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Did you go to Blockbuster, or did they come to you? No, we tried going to Blockbuster for months. We tried reaching out to them, but this was the ultimate listen: we were doing $5 million a year, and they were doing $6 billion a year. So we had 150 employees, and they had 6,000. We were like a gnat to them, to an elephant. Their tail flipped around, "What's this thing buzzing?" No interest in us whatsoever. It took months, and finally we got the call. As luck would have it, we got the call while we were at a corporate retreat at a place called the Alisal Ranch. There's a city called Santa Barbara on the coast of California, pretty rural, and the Alisal Ranch is way back in the mountains. It's a dude ranch, you know, horses. So we're on retreat, and you also know that in Silicon Valley we're pretty casual, and when you're on retreat you have to work at it to be even more casual. All I had with me was shorts, T-shirts, and thong sandals. That's all I had with me, and that's when Blockbuster called and said, "We'd like to see you tomorrow in Dallas." I remember turning to Reed and going, "There's no way we can fly non-stop out of Santa Barbara. The time zones are different, we can't possibly get to Dallas by tomorrow." So we did the prudent thing you do when you're $50 million in the hole: we chartered a corporate jet, a rounding error, I think they call that. We flew to Dallas and went up to the 27th or 28th floor of this massive glass and steel skyscraper, into a huge cavernous conference room with a big hardwood table, made, I'm sure, out of some endangered Amazonian hardwood. It was horrendous, the whole thing. I'm there in shorts, a T-shirt, and thong sandals. Reed was jealous, he had a Hawaiian shirt, he had buttons. Anyway, in come the Blockbuster guys, and we make our pitch: we'll combine forces, you'll run the stores, we'll run the online business, we'll build a blended model, which our research has shown is a game changer, and everything will work out. It was going good. They were asking good questions, they were leaning in, and we were thinking, okay, this is rolling. Then they asked the big question: how much? We'd rehearsed on the plane. We figured we're $50 million in the hole, so $50 million. There was this silence in the room, and I was looking at the Blockbuster execs, trying to piece together what the reaction was. Finally it dawned on me: they were trying to suppress laughter, trying to keep a straight face at the hubris that this little company, $50 million in debt at the trough of the meltdown, could possibly be worth $50 million. As you can imagine, the meeting went downhill pretty quickly after that. There was a long, quiet ride in the cab back to the airport, and an even quieter ride on the jet back to Santa Barbara. I so profoundly remember sitting there on the plane with my head down, not talking, just thinking. I was so confident that if we just got the meeting, this blended model was so self-evidently great that they'd save us. But they weren't going to save us; they were going to compete with us, and we were in trouble.
Did they make you an offer? No, they just rejected the $50 million offer. My dad, one of the things he would sometimes say to me when I was struggling with some particularly nasty problem and came to him for the solution, was, "Sometimes the only way out is through. You've got to take these problems and just go right at them. There's no way around." This was such a classic case of that. There was no easy way out. The only way we were going to survive was to compete with them, and we had to put ourselves in a position where we could do that. When we laid people off, we dropped entire lines of ad junk, little businesses, and completely focused in, and we survived. Eventually we passed Blockbuster, and eventually Blockbuster went into bankruptcy. I don't know how Blockbuster couldn't have just looked over and seen that your business was succeeding at some point and gone, "Okay, we've got $6 billion in revenue a year. We'll just destroy them, we'll overpower them with advertising or something." It's a big piece of the innovator's dilemma. In their case, a couple of things were going on. Number one, imagine you are the CEO of Blockbuster, called John, wasn't it? John Antioco. You've got $6 billion coming in through your standard business model, which is serving bricks-and-mortar stores all over the world. Someone comes to you and says, "We need to build an online component," and John says, "Well, what do you think that could do in revenue the first year?" And you say, "$2 million." So would you say, "Okay, take our very best engineers and put them on this project"? No. You say, "Okay, here's a hand, figure it out," and you put the B team on it. Of course it doesn't work. Netflix wasn't a movie company, it was a software company. We had Silicon Valley, we had people who had spent their whole lives building software. You can't compete with that, and even with their A team it would have been challenging. But they put the B and C teams on it, and they did that a second time and a third time, and each time we got stronger and stronger, and eventually they said, "We've got to fix this." They picked a team, they resourced it adequately, and they said, "Get out of the building, go across town, set up here, here's the money, come after these guys." It's a story that has not really been told very well, but they came really, really close to taking down Netflix. They had that blended model, which we knew was a killer. A blended model means you can rent from Blockbuster and return it in the mail, or return it at the store, or go pick it up at the store, or have it mailed to you. We couldn't compete with that. We didn't know the stores. It came really close to taking Netflix down, until all of a sudden they had all kinds of unrelated corporate shenanigans that made them decide to change CEOs. They were going to defund this online business and walked away from it.
What did you talk about on your Instagram recently? When John quit the business. John was the CEO of Blockbuster, and him quitting, for a variety of reasons, is much of the reason you think Netflix ended up not getting killed by Blockbuster. Correct. Can you explain that? I'm not going to get this entirely right, but there were corporate raiders who would buy large amounts of a company's stock and take multiple seats on the board, and begin to try to dictate things to make a company more short-term profitable. That happened to Blockbuster. One of the acts they did was deny John Antioco his bonus. He was the CEO of Blockbuster, yep, and he said, "You can't do that," and they said, "Well, we're going to, we're not going to pay you the bonus you were promised in your previous agreement." So he said, "In that case, I quit." Then they went to find a replacement and brought in a person who had all of their experience at retail stores, at convenience stores. His vision was, "We have 9,000 stores in almost every community in the country and the world. Why aren't we selling gum and clothing? Why are we wasting money on this digital stuff?" This is super movie geeky, so pardon me for the segue. Steven Spielberg, who I'm sure you're familiar with, had a film school project that was a movie about a robot. The robot operates on a cost-benefit analysis, and there's the penultimate scene in the movie where the robot is chasing somebody, getting closer and closer, and he's just about to reach up and grab the person's ankle. You see the sunk cost of the robot's time reach break-even, and he stops, walks away an instant before he grabs the person. That's what Blockbuster did. They were within seconds of grabbing us by the ankle and yanking us off the ladder, when something unrelated happened, and they just turned and walked away, and we scampered to safety. They lost focus. Yep. There are a lot of reasons, and Netflix didn't beat Blockbuster on its own. Blockbuster went down because it had a business model that was very, very difficult to change, and it didn't have the courage and persistence to do the things that would have made it change.
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