In 1997 Blockbuster decided that DVD would never replace VHS. With that decision he began to dig his grave

In 1997, Warner Bros. proposed blockbuster an exclusivity agreement to rent DVDs. The deal replicated the model that was already practiced with the VHS format, which gave 60% of income to the video store chain. Blockbuster declined because they were confident that magnetic tape would maintain its dominance for years. Warner responded by drastically cutting the wholesale prices of its records and Walmart was quick to take advantage of the opening: In less than a decade, it overtook Blockbuster as Hollywood’s biggest moneymaker.

The DVD arrives. In 1997, this format arrived promising better imaging, more durability, and interactive features (we were so young). But it had a giant before it: in 1988, after defeating Sony’s Betamax format, VHS already controlled 95% of the home video market. And a decade later, in 1997, it was an empire: VHS rentals generated $10 billion annually for movie studios, with Blockbuster pocketing about half of that revenue. VHS had reasons not to be afraid: DVD players were very expensive, between $300 and $500, and VHS devices were very accessible. And they were not wrong: DVD sales would not surpass those of VHS until 2003, six years after its commercial release.

Warner’s proposal. Warren Lieberfarb, head of Warner Bros.’s home video division and one of the key figures in the development of the DVD format proposed to Blockbuster a deal that replicated the VHS model: exclusive rights to rent the company’s new DVD releases before they hit stores for sale to the public. Warner would receive 40% of the rental income from those records. John Antioco, CEO of Blockbuster, had just arrived at the company after passing through Taco Bell, and his decision could be key to the company’s future.

The rejection. Blockbuster decided to reject the proposal because it believed that VHS would maintain its dominance for years. As we said above, a not unreasonable assumption. Furthermore, creating an inventory of DVD movies was an unnecessary expense under the profitable and peaceful reign of VHS. Some later format releases, before the advent of DVD, possibly made Blockbuster think it had done well: JVC’s D-VHS digital tape, which allowed high-definition recording, was a flop. But Blockbuster didn’t have two things: Hollywood support for DVD and the inevitable drop in player prices.

The answer. Warner Bros. responded with a strategy that would transform home cinema: it drastically reduced wholesale prices for its DVDs, in order to compete directly with the rental industry. This allowed businesses to sell records at prices that made purchasing more attractive than renting. The North American giant Walmart detected the opportunity very quickly and began to sell DVDs below the cost price, and in this way, for example, they sold their discs for 15 or 20 dollars when renting a VHS cost between 3 and 5 dollars per day.

The power of Walmart. Walmart’s network of stores had power in distribution, covering the entire country, that Blockbuster could not match. In addition, it had privileged deals with suppliers and, in general, a fund and resources that allowed it to absorb the losses from the DVDs. In this way, Walmart replaced Blockbuster as the studios’ main source of income in less than a decade. This led to redefining the balance of power in the industry: the most valuable distribution channel was no longer the video store, but became large commercial stores, where consumers no longer only bought movies.

Blockbuster, free fall. As is well known, It was not Blockbuster’s last catastrophic decision: in 2000, when Reed Hastings and Marc Randolph, co-founders of Netflix, approached John Antioco about selling their DVD-by-mail rental service for 50 million dollarsthe executive declined the offer. A decade later Blockbuster declared bankruptcy in 2010 while Netflix reached a valuation of billions.

They are not the last. The case has parallels with recent technological transitions where dominant companies have underestimated the speed of the public’s adoption of new formats: the physical media industry believed that Blu-ray would maintain its relevance against streaming. And it is also easy to draw lines that link current technology companies with the adoption of AI: who will be the next giant to fall?

Header | Stu pendousmat

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