The video store that turned down Netflix

In the 1990s Blockbuster was where many families rented films for the weekend. At its peak, around 2004, it had roughly 9,000 stores worldwide. Part of its income came from late fees charged when people returned tapes and DVDs late.

In 2000, Netflix co-founders Reed Hastings and Marc Randolph met Blockbuster's leaders and offered to sell their small, loss-making DVD-by-mail company for about $50 million. Blockbuster said no. Netflix grew with monthly subscriptions and no late fees, then moved into streaming from 2007.

Blockbuster did respond. It launched an online rental service in 2004 and dropped late fees in 2005. These moves cost money, and after a change of leadership the company pulled back toward its stores. As streaming and rental kiosks grew, store visits fell. Blockbuster filed for bankruptcy in September 2010, and its remaining stores were sold to the satellite TV company Dish in 2011.

In 2000 Netflix was small and losing money, so turning it down looked sensible on paper. The bigger issue came later: Blockbuster's model depended on stores and on fees customers disliked, and fixing that meant giving up income it already had. Each time the new approach cost money in the short run, the pressure to go back to the old one won.

The AI angle: it is easy to compare a new tool's first, clumsy version with your polished current process and decide it is not worth it. The more useful question is how fast it is improving and what your customers will expect once it does.

The idea behind this caseLesson: Will AI take my job? →

1. 1Look at what customers dislike about your business, such as fees or waiting, since a rival will build around it.
2. 2Judge small new competitors by how fast they are improving, not only by their size today.
3. 3When you start a new approach, agree in advance how long you will fund it before judging the results.
4. 4Keep testing the new way even when the old business still brings in most of the money.