If you were in the room, would you take the deal… or walk away?
That’s the question we’re answering with each piece in our Deal or No Deal series, where we cover some of the most famous and surprising deals (and no-deals) from business history. First, we’ll lay out the facts and dig deep into the details. Then we turn the final decision over to you: deal or no deal?
The Deal Offer
In 2000, Netflix was a 3-year-old DVD rent-by-mail service struggling to gain a foothold in the video rental industry. The company’s business model raised eyebrows: subscribers paid a flat monthly subscription, browsed and selected movies online, and had them shipped to their home. No due dates or late fees.
On the other hand, Blockbuster was a 15-year video-rental industry veteran and Friday-night hotspot for those looking for a good movie and maybe a sugary treat to take home. The typical rental period depended on the movie but usually ran from 2 to 7 nights. If the movie wasn’t returned by its due date, the customer faced the dreaded late fee. And Blockbuster loved late fees. In fact, customers missing those rental return windows were a massive source of revenue for the company, bringing in an estimated $800 million a year at its peak.
Back to Netflix: Money was dwindling quickly from shipping DVDs and their subscriber base wasn’t growing fast enough to rescue the startup. So, Netflix cofounders Reed Hastings and Marc Randolph found themselves at Blockbuster’s headquarters in Dallas. If they were going to survive and thrive, they would need a wealthy corporate partner to do it. While details of the official offer are scarce and vary depending on who is telling the story, one thing is constant: the co-founders offered to sell Netflix to Blockbuster for a cool $50 million.
The Result
According to Randolph, Blockbuster executives nearly laughed the two out of the room. Blockbuster was the world’s largest chain of video rental stores and was living in the glow of raising $465 million in its initial public offering the year before. Against those numbers, a $50 million acquisition might not sound astronomical. But in Blockbuster’s eyes, Netflix was an unprofitable startup serving a relatively small niche with a model that wasn’t even built around the new-release rentals driving much of Blockbuster’s business. The dot-com crash also brought a ton of skepticism around internet-based companies.
As we all know, Netflix’s story didn’t end there. It continued to grow its subscriber base, went public in 2002, and, in 2007, made another bet on where entertainment was headed by launching its digital streaming service. And the rest, they say, is history.
Unfortunately for Blockbuster, the rental industry was already shifting. Its in-store rental business began declining in 2003 as consumers found more ways to buy and rent movies. Over the next several years, competition from DVD sales, Netflix’s mail-order model, Redbox kiosks and eventually digital entertainment put increasing pressure on Blockbuster’s massive physical-store network. In 2005, the company eliminated late fees at its company-owned U.S. stores, giving up what had been one of its most lucrative revenue streams to stay competitive. The company eventually filed for Chapter 11 bankruptcy in 2010 and began closing its company-owned storefronts. The last corporate-owned Blockbuster shut its doors in 2014. A handful of franchise locations remained, but by March 2019, just one was left.
The Final Decision
Today, Netflix is a company worth hundreds of billions of dollars. The last lone Blockbuster store remains open in Bend, Oregon. The independently owned franchise rents DVDs and Blu-rays and sells nostalgic branded merchandise to visiting tourists.
As the old saying goes, hindsight is 20/20. While a $50 million price tag might not be much for an industry titan, it’s still quite a cost for a largely unprofitable business in the middle of a dot-com crash. Few could have predicted just how quickly the digital shift would reshape the industry in the years ahead. But with high risk comes even higher reward. Now, we turn the spotlight on you.
If you were at the table, what would you say: deal or no deal?