Blockbuster Closing a Cautionary Tale for Slow-Moving Businesses

After years of life support, Dish Network made the difficult decision to remove Blockbuster from its feeding tube. Since acquiring the business in April of 2011 out of bankruptcy court, the satellite television provider has slowly and steadily wound down operations while maintaining an inexplicable optimism about Blockbuster's ultimate fate. Dish's interest in the company stemmed beyond the physical locations and toward the company's streaming-ready catalog and DVD-by-mail business. Whether the investment was ultimately lucrative for Dish or not, the story serves as a good reminder to investors: over all else, whether it be balance sheet strength or valuation, a company's long-term vision is absolutely paramount in evaluating a business.

You're my boy, Blue

Blockbuster may be going down without as much as a "pff," but the company should evoke some degree of nostalgia in the hearts of every movie lover throughout the '90s. Before we had anything close to a YouTube, a Netflix or even an On Demand menu from our cable provider, we had a blue-clad holy house of movies. The business was fantastic — high margins, industry-leading moat, recurring revenue, excessive yet unavoidable late fees (at times generating half a billion every year), and most importantly, an unparalleled selection of film favorites, from Hot Shots to The English Patient, available in a two-VHS set.

Ultimately, though, Blockbuster management failed to embrace the future of their own business. They were aware of a pending challenger, yet they remained plagued by hubris and some corporate form of inertia. Blockbuster was late to every event in the evolution of the home video industry from the early 2000s onward. Mail order video, digital video, rental kiosks — every opportunity the company had to trek forward it seemingly missed, or at least arrived at well after the "niche" had been cornered. As mentioned in The New Yorker , Blockbuster leadership once called the Internet just that — a niche.

To compensate for dropping demand, Blockbuster signed deals with media companies to sell merchandise in the front of the stores— stuffed animals from characters in the movies lining the aisles and other uninspired, uninteresting products that align poorly with the video rental business. The company tried to sell satellite television subscriptions and prepaid cell phones to 9-year-olds preparing for a sleepover. The problem wasn't just that Blockbuster shoppers had no intention of signing up for a basic TV package while renting a handful of dramedies — it was that a start-up in California could ship every movie found in the stores, with no late fees, at a cheaper long-term cost, without having to pull their children through the overpriced wall of candy guarding the cash registers.

Remember, remember
Of course, it's easy to cry negligence now that the industry has officially transformed. At the time, there were undoubtedly those who agreed with Blockbuster management — stay the course and do what they do best. The company's biggest assets — its catalog and its distribution system — could have easily bought the company time to adapt to the changing business, or at least prepare for a softer landing.

Instead, the company let its debt load pile up while cash flow dwindled. Management blamed Netflix, Redbox, and a stronger theater business for the increasingly poor results when they should been blaming themselves. The company eventually partnered with NCR to roll out Blockbuster Express kiosks as well as a mail delivery business, all while management pulled the typical cost-cutting levers to slow the bleeding — closing underperforming stores, refinancing, laying people off. Every store was soon to become an underperformer.

Signing up for the corporate Atkin's Diet and playing catch up are useless defenses to business model disruption. Innovation is the only weapon against innovation.

For investors, remember that nothing is sacred or untouchable in the business world. Blockbuster's brand strength and business moat was impermeable until it wasn't. Look for management that isn't just coping with industry changes, but embracing them. This applies most frequently to the technology industry (here's to you, BlackBerry), but it can happen anywhere.

Thanks for the fun times, Blockbuster, you sadly won't be missed.

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The article Blockbuster Closing a Cautionary Tale for Slow-Moving Businesses originally appeared on Fool.com.

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