Ideas in the Wild: Alan Payne Tells the Full Story of Blockbuster’s Collapse

For more than two decades, Blockbuster was America’s favorite way to watch movies. Millions of customers visited more than eight thousand stores around the globe every week, providing more data about movie audiences than anyone in history had ever owned.

If any company should have predicted the disruptive forces coming down the pike, it was Blockbuster. But as new threats emerged, none of its five CEOs had answers, and the company collapsed long before its time. Built to Fail tells the complete inside story of Blockbuster’s meteoric rise and catastrophic fall. Beneath the surface of explosive growth lay a shaky foundation of financial difficulty, tunnel vision, and missed opportunities.

Written by Alan Payne, the man who built the longest-lasting Blockbuster franchise chain in the country, Built to Fail is a cautionary tale for today’s disruptive marketplace, explaining why Blockbuster was a broken company long before Netflix ever streamed a single movie.

I recently caught up with Alan to learn about the events that led him to write the book, his favorite idea he shares with readers, and how he’s applied that idea in his own life.

What happened that made you decide to write the book? What was the exact moment you realized these ideas needed to get out there?

I knew for a long time that I wanted to tell the story of Blockbuster and was encouraged by friends and family to write the book. But I did not decide to do it until I answered the question of how to tell the story. That came by way of many hours of discussion with Scott Watson, Blockbuster’s first international franchisee and the founder of the Association of Blockbuster Franchisees. He had an equally strong desire to have the story told and knew more about the early days of the company than I did.

I don’t remember the exact moment, but there was a point in those discussions when the “how” became clear. It should be told as the story of a company that seized an opportunity and made the early participants rich beyond their wildest dreams, but one that could not survive long term because of how it was built. How that could happen to such a dominant company and iconic brand would be the central theme of the book.

I spent the next year and a half doing research and interviewing the key players to be sure I got the story right. As I connected the dots, it became clear that the conventional view of why Blockbuster failed is not accurate. Contrary to what most believe, Blockbuster did not fail because it failed to transition from physical media (DVD’s) to streaming on the internet. Blockbuster had lost three-fourths of its equity value and was in deep financial difficulty more than a decade before Netflix streamed a movie.

This book is the story of how and why that happened.

What’s your favorite specific, actionable idea in the book?

“Always know more about your competition than they know about you.” To many who work in competitive industries, this is obvious, but never at Blockbuster. The same can be said of most companies that fail, both large and small. Blockbuster was so successful in its early years that there was consensus in the company that they got everything right—and everyone else got it wrong. This stifled innovation and produced a stagnant company that lacked curiosity about the home entertainment business that it had brought mainstream. Had management studied the company’s competitors (regardless of their size) this closed mindset would have never existed, and they would have been forced to acknowledge deficiencies that appeared early on.

But instead, a wanton ignorance developed that left Blockbuster unprepared to deal with its first large competitor: Hollywood Video. Just four years after Hollywood Video went public and opened several hundred stores, Blockbuster had declined from a company that had more cash than it could spend on new stores to one that was cash flow negative, a full ten years before Netflix had streamed a movie. Even though management would change in subsequent years, Blockbuster’s approach to dealing with competition never changed.

They ignored every one of them… until it was too late.

What’s a story of how you’ve applied this lesson in your own life? What has this lesson done for you?

From the beginning, our company took every competitor seriously, regardless of how small. While Blockbuster ignored Netflix by-mail as it became a threat in the early 2000’s we studied them in-depth and determined their strengths and weaknesses. Although we received no support from Blockbuster in this effort, we executed a comprehensive plan to attack Netflix’s weaknesses and match their strengths as best we could. To do this we invested in inventory and improved our primary customer propositions. These strategies were supported by an aggressive advertising campaign that was counter to everything Blockbuster was pushing at the time.

As a result, we almost tripled our company’s profit at the same time Netflix developed into a significant competitor. Learning from Netflix made us a better company and sharpened our competitive edge. During the same years, Blockbuster’s profit plummeted, its stock price declined by 80%, it experienced multiple cash crises, and broke debt covenants multiple times.

When CEO John Antioco left under pressure in 2007, we were having our most profitable year ever. Then just three years later Blockbuster filed bankruptcy and closed almost half of their stores. That same year we had only closed 3 of our 41 stores, cashed out our equity partners with a 40% return, and were on schedule to retire our debt.

I believe this divergence in performance was primarily a result of our desire to understand our competitors instead of arrogantly ignoring them. It made us a much better company than we would have been otherwise.