who wept for Blockbuster? Not I.
RWL #322
Greetings from the University of New Hampshire! Pic above is mini-Woodman (he’s about 5 inches tall - I also have a 12 inch version). He was playing some 80’s tunes this week, specifically Technotronic’s Pump Up the Jam (put the needle on the record!)
and that got me thinking about Blockbuster Video. Innovative for the ‘80’s, no one wept when Blockbuster went bankrupt in 2010. Thinking about my essay last week, and how sad I am to see a music store closing, why not only did I not feel bad about losing Blockbuster, but pretty much everyone felt the same way?
Flashback to 1987: it’s a Saturday night, and nothing else to do. A couple of friends and I head to Blockbuster, which had bought out the local video store and Borg’ed it into its chain. We go in and look for the latest shoot’em up video - something intellectually challenging for high school junior boys, like Arnold Schwarzenegger in The Running Man. or whoever was in Deathstalker II. New releases were priced at $6, which doesn’t sound like much, but in 1987 I was working retail for $3.50/hour. Inevitably, if you got there past dinner time, you weren’t going to be able to rent a new release anyway, so then you got kicked back to say, Terminator (the 1984 original), which you could rent for $3. And oh, by the way, the movie was due back the next day by 4PM (if I remember correctly), and if you didn’t get it back on time, you were charged for another day’s rental as a late fee. Late fees on videos was sort of a meme, if there had been memes, back in the ‘80’s and ‘90’s.
My family bought our first VCR in the summer of 1985 when I was 15 and we first moved to New Hampshire. We moved shortly after school got out, and my sister and I didn’t have any friends, having just arrived in town, so we watched a lot of videos those first few weeks, and I have to tell you, it was kind of amazing. You could suddenly watch a movie at a time you wanted, without having to wait for it to come up on TV. And you didn’t have your watching interrupted by commercials. I had loved the Star Wars trilogy as a kid, and I remember reenacting it with my friends on the playground when I was in elementary school, drawing on our collective memories of the movie, because we had seen it maybe just a couple of times. VCR technology seems so quaint in a day when 15-year olds have three or four different streaming services on the phones they have in their pockets, and you can just re-watch any movie you really like, but it was a radical departure from retelling your favorite movies to your friends. I think, as with all technologies, it doesn’t take long for you to take it for granted, and even to become a bit resentful when it doesn’t work just perfectly.
Initially video rental stores were mom-and-pop affairs. Not necessarily well run, not great variety, rules and practices were highly variable. Blockbuster developed an effective franchise system with standardized management and improved the quality of the experience, but also raised prices and implemented nasty late fees. Blockbuster really was a better service, and it created value for us as customers, but it then extracted most of that value for itself by charging high prices, and squeezing out even more value if you didn’t follow their rules exactly through late fees (or failure to rewind fees - uggh - the memories). We were willing to pay the higher prices because the service was worth the price, but Blockbuster’s prices were so high that they left very little consumer surplus. Consumer surplus is a phrase economists use to describe the difference between the value a consumer puts on a good or service and the price a firm charges for its goods or services. My friends and I might have had a willingness to pay (WTP) of $6.50 to see The Running Man, and so we were willing to pay the $6 to Blockbuster to rent a copy (if there was a copy), and we were left with $0.50 of extra value (our consumer surplus). A consumer will pay up to, but not more than, their WTP. However, the closer the price is to the consumer’s WTP, the less consumer surplus is left between the consumer and the seller, and thus less goodwill. So in this case, Blockbuster could have charged us up $6.50 and we still would have rented the movie. Had they charged $6.51, we would have put the movie back on the shelf and found something else to do (like driving over to the McDonald’s and hanging out - you know, cool stuff like that. Small town life - it is what it is).
I just finished reading Felix Oberholzer-Gee’s new book Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance, which was excellent, and discusses strategy as exploring ways to increase customer’s willingness to pay (WTP) and supplier’s willingness to sell (WTS), so that everyone in the value chain (customers, suppliers, and the firm) can all experience an increase value. He visualizes the value chain as a stick, like this:
A customer’s willingness to pay (WTP) determines how high the stick goes. The firm sets a price below the customer’s WTP, and the gap between the WTP and the price is the consumer surplus (the $0.50 I mentioned above). The wider the gap between WTP and price, the more goodwill the customer will feel toward the firm. Of course, with a fixed WTP, the lower the price (and thus, a larger consumer surplus), the less profit the firm makes. WTP isn’t fixed, though. Innovative firms can raise WTP by improving products and services. For example, you would be willing to pay more for an iPhone 14 than an iPhone 3 because an iPhone 14 is a much better product than an iPhone 3. Thus Apple raises the height of the value stick (the WTP is higher), and Apple can charge a higher price. The consumer surplus might even get bigger if the firm doesn’t get greedy and push the price up faster than the WTP rises. In my opinion, that is what Blockbuster did, though.
I am going to ignore the bottom end of the value stick for this purpose because I don’t have insight into that part in this case. For sake of illustration, I am leaving the cost end identical and focusing on the top part of the stick. As I said, Blockbuster really did provide a better service than the old Mom & Pop stores. They had more variety and more movies in stock. So they raised the WTP of their customers, as demonstrated visually by the fact that the Blockbuster stick is taller than the Mom & Pop store stick. But Blockbuster also raised its prices dramatically, squeezing consumer surplus to near zero (including the sneaky and obnoxious late fees). So while they increased the overall value in the value chain, they reduced customer goodwill and loyalty. A small consumer surplus makes consumers very willing to go elsewhere. My wife and I started our Netflix subscription sometime in the mid-2000’s when Netflix was still mailing DVDs and we basically never went back to Blockbuster after that.
So I did not weep when I heard Blockbuster was going bankrupt. I probably hadn’t been in one in a few years. In fact, I distinctly remember thinking, “Good”, and maybe some less kind words, when I heard the news. Blockbuster failed for a variety of reasons - failure to keep up with technology being one of them - but their pricing strategy did not create fans. It created marginal, mildly resentful customers who were primed to jump to any competitor that offered more consumer surplus.
I think firms like Amazon create large amounts of consumer surplus. I’ve been an Amazon addict for more than 20 years. I don’t think a week goes by during which I don’t order something, and sometimes it’s multiple orders. The prices are excellent, the speed of delivery is incredible, and the variety of things they make available is mind-blowing. I love Amazon. You can ask my wife, she will confirm this to be true.
I’ll close by saying I think this value stick idea is useful for thinking about your own relationship with your boss and your organization. You are selling your labor. How much surplus do you create for your organization? Is the gap between your price (wages) and the value (WTP) wide? Or do you produce value just barely in excess of your price like Blockbuster did? If you aren’t leaving your organization with extra value, you better watch your back. Your manager is going to be looking for ways to eliminate you.
Next week I plan to talk about the bottom half of the stick. As leaders, we have a lot of ability to control that part as well, maybe more. OK - that’s it for me! I’ll be back Wednesday with links. As usual, willing good for all of you! Happy Sunday!
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