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Ken Auletta has written Annals of Communications columns and profiles for The New Yorker magazine since 1992. He is the author of eleven books, including five national bestsellers: Three Blind[…]

Ken Auletta on how Blockbuster underestimated Netflix.

Ken Auletta: Netflix in the early days – we’re talking about the late 1990s – was terrified that it was gonna go out of business.  They were mailing DVDs and it was very expensive to do that so they weren’t making any money.  And Blockbuster was this colossus and so Reed Hastings, the founder of Netflix, gets on an airplane and goes to Dallas to try and convince Blockbuster to come together and partner in some way.  Ultimately what he really wanted to do was for Blockbuster to buy Netflix and for Netflix to be their long range online arm because he knew one day he would be delivering television, or video over the Internet.  And Blockbuster could have its stores but he thought the stores would be in decline as, in fact, happened.

Blockbuster in retrospect stupidly declined to invest in Netflix. And within a couple of years Netflix had basically helped destroy Blockbuster.  Blockbuster was an old technology.  You went to a video store to rent a video.  Most of the top 20 movies were already out of stock because people had rented them so there’s a lot frustration.  And Netflix was basically, you know, get what you want when you want it and knew that they would move away from the DVD business to the download video business.  So you could watch as many, you know, you could never run out of stock.

I think it’s very accurate to compare Netflix to a book and I think that’s part of the forward vision that Hastings had.  If you think about the way – what Netflix has done with what has come to be called bingeing, it basically replicates a book because it basically says you want to watch House of Cards or Orange is the New Black, you don’t have to wait and watch it at ten o’clock on Friday nights or eight o’clock on Thursday nights.  You can watch it whenever you want.  And, by the way, you don’t have to watch commercials. And, by the way, which means the show is longer.  And, by the way, you don’t have to watch a single episode, you can watch multiple episodes.  Watch it as long as you want.  Eat as much as you want.  Just as when you read a book.  You want to read more than chapter, you read more than one chapter. So the analogy is apt and I think he was smart about that.

Blockbuster had the resources and had it been smart enough to go online, invest some of those resources to go online, they would have decimated Netflix.  Blockbuster was, you know, its ownership didn’t want to spend the money.  They were engaged in battles with Carl Icahn in a potential takeover effort on his part.  And they suffered the classic innovator’s dilemma which was they basically said we have a good existing business with these thousands of video stores.  Why should we disrupt it for a maybe business, the online world that may never pan out.  And let’s stick to the netting, keep to the netting. And that’s what they did and they lost the netting.

Directed/Produced by Jonathan Fowler, Elizabeth Rodd, and Dillon Fitton