Marc Randolph and their chief financial officer, Barry McCarthy. Netflix rented DVDs by mail. The dot-com crash had hit, its cash was running down, and selling, Randolph wrote later, “had seemed to be our only way out.”
Across the table sat Blockbuster’s chief executive, John Antioco, and its general counsel, Ed Stead. Blockbuster had gone public a year earlier, raising more than $450 million, by Randolph’s account.
Hastings proposed that the two companies join forces: Netflix would run the online business, Blockbuster the stores. Part of his pitch, in hindsight, describes the whole story. “With us focusing on back-catalog items, you’ll be able to concentrate your inventory on the new releases which are at the heart of your business.”
“The dot-com hysteria is completely overblown,” Antioco said. Stead added that the business models of most online ventures, Netflix included, weren’t sustainable. Then Stead asked what number they had in mind. McCarthy started talking about comparables and return on investment, until Hastings cut in: “Fifty million.”
“John Antioco was struggling not to laugh,” Randolph wrote. The meeting went downhill from there, and it was a long, quiet ride back to the airport.
From Blockbuster’s side of the table, the answer had logic. Netflix’s early service, Clayton Christensen and his coauthors wrote in Harvard Business Review in 2015, didn’t appeal to most of Blockbuster’s customers, who rented movies, typically new releases, on impulse. Delivery through the mail meant selections took several days to arrive. The service appealed to only a few groups: movie buffs who didn’t care about new releases, early adopters of DVD players, and online shoppers.
Netflix kept improving, and later moved to streaming over the internet. Christensen and his coauthors called its route to Blockbuster’s core customers “a classically disruptive path.” Blockbuster did fight back. It ended late fees and started online and kiosk services of its own, the Associated Press reported; by the AP’s count, Netflix subscribers grew from 1 million in 2002 to 15 million in 2010.
On September 23, 2010, Blockbuster announced that it had filed for Chapter 11 bankruptcy protection. For the time being, the company said, all 3,000 of its U.S. stores would remain open.