This blockbuster is one you mustn’t miss

Rather than renting out movies last week, Blockbuster launched a title of its own. Last Wednesday the Texas-based movie rental company filed for Chapter 11 Bankruptcy protection in a US court. Challenging competitive forces, $900m in debt and a decline in its market share means that the only way Blockbuster can survive is to close many of its 3,300 stores in the US and review its international operations.

Founded in 1985, Blockbuster built its success around “depth of copy” – the trade term for offering more new releases than the competition. Aggressive growth followed until, at its zenith, Blockbuster achieved almost 50% share of the US’s gigantic home rental market, the rest being shared across mostly independent rental stores.

But then, in an all-too-common tale of ignorance and arrogance, it ignored a tiny upstart with a different business model. In the middle of the dotcom boom – 1999 – a new rental firm was launched called Netflix. The company offered a subscription service in which customers could order DVDs over the phone or internet and have them delivered to their homes. Soon Netflix augmented that service with internet video streaming of movies for the same basic rental price. By 2003, Netflix had 1 million loyal customers and a 95% share of the online DVD rental space in the US.

Back in Dallas, Blockbuster wasn’t worried. Thanks to an established base of 48 million customers, Blockbuster was 50 times the size of its upstart rival. Blockbuster senior management were openly dismissive of the Netflix threat when quizzed by Fortune magazine in 2003.

Blockbuster explained that its customers were more “spur-of-the-moment renters who did not necessarily plan their movie watching in advance”. According to its research, of the $8bn US customers spent on renting movies in 2002; less than $200m was attributed to online rentals. As a result, Blockbuster regarded online movie rentals as a “limited business opportunity”.

Seven years later and Netflix is the market leader with a 36% share of the $6bn US rental market compared with Blockbuster’s rapidly declining 22%. Where did Blockbuster go so horribly wrong? How did it halve a 50% market share in less than a decade and find itself staring at financial oblivion?

Blockbuster was openly dismissive of the Netflix threat in 2003. Seven years later and it is market leader

The answer is Marketing Myopia and it was the title of a paper published almost exactly half a century ago in the Harvard Business Review by HBS Professor Theodore Levitt. In the paper, Levitt challenges companies to ask themselves what business they are really in and to answer that question from a consumer rather than organisational point of view. He uses the case study of the American railways which were, back in 1960, in abject decline despite the fact transportation was on the rise in the US. The railway companies had fallen into the trap of thinking they were in the business of running a railway when in fact their real purpose was to transport people and things. Had they realised this fact they might have benefited from the automotive and air transportation revolution that was taking place in America by getting involved in those businesses rather than ignoring them and eventually going broke.

The plight of Blockbuster might be caused by that most 21st century of phenomena, the internet, but the strategic roots of its crisis were predicted decades ago by Professor Levitt. If only Blockbuster had realised what business it was really in. Rather than dismissing Netflix, it could have acquired the company or launched a competitor service much earlier than its eventual 2004 tepid rollout of an online service. Instead, blinded by its own definition of the category and misled by an arrogant disregard for its competitors – it got what was coming to it.

Always remember that categories don’t really exist. They are a dangerous confection invented by marketers to make sense of their business. Consumers don’t think categories, they think laterally and instinctively across them. And therein lies the danger of categories. Blockbuster really believed it was in a different business from Netflix because its competitor delivered while it retailed rented movies. The consumer, however, just saw two alternative ways to watch a movie and made their choice accordingly. Netflix always knew it was competing with Blockbuster, but the incumbent traded for years with a competitive blind spot in which it ignored the competitor that would eventually destroy it.

Never mind those who say we need to reverse/ rewrite/revisit the business of marketing. We need more discipline in the marketing discipline.

There is nothing wrong with the traditional corpus of marketing theory. As Ted Levitt neatly demonstrates with his 50-year-old paper, the old theories have just as much relevance today as they had back then. His HBR paper might have been about being short-sighted, but the great Professor Levitt – who passed away in 2006 – was anything but. lMark Ritson is an associate professor of marketing, an award winning columnist, and a consultant to some of the world’s biggest brands