Netflix vs Blockbuster - Sudden Death | 1

From Wondery, this is Business Wars. I'm your host, David Brown.

You'll get a close inside look into the dynamic, sometimes commanding and cunning entrepreneurs who drive these companies. We'll learn about the strategies these business titans use to trump their rivals. Today, we take you to the front lines with an eight-episode series on the battle between Netflix and Blockbuster, and eventually HBO. It was a war. It lasted eight grueling years. It left behind casualties, thousands of hollowed-out buildings, and economic losses in the billions.

Maybe you or your parents remember those times back in the nineties when you'd get that itch for a movie. Then hop into your car, turn on the radio, head out for Blockbuster. You remember you pick out your VHS or DVD and stand in line trying to ignore all the popcorn and candy at every turn?

If you were lucky, they actually had the movie you came for, but often you left with a second or third choice, and a lot of times the rental fees turned out to be just a down payment, because all too often there were hefty late fees, too. Around nineteen ninety seven, along came a guy named Mark Randolph. He was a Silicon Valley marketing wizard with a mind like a wearing blender. And he had a mathematician friend named Reed Hastings, real forward thinking guy, computer programmer.

Well, Randolph and Hastings came up with a whole new model for distributing movies to consumers. When Reed and Mark came up with Netflix, They knew they'd have to take on the mother of all movie rental chains Blockbuster. What they didn't know, what they didn't even see coming, was that eventually their business model would up in network television too, and change the entire movie industry. Bottom line, if you like lots of movies, Truth is you can thank Hastings and Randolph for the first time.

Writer Gina Keating takes us to the moment when the possibility of all this crystallized.

That made him look like a short boxer or a Roman Emperor. He can't remember what he wore that Sunday afternoon, but he favored plain starched white shirts, open necked with a blue blazer and slacks. His mood was confident, exultant even. But he didn't want to get too far ahead of himself. The street was packed with impatient drivers, and he was looking for a house number. The escalade's wheels crunched slowly over the snow-packed streets.

Antiaco didn't want to be late for his meeting, but he also didn't want to maim one of the hipsters in designer boots and winter gear slipping and sliding alongside his car. They were all trying to get to the glitzy parties and film premieres on Main Street. The Sundance Festival that attracted all these LA types wasn't really Antiako's thing.

He preferred to spend his free weekends at his ranch outside Dallas, puttering, putting up deer feeders, inspecting fences, watching his wife, Lisa Rider, prize Arabian show horse. Every few months he visited New York to hang with pals from his old neighborhood. They'd spend hours in chic restaurants they couldn't afford in their salad days.

Nick Shepherd, his high strung but loyal chief operating officer and right hand man at Blockbuster, had convinced him to attend this festival as a sort of victory laugh.

They had found the formula to kill Netflix.

In truth, they were both close to folding. But Hastings, the founder of Netflix, could not fathom how Blockbuster could replicate the complex, intuitive, online user interface that he and his co-founder Mark Randolph had slavery for seven years. But Blockbuster's antiaco thought he had done just that thing. Here's how Antiaka remembers that call from Netflix's Hastings. Hey, John, I heard you might be in town for Sundance this year. As a matter of fact, I am. Well listen.

Maybe we should get together and talk. I'm gonna be in my chalet in Park City, uh all day long. How does uh lunchtime today work for you? Sounds like a good idea. When he hung up, Antiochos said with a slight sneer, Of course, uh Chalet in Park City. Antiochko and his blockbuster team were at Sundance to place their orders for the latest DVD releases, and while schmoozing He picked up a piece of intelligence. Word was Netflix was not doing well.

Possibly on the ropes, in fact. Hastings sat alone in his chalet, waiting as the gray day warmed a bit and the voices of festivalgoers echoed along the street outside. He loved Park City's quaint little town with its clock tower, swank shops, and an old fashioned theater marquee.

He'd bought an old red brick meeting house with a steeple and stained glass windows and converted it into a vacation home. Here he and his wife Patty and their two children, now in middle school, Could escape from overheated tech obsessed Silicon Valley to ski, hang out during school breaks, that sort of thing. He hoped that the family trips made up for all the time that Netflix had sucked away.

Hastings stayed home in Santa Cruz in Northern California when Patty took the kids to Italy for a study abroad year. Meanwhile, back in Wall Street

Hastings had worked obsessively on the code for Netflix's powerful algorithms that tracked web visitors every movement and preference, amassing an unmatched treasure trove of information. Despite the supremacy of this powerful data-sucking engine, Hastings would eventually learn that Netflix was a shakier vessel than he realized. Co-founder Mark Randolph had described the struggle to keep Netflix alive as pissing blood for years. Hastings paced the house alone waiting for Antiaco.

Whether the Netflix gurus had struggled for nothing hinged on the outcome of this meeting. First, he would get Antiako to admit what Netflix's data showed that Blockbuster was going broke trying to kill Netflix with its new Total Access program. See, total access Let Blockbuster online subscribers return their DVDs to any of Blockbuster's 7,000 American stores and rent a new movie immediately. Netflix just couldn't match that kind of convenience.

But Hastings knew Antiako's pressure point. Actually, Blockbuster was losing money on. Every transaction. The big chain was already a billion dollars in debt, and Antiochos Board of Directors, led by billionaire investor Carl Icon, they were yanking on the reins.

The company's share price would collapse along with its ability to borrow money to sustain operations, unless Well, Blockbuster went belly up first from its debt. And so, as he waited for Antiako to arrive, Hastings reflected on the fact that he had repeatedly and publicly dismissed Blockbuster as technologically inept. He wished he hadn't said that. Most people who know Hastings well say that he is a genius and visionary. They also say he does not comprehend people all that well.

Especially when they act in ways that he considers illogical. And that's how he came to underestimate John Antioch and the boys at Blockbuster Online. They were illogical. Antiako spotted Hastings chalet and pulled up to the curb. Antiaco took a few moments to savor his vindication. The sheer arrogance of Hastings You didn't think we could figure this online thing out, did you, Reed? Warm by the heated seat.

He paused and listened to the engine tick as it cooled. Then, he put on his game face, walked up the snowy sidewalk to the wide wooden porch, and raised his fist.

To do all that, he desperately needed control of the$6 billion that Blockbuster generated every year. But Blockbuster's overlord Viacom extracted a five dollar per share Special Dividend. Only after Viacom sucked the life out of Blockbuster did it spin off in late 2004, leaving Blockbuster with$1.2 billion in debt.

This time he figured that competition from Netflix and video on demand would make his$700 million bid for Hollywood video look less anti-competitive and more like an attempt to consolidate a dying industry. After all, video store rentals were plummeting, everyone knew that. At one time, there were something like 70,000 video stores, and by 2005, almost 80% of them were gone. Customers simply had more choices, video on demand, Netflix, and cheap DVD.

Antiako wanted to close the underperforming stores to boost sales at the healthy stores. That would give him cash to invest the hundreds of millions it would now take to catch Netflix. Then Icon set his sights on Blockbuster. As soon as Antiako met with Icon, he knew he was in trouble. Icon's opening salvo made Antiako's hackles rise. You make too much money, he says. Icon planned to quickly profit on both ends of the deal,

Hollywood video stockholders would get a premium price to sell their shares. Blockbuster's stock would bump up in value just because Icon was on the scene, agitating management to squeeze more money out of the deal for investors. So Icon bought$150 million worth of Blockbuster stock and$60 million in Hollywood video shares, then sat back and waited for Antiochko to buy Hollywood video. But the Federal Trade Commission had not warmed to the merger.

And there was a player in the wings no one was laying big odds on. Number three Video Rental Chain Movie Gallery, which offered one point one billion for Hollywood video. Antiocho had no choice. He had to drop out. With a company already deep in debt, he just didn't have the money to make a counter offer. Icon was furious. The 69-year-old Queens native had made his name as a cutthroat corporate raider in the 1980s, alongside corporate insider trading felons Michael Milkin and Ivan Boskey.

The walls of his office in the General Motors Building in Manhattan. were lined with framed newspaper clippings and photos, like so many hunted trophy heads. of business titans and companies he had taken down over the years. They included the former executives of Nabisco, Texaco, Revlon, Time Warner, Motorola, Marshall Fields, Phillips Petroleum, and trans world airlines.

he'd find out soon enough he'd tangled with the wrong guy. Instead of scaring Antioch, the threats made him dig in harder. See, Auntieako grew up the son of a milkman in a tough Brooklyn neighborhood. He knew how to deal with He sized up Icon and figured he could take him.

Through dozens of intimate and revealing interviews with those who knew Springer best, I examined Springer's lifelong struggle to reconcile his TV persona. With his political dreams and aspirations. Named one of the best podcasts of the year by The New Yorker and Rolling Stone, Final Thoughts Jerry Springer is a story about choices: how we make them, how we justify them to ourselves, and how we transcend them.

Or don't. Listen wherever you get your podcasts. Or binge the whole series ad-free right now on Audible. Start your Audible subscription in the Audible app.

If the Blockbuster CEO left voluntarily, he'd have to bail without his fifty four million dollar parachute. At every opportunity Icon tried to publicly humiliate Antiako and make his life difficult. Icon demanded that board meetings be held at his Manhattan office, far from Antiako's Dallas headquarters. At those meetings he pushed aside Antiaco, Blockbuster's chairman, saying he would now preside over meetings.

Icon seemed to take pleasure in letting Antiako's proposals die from neglect, Even more mortifying to Antiaco and his team, Icon insisted that his twenty-six-year-old son Brett, an aspiring filmmaker, weigh in on any of Antiaco's business plans. Icon called Antiako at his office after hours for long-winded discussions about blockbuster business. When Antiako stopped taking the calls, Icon complained that Antiako spent more time drinking tequila on his ranch than running the business.

Reed Hastings over at Netflix watched it all with wary glee. As long as Icon and Antiako fought with each other, Blockbuster would not beat Netflix. Hastings followed Icon's lead, deriding Antiako publicly. When Antiako announced plans for Blockbuster Online, Hastings practically yawned.

Blockbuster's track record in online technology and marketing is less well developed, he told a reporter, and then added dismissively. We find it unlikely that Blockbuster will promote their online service effectively. That was the PR equivalent of a mic drop. Antiako found Hastings insufferable, and then it got worse.

For two years, Netflix grew almost unchallenged, from two million subscribers in two thousand four to six million at the end of two thousand six. Blockbuster stalled at just about a million subscribers as it struggled with debt and technology problems. In truth, both companies were operating on a razor's edge. Marketing dollars are the lifeblood of subscription businesses, and Netflix and Blockbuster were pouring hundreds of millions into a grab for new subscribers.

They cut their prices, bought ads, did deals for exclusive content, anything to set themselves apart from each other. They treated it as a battle to the death because no one knew yet whether there were enough customers to sustain two online rental companies. Then Blockbuster's total access. Stop Netflix in its tracks.

Somehow, Antiocho managed to win over Icon with the ridiculously expensive total access that allowed customers to drop off movies rented online and pick up movies in a blockbuster store. And that collaboration made them dangerous, Hastings thought, as he waited for Antiaco to arrive at his snowbound chalet. In just six weeks, total access had nearly doubled Blockbuster's subscriber account to two million. Hastings had to stop total access, whatever it took.

A sharp knock shook Hastings out of his reverie. He met Antiako at the door of the red brick meeting house and settled him in the living room with a beverage. The two men sat, uh study in contrast. Hastings, tall and lean, wore a goatee. He was a rumpled nerd with a sharp mind, but he was short on emotional intelligence, with a tendency to blurt out painful truths.

Antiako, neat and stocky, was a charming storyteller with the patience and reserve of a high-stakes poker player. He was watching Hastings carefully. He waited for Hastings to come to the point. Hastings began awkwardly. John, congratulations on total access. It's a great program. I wish now I'd taken your team a little bit more seriously, but John, we are going to have a serious problem next week.

Next quarter with subscriber growth if you keep this stuff up. I'm sure you guessed that, right? The word from the studios is you're losing subscribers as fast as we're picking them up, Reed. But you are giving away those store rentals. We figure that's gotta be costing you what?

Two bucks per rental? Pretty soon you're gonna be spinning yourself right into oblivion. You guys are gonna be bankrupt. The minute you quit giving away store rentals and raise your prices, we're gonna start growing again. There was a moment of tense silence as the two men weighed the stakes. Well, what do you suggest? Antiako said. John, let us buy your subscribers. We are better at online rental. We are just better at technology.

There it was, Auntieako thought. Even with Netflix's imminent demise, Hastings couldn't resist one last dart, could he? His arrogance was not dimmed in the least. So Antioch. replied. I had something else in mind. I want to keep the stores and the online business, but maybe there's a way for us to be partners, maybe in a joint venture. To which Hastings replied This is not even a business you wanted to be in, John.

Stop right here for a moment. Now you're Antioch, and Hastings, well Hastings has just made a Hail Mary move to buy your subscriber base from Blockbuster. So Antioch's thinking, Wow The hundreds of millions I've spent, the barbs I've taken from Wall Street, from Icon, from my very own board, from this Hastings fellow. All that is about to pay off. I've got Hastings right where I want him. And what was that?