- May 8, 2018 -
Everyone loves a good underdog story.
A David and Goliath story...
You know, where a young shepherd boy defeats a giant Philistine warrior with just a sling shot and a few stones.
It's the stuff of Hollywood movies...think Karate Kid, Hoosiers and epic WWII film Dunkirk.
But every so often, the small business guy has the chutzpah to take on a corporate Goliath and comes out on top.
You might not know this bit of fascinating trivia but...
In 1997, Reed Hastings returned Apollo 13 to Blockbuster and was hit with a $40 late fee.
"I had a big late fee for 'Apollo 13.' It was six weeks late and I owed the video store $40. I had misplaced the cassette. It was all my fault. I didn’t want to tell my wife about it. And I said to myself, 'I’m going to compromise the integrity of my marriage over a late fee?'
Later, on my way to the gym, I realized they (the gym) had a much better business model. You could pay $30 or $40 a month and work out as little or as much as you wanted."
On that day, a David and Goliath business story was born.
Back then, Blockbuster was the dominant player in the DVD rental business with $3.3 billion in revenue. It had the deep pockets and backing of its primary owner Viacom to protect it against any threat to the monopoly they'd built.
When Hastings launched Netflix the following year in 1998 with only 925 videos available for rental from its website (no subscriptions yet but a smaller-than-Blockbuster's late fee), Blockbuster's execs didn't blink an eye.
No real competition there...just a puny gnat on the wall.
The following year Netflix announced their new monthly subscription model for DVD rentals and dropped all of their late fees...Blockbuster still didn't make a competitive move.
Only two years later, in 2000, Reed Hastings proposed a partnership to the CEO of Blockbuster. The idea he ran with was that Netflix would run Blockbuster’s brand online and Blockbuster would promote Netflix in its stores.
Hastings got laughed out of the room. Understandable...considering who the David and Goliath are in that room.
But every giant has an Achilles heel...and Blockbuster's was that a big part of their revenue model was dependent on their customers accruing late fees.
Whereas, Netflix had the advantage of keeping prices low by not having local retailers...and instead of charging people to rent videos, it offered subscriptions which made annoying late fees unnecessary.
Customers could watch a video for as long as they wanted or return it and get a new one.
Netflix was now a BIG nasty fly in the ointment for Blockbuster.
A battle ensued for several years...
+ Blockbuster was stuck in bureaucracy with a board of directors who couldn't agree on a plan of attack...while Netflix was innovative and laser focused.
+ Blockbuster was saddled with debt from failed brick and mortar stores along with bad investments...while Netflix ran a lean operation based out of one central location.
By 2010 the dust settled. Netflix had more than quadrupled its revenue...while Blockbuster fell to the ground, bankrupt.
What can we take away from this?
You don't have to have a staff of 20 or a gaggle of products and services to be successful.
Going in debt to finance a bigger operation doesn't always mean it's a wise step to take.
Growing faster than your infrastructure can handle can be the kiss of death.
Every now and then the little guy (or gal) wins!
Running a small shop but want help in tackling your competitors without more unnecessary armor than needed? Request a free consult with us.
Make it a great day!
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