Innovation: Netflix vs. Blockbuster ft. Gina Keating

Updated: Jul 20




Kriti: [00:00:00] Hey guys, welcome to WhyFI Matter$. So it's been a few weeks since the last time I spoke to you. So I hope everyone is doing well happy pride month and happy summertime is finally, finally here. I'm so ready for the summer and to have a little bit of a break from school, but yeah, I'm excited for this episode as well.

It's going to be a story about Netflix, and I'm sure all of you are familiar with Netflix and Blockbuster, which maybe some of the people who are in the audience who are a little bit older might know, but Netflix right now is definitely the place to go for movies and TV streaming. And. As of January this year, it was reported that Netflix has around 203 million subscribers.

I'm sure it grew a lot during COVID and I'm sure it's even more now, obviously in June and it's used worldwide except in certain countries due to local restrictions. But Netflix, I feel like is just. Becomes such a big part of mass culture of popular culture. So today I have invited Gina Keating to help us understand the history and evolution of the movie rental space and the rise of Netflix.

Like how did it become the world's largest streaming service? Gina worked as a staff reporter for Reuters and United press international for more than a decade. And her work has appeared in variety, Southern living and Forbes. And she's also the author of the book, Netflix, the epic battle for America's eyeballs.

And she's also the writer and filmmaker for the documentary Netflix versus the world. Which was released in 2019. So you can watch that and read her book. I'm super excited and I hope you enjoy the interview.

Hi Gina. Thank you so much for coming on. WhyFI Matter$ today. I'm super excited to have you on the show.

This is a topic that I think is extremely interesting. Maybe it's just because I'm a gen Z. So I'm really excited to learn more about the history and the evolution of the movie rental business and the customer experience with movies, I guess, and then also more about how innovation can give you a competitive edge.

So thank you so much for coming.


Gina: [00:02:31] I'm so excited. To talk to you and talk to your audience because I don't really get to talk to people your age that much. So your questions really intrigued me and there are different from questions that other journalists asked me. So I'm really excited


Kriti: [00:02:48] to, yeah, I think just to start.

Um, us off. Can you tell us a little bit more about yourself as a teen in high school? Were you always kind of into movies or having a sort of. eye for like what's happening in the entrepreneurial world.


Gina: [00:03:09] Um, grew up in St. Louis, Missouri. And I went to an all girls Catholic school and I graduated in 1982. So there wasn't a lot of emphasis at my school on entrepreneurship or really on. Um, doing anything particularly ambitious as a woman , the culture around my town and my school was you were going to go to college and then maybe get married and have some kids.

So what I was interested in school was reading all the time. Like even when I wasn't supposed to be. So story has always been really important to me. I became extremely passionate about it. I worked in television magazines, newspaper. I wanted to try everything. And then, um, I worked at Reuters for Reuters in different outlets for about 30 years. And then I just decided, you know what, I've done. Every kind of story there is. I've written every kind of journalism there is. And now I just want to do the stories that I love. And that's what I do now. I make podcasts and movies and and write books and it's about stuff. I like,


Kriti: [00:04:13] so can you kind of give us a brief history or since a lot of the audience are teens. We don't know much about the movie rental industry in the , nineties, right? So can you give us a brief history?


Gina: [00:04:30] Sure. This is the most fun thing in the world for me, because it's hard for me to realize that there are people who don't know what it was like to go to a blockbuster store right now.


Kriti: [00:04:43] I had no idea what a blockbuster store was before. And my mom, my mom was like, oh, um, cause I was obviously researching for you.

And then she was like there was a blockbuster by our house. Actually like in 2004, 2005 when I was like one year old and yeah, and now it's like, a hair salon. Like they converted into a hair salon.


Gina: [00:05:10] It, that is because there were blockbusters literally designed to be within five minutes of 90% of the people who lived in America.

Um, but so it actually all started in about the seventies and the really important thing that everybody should take away from this interview is that when you fail to innovate, when you think that you can keep a business model, the way it is. Just because it's convenient for you, you're going to fail. And that's what happened to blockbuster and it's what is happening to the studios.

And all of this started in around the late seventies. Um, you used to not ever be able to watch a movie. Unless it was on network TV or in a, in a movie theater, there was no such thing as a DVD. You couldn't rent stuff. So, you know, you'd go see Cinderella. And literally Walt Disney would not put it up again until seven years later.

So the studios had immense control over all of their content and they wanted it to stay that way because they can charge a lot of money. Right. So DVD came along or not. I'm sorry. VHS came along and it was extremely expensive. Um, they, it was, it was, um, intended to record stuff off of television. But then people started recording movies and TV shows and stuff like this and selling it.

Um, and so the studios took control over that and actually said, okay, well, we're going to start selling movies. On DV on a VHS, but it's going to cost a hundred dollars VHS and, and also the VHS machines were very expensive. So what people would do, who are my age is we would have to go to, um, say like a gas station or a pharmacy, and they'd have a little corner where you could maybe rent a DVD player and you could rent a movie, um, because these little.

Modern pop businesses would buy, um, a few of the DVDs and then they rent them to make the money back. And that's the only way that people could afford to do it early on. So then come along, um, people who decide. To make chains of these because they were super popular that were only dedicated to videos.

So they'd make these big investments and buy all these VHS tapes and you'd go in just like you did with blockbuster and, um, and rent it. And then as the price of DVD player or VHS players went down, more families would buy them themselves. So this became, um, as the technology improved and got cheaper more people were doing it.

So blockbuster comes along and swallows up all these mom and pops short stores and gets an economy of scale so that, you know, you put a blockbuster store on every corner and you can buy tons and tons of inventory. It becomes cheaper. So blockbuster. Pioneered that model because they got enough stores so that they could go up against the studios and demand cheaper prices for the VHS tapes and the equipment and so forth.

They also had a really important court case with the Supreme court because the studio sued blockbuster and said, Hey, you can't make money off of our VHS tapes. You can't make money off of our movies, but the US Supreme court ruled. Yes, you can. If you buy it for your use, you can do whatever you want to.

And that was a super important court case, which allowed anybody. Now that buys a piece of physical content to do that. So that gave rise then to companies like Netflix and Amazon prime and Hulu and all these other guys. So that's how the whole thing started. And the funny thing about that, probably your mom and I can relate to this is that.

That was a special experience. You know, you couldn't, you had to go to the blockbuster store and your whole family had to decide which one or two or three videos are we going to get and sit down and watch as a family together. And it was a totally different experience than how people experience their content now.

Right? I think that's why there's a lot of nostalgia right now around blockbuster going bankrupt.

Yeah, she, um, so she grew up in India, so she never really watched a lot of movies there because it, she wasn't, there wasn't a lot of access to movies. Like maybe once every Sunday night she'd watch an episode of like Spiderman or something.

But when she came to America, they had obviously a lot more supply, um, an abundance of movies. So. It was, she kept saying that it's a very, very nostalgic, it was a fun experience to go into the blockbuster with my dad, find a movie I'll be at home and they just then go back, find another movie.


Kriti: [00:10:11] Like she kept saying that it was a very interesting experience for her, especially coming from a place where movies were scarce. So, yeah.


Gina: [00:10:20] Well, you'll, you'll be interested in this and she will too, but it was in my book. Um, Bollywood was one and also other ethnic type films were the cornerstone of early Netflix because of the fact that in my generation, your mom's generation, it was hard to find stuff.

It was hard to find step if you loved foreign films or, um, you know, like I said, Bollywood, or anime or something like that. If you lived in a normal town in America or really anywhere in the world, it was super hard to find that stuff you had to basically put up with whatever was on the shelves.


Kriti: [00:11:01] But now. You can go on Netflix and they have a section dedicated to foreign film film, like Bollywood. Obviously they have a lot of K dramas . Um, yeah, that's interesting. So can we talk a little bit about your book called "Netflixed the epic battle for America's eyeball"? I liked the title.

It's great.


Gina: [00:11:27] Because I really hated it, but it was, um, it was my first book and I I wrote it for the publisher penguin and that was their choice. I wanted the battle for America's living rooms or something, but I think they were right because by this time people weren't always watching content in the living room.

Yeah. So the inspiration for that was I was what's called a beat reporter for the financial Newswire Reuters for about eight years, um, on Netflix and Disney and a lot of studios. Um, and I watched Netflix from 2003 to 2010. As a journalist for Reuters grow and really defy what people on wall street were saying about it.

I watched it go through the 2008 downturn and it just got stronger and stronger because. The people who were running, it really took a different approach to, um, to running a public company than any entertainment companies that I covered. They were doing a fantastic job. And I really wanted to analyze that. the thing that attracted me to them was that, um, you know, they weren't so much, of course they wanted to make money and be profitable. But they had a really long term outlook. So when you're a publicly traded company, you have to report your earnings every quarter. And a lot of times, if you know, You don't make the earnings that wall street analysts think that you should, they'll say, you know, tell investors, sell your stock.

And a lot of things like negative things happen to you when you're not meeting expectations. And that's kind of the price of borrowing public money, which is what you're doing when you're. Paying a publisher, right? When you're issuing stock, you have a lot of scrutiny on you. Right. And some of it isn't really, um, it's, it doesn't make sense.

It's not kind of fair because people don't really understand a lot about how public companies work unless they really study them. So Netflix knew that their stock was very volatile, but they would ignore. Anything that the investment community said, if they knew that their strategy was correct? I found that very creative, they

trusted in themselves,

right?

They were interested in their users. They were interested in their long-term experience. Um, and the long term viability of the company, they had a vision. For what they had to do to be a really little startup. And they knew they were going to have to go up against not just blockbuster and all of the video stores, but they'd have to go up against the cable companies.

And eventually when they became a real threat, they knew they were going to have to make their own shows, which they had no face and doing. Right. So they really mapped out. What their 20 year plan was, they understood the technology and how it was going to evolve. So they had a really complex picture of how their space was going to evolve.

And they just kind of got tired of telling analysts, okay, we know what we're doing. So they, , they just say, look, this is how much we're going to make. We're going to lose customers , for this particular quarter, or we're going to take all of our profit and run it back, put it back into the company and buy a lot of advertising so we can grow really fast.

So they would do stuff like that. That was very antithetical to what wall street wanted. And they'd watched their shares tank. And they were just like, we gotta keep going. You know, , we know what our vision is. I thought that was extremely courageous. Amazing. Wanted to know more about that.


Kriti: [00:15:11] Yeah. I think that, no, I think that's , it's almost as if you're describing like a person, like an athlete because. A lot or like athletes, whatever you do, musicians, I just keep going. Even if they are being scrutinized by the public. And they're all very brave. , so I wanna talk a little bit about, you know, blockbuster and that business model and why blockbuster eventually. It became bankrupt. So, and around 2000 blockbuster collected nearly $800 million in late fees. So this accounted for 16% of its revenue. So can you tell us more about this business model?


Gina: [00:15:56] Yes. Okay. So blockbuster, as I mentioned to you as sort of a huge conglomeration of a lot of little chain stores that were rebranded blockbuster and they relied on their store revenue.

Okay. And the revenue that came in from stores was four. Remember rentals. Sales of videos and anything else that in the store, like candy and stuff like that, but also like you mentioned late fees. Okay. So, and that business was very volatile also because it was very subject to the ups and downs of the economy, because it's kind of a luxury item.

So when people are feeling, you know, Secure. They're going to go to blockbuster. They're going to run a movie every week or every three days or something like that. But in downtimes they won't go. And so what blockbuster was doing was which was not sustainable and really bad for their business model was they were trying to make up that money. That they weren't getting in the downtimes with late fees. So it became, sort of a popular , conception that blockbuster was really unfair with its. Late fee charges. So like you might turn it in at 1130, it was due at 12 and then you'd get a late fee and you can possibly get out of it because it was, you know, corporate and they just wouldn't give you the money back.

So there was a lot of hate hatred by the customers around the late fees and that ultimately really torpedoed them because it became the selling point for Netflix's business model. We don't charge late fees. Keep it as long as you want. So that was the pain point for blockbuster, anytime that you have , bad customer service that is that people feel is kind of like a universally evil, bad business practice.

Yeah.


Kriti: [00:17:47] So Why is Netflix more patient than Blockbuster?


Gina: [00:17:51] Okay.

So Netflix started out using the exact same business model as blockbuster , they, you know, they just thought, Hey, you know, we're going to take this business. That's in stores in real life and we're going to just recreate it online. And that's, that was part of it. But remember they had expenses. They also had some of the same expenses, which was, they had to have warehouses to store, um, the DVDs they had to. And remember they weren't streaming at first for the first 10 years.


Kriti: [00:18:23] I'm thinking about it as if I can. Oh, I


Gina: [00:18:27] say, okay. And don't forget. So they had to buy DVDs at first and put them in warehouses and they had postage. Which was their expense. So at the very beginning, they were also charging. It was a one-time you do exactly the same way as blockbuster.

You go to their online store, put your credit card in, and then you would, you know, shop on their website. And they would mail you the DVD and you would mail it back. And the first three years, or two years of their existence, they charged you late fees. If you couldn't get it back. And that, and people hated that.

So when they were desperately trying to save the business, because people would try it out because they would get free coupons in their DVD. When they bought a DVD player, they get it, try it out and then they'd never come back because they didn't. You know, they thought it was a terrible model. So Netflix eventually came up with this idea that they were going to do the subscription based service.

So you could just pay one fee a month and get as many DVDs as you could, as I was with arriver or, um, you know, that you could turn around in the mail. Um, you had this queue that you could get. Next movie sent to you. You just make the cube and they would send you the next DVD in your queue, as soon as you got the other one back. And you could keep everything as long as you wanted. So that was their big revelation , but their overhead was the same as blockbusters pretty much. Um, but what they did differently was. They, um, realized their customer usage patterns. And this is really important too. As an entrepreneur, your customers don't act the same. During , different life events are going to, , influence how people spend money and you know, how often they use a particular product. Netflix did a really smart thing from the beginning and that's that they collected a lot of data on their consumers. They collected , obviously your, um, your address and where you lived. Um, and that socioeconomic area and they analyze that, then they would look at like what you picked out to, to rent and they still do this. How long you kept it out um, when you sent it back, how many times you've rented and what they realized was. When people signed up for Netflix, initially they would rent a ton of movies and Netflix would probably lose money for a few months on these people because they were spending a lot of money on postage and they were buying or renting a lot of movies.

But eventually, especially in the summer, they would continue to pay their subscription fees and maybe rent one movie. So they'd have a ton of overhead up front getting that customer that as. The customer aged into the system. They wouldn't rent as much. And so all of that money was profit. And that's what Netflix understood that blockbuster didn't was that because they blockbuster wasn't a data-driven company.

Netflix was so they really researched what the customer was doing, how they could make people sign up more, how they could make people really love the service. And just keep paying the subscription fee. So that that's what the big difference was, was that they analyze and analyze and analyze and optimize and optimize.

And blockbuster just was like, here here's the store come or don't come. And that you just can't do that in the, in the age of commerce.


Kriti: [00:21:54] I didn't know that. . I dunno. I just feel like it's so weird. Cause I, I don't ever like, think about it past and what it took for them to get there because I literally only remember it being on my TV and it's just. Netflix. I could just find it, whatever, fine, whatever move I want. Like, I don't remember any of their background and I take it for granted how easy it is right now and all of this shipping. I think it's really great how they were able to tap into their customers and see their experience. And I think that's a big takeaway for any entrepreneur.


Gina: [00:22:32] Oh, it's a huge takeaway because in my opinion, that's what won it. Because people, you know, when, when file, you're way too young to remember this, but file sharing started around the same time that Netflix was fine found it. So, um, BitTorrent and, um, oh, I can't think of the name of the music sharing Napster that was new back in those days.

You could, the internet was just capable of doing, of doing that stuff, of carrying that amount of data. So people were sharing music files. They were trying to share. Video files and the studios and music and, and movie studios were getting really upset about this because they rightly understood that it meant piracy and the loss of, um, of revenue for them, but what they should have done when it became really obvious that this was not going to go away was make the experience.

Of of watching movies or listening to music online, they should have made it really great to do through their portals, but because they resisted it so much, the customers went to, you know, to other places where that revenue could not be captured by the content owner. So. So that is a huge takeaway. I mean, you have the ability now as an entrepreneur to really know your customer in a way that my generation did not know.

So I would, I would highly urge everybody to use all of the data that you can to really understand the customer and really react to it because that's what Netflix does. They're constantly doing a B testing and they learn a lot about that. Sometimes it's a little creepy, but, um, they're profitable, you know?


Kriti: [00:24:15] No. I was

talking to my dad because he, um, he works on another streaming. Well, he doesn't work on it, but he works for a company that does another streaming service. And I was comparing the two streaming platforms, um, prime video, and then Netflix. So I was just like telling him. Amazon prime looks ugly.

Like it just, oh, I love Amazon prime. I'm not, I don't have anything against it, but it looks ugly. It's boring. It's cluttered. Like you have 50 million movies that are. Very small, like fit it onto a screen and it just is not as enjoyable as browsing through Netflix. And also I think Netflix actually does do a better job for me with movie recommendations.

So I think it just, um, it definitely their whole business is based on their customers. I feel like that's very. Intuitive. Like that's what a business should do. Right. But I guess blockbuster just failed to really see that. , so was blockbuster did they, what was their downfall inevitable or do you think that. They had some thing that could have gone for them, because I remember learning a little bit about how they did have a plan to start it online and not just a brick and mortar store.


Gina: [00:25:46] This? Sure. So, and this goes to one of the other things I think is really important in starting a company. You know, they're the two guys who founded Netflix, Reed Hastings and Mark Randolph were very different personalities. Mark Randolph was absolutely fascinated by people. And strangely enough, one of his, um, great uncles was a guy named Sigmund Freud who oh, really? Yeah. That's another uncle was a, um, was a guy who was very famous in advertising circles , Named Alfred Bernays and he was considered the father of modern PR. So if you believe in loud genetics determining, you know, people's reality, Marc Randolph was a perfect guy to, um, to do Netflix because he wanted. Um, the perfect direct mail that you, that was the thing that we used to have back in my day, where you get these flyers in the mail and people would try to get you to buy different things with these flyers or, um, you know, mail order, that kind of stuff.

I mean, it's so ancient now, but he was interested in that and when the internet came around and he said, oh my God, this is the most perfect. A way to do a direct contact with consumers and I can watch what they do, because I can just set up like a green button here and a red button here and see which one they like, and I'll make the type this size or this size, or make the pictures one size or the other, and just.

Experiment on people and see which one they'll go for. So you had that guy on the one hand, I'm really interested in, in trying to service customers and give them what they wanted and analyzing them. And on the other hand, you had Reed Hastings who was a mathematician, and he brought skills of, as you mentioned, the matching algorithm, which gives you the recommendation.

His idea was, well, you know what? We can't have a clerk, like what you get in a movie store, which was a real. Important experience for people in my generation because you'd walk in and you'd be like, I want to see a movie that's kind of like "die hard" or something like that. And you don't know enough about it to pick that out.

So a lot of times the clerks in the store would give you the recommendation. And that was your way of learning about movies. So Reed Hastings wanted to make a virtual clerk and he decided to take this data. And figure out how to do an algorithm to recommend stuff to you. If you liked this, you're going to like that smart.

Right. And he also was able to mathematically optimize a lot of stuff that they were doing. Like where do we put our distribution center? If we take all of our customers and we make a, a big. Chart of where they live. Like where's the best way that we can put the distribution center so that they'll get the movies faster.

And then they moved to streaming and they have to make, um, movies for themselves. And they are not sure, you know, we've never done this. We don't know if this is going to be popular or not. What kind of genre, what actors and so forth. So they literally. Would take the data that they learned, um, from the DVD by mail business and say, okay.

Hm, Kevin Spacey, everybody loves him. Everybody loves British drama. Everybody loves Robin Wright? Let's make house of cards, you know, so that's how they would do it. It's everything was very mathematical because of read on this side, like the decision-making and everything was very customer focused because of mark.

So it was like kind of a perfect marriage. And the problem that blockbuster had was they were very. Um, like numbers, business oriented, they didn't have that customer facing, um, DNA in blockbuster. It was, it was very much like numbers and, you know, trying to

make money. Right. They also didn't have much data analytic side analysis either.

No,

cause they just didn't have the data. You know, people would walk into the store and there was really nothing to quantify except like what they purchased. So you don't, you don't have that same kind of rich data, data, rich experience. So blockbuster when it realized that it was starting to lose customers to Netflix.

In certain markets like the very tech oriented cities, we're the first place that it started to see a loss of customers to Netflix. So they said, oh my gosh, you know, we got to do something about this. And they actually did create a service called blockbuster online. And the funny thing about it, which you'll see in my movie, if you watch it.

It's also an Amazon prime, um, was they stole everything about the Netflix website. They actually, everything, they took the size of the pictures, the size of the type, um, the business model, everything, and they put it up and that was, um, that was their competition. And they actually did really well until about 2008.

When a new CEO came in and decided that online rental was not important and he was going to try to make the stores great. Again, I mean, what a dinosaur, right. He decided to stop spending money on the Dharma online business and it tanked and died. So, yeah. It's and that should tell you something about the mentality of people who don't want to go forward, who don't recognize in the past, right?

Yeah.


Kriti: [00:31:12] There's like a good quote. Um, by Jon Meacham, who's a famous historian , I forgot the exact words, but he says we're stuck in the nostalgia of the past and the narcissism of the present. So isn't that powerful. So I think the guy who. Decided to get rid of the working, the business model that actually worked for blockbuster is probably has that mentality.


Gina: [00:31:45] Yes. Yes. And you, you also wanted to ask me about Carl Icahn, who was, um, a board member at blockbuster. And I would say that he fits that description also.


Kriti: [00:31:57] Does that invest your grind,


Gina: [00:31:58] right? Yes. He's the investor.


Kriti: [00:32:01] Okay. So I actually remember, I want to talk a bit about Netflix and focus on the present, which is obviously Netflix is one of the biggest, you know, streaming services.

So I want to talk about their competition. So when I was little, probably like six or seven everywhere, I went like a, Jewel-Osco a Walgreens to CVS. They all had red box. That company, they had all those red boxes. Um, So do you think actually I was very entrepreneurial back then and obviously I never executed it, but I was like, there should be a red box for books.

Yeah. I feel like there's a lot of libraries. Like libraries kind of do that or libraries, especially the libraries in my city. They've definitely been innovative and up their game. So there's no need for red box for books anymore, but, um, Do you think this was ever a kind of threat for Netflix?


Gina: [00:33:03] Yes.

Netflix believed that it was a threat to them. And there was a transitional period that Netflix plan through between the end, more or less of DVD rental, DVD by mail, rental, and streaming. And in that transition, they were not able to get. Really a list movies, because by this time the studios were onto them and they said, we're not going to license great content to you.

We're not going to license the broadcast rights to you. You're going to have to get real third rate content. And so even though it was really cool to be able to stream you were streaming stuff that was like, people didn't want to watch it was decades old. Yeah. And so, but Redbox came along at that time.

When you could, um, when you wanted, um, to be able to return a movie, anytime you wanted, you wanted it and blockbuster was declining at that time. So it was, um, it was kind of a threat just in that little interim period, but that's also, um, a, a particular. Um, population who uses the red boxes. Um, and it was one that isn't really served so much by a subscription business because people who subscribe to stuff usually are a little higher end customer.

They're a little more fluent because they have a card. And they have to be able to pay that every m