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Blockbuster Video Was Once a Master at Scaling

19 June, 2020

Blockbuster opened their first store in Dallas in October of 1985. They weren’t the first video rental company, but they did have the largest selection of movie titles, over 6,500, which was more than any of their competitors at the time. Their first store was a huge success and throughout 1986, they opened three more stores in Texas.

4 Stores in June of 1986
4 Stores in June of 1986

After taking on a few investors, they were able to start expanding aggressively. In 1987, they opened their first stores in the Midwest starting with Illinois and Michigan. Before Blockbuster, most video rental stores would keep stacks of tapes in store rooms and behind counters to discourage theft. Blockbuster on the other hand, displayed the VHS covers on the shelves throughout the store in the same way bookstores do. Customers enjoyed the experience of wandering through the store and picking up movies that looked interesting. Blockbuster’s recipe was working well.

By June of 1987, they had opened over 30 stores and were still expanding rapidly. They had a three day rental policy on most titles which encouraged customers to rent more than one movie at a time. On top of that, they found that there was a significant demand for older, non new-release movies which worked out well for them because these types of movies were cheaper to purchase from the VHS distributors and they were able to increase their profit margins by offering them.

133 Stores in January of 1988
133 Stores in January of 1988

Throughout the rest of 1987 they started acquiring other VHS rental chains that were already established in other states. With the purchase of Southern Video Partnership and Movies To Go, they were able to expand to 133 stores by the end of 1987. They also established six regional offices and a high volume distribution center in Dallas.

In 1988, they purchased the rental chain Video Library, Inc and also made a deal with the United Cable Television Corporation to open another 100 stores over the next two and a half years. By the end of that year, they had over 400 stores making them the largest video rental chain in the country.

While Blockbuster’s store concept worked really well, it wasn’t unique enough to be patentable. They knew that other companies would likely start copying their business model. To overcome this, their strategy was to grab as much market share as quickly as possible to stay ahead of any potential competitors. Throughout 1989, they purchased another four established rental chains and by 1990, they had opened over 1000 stores.

1,006 Stores in January of 1990
1,006 Stores in January of 1990

At this point, there were some concerns that the growth of the video rental market was starting to slow down. To increase business, Blockbuster ran a massive ad campaign that included joint promotions with McDonalds and Domino’s Pizza. They also began offering video game equipment and Sega Genesis games at some of their stores. In an effort to streamline its corporate management, they purchased a large office building in Florida and consolidated their six regional offices.

2,050 Stores in January of 1993
2,050 Stores in January of 1993

By 1993, they were operating over 2,000 stores across the country. Blockbuster started acquiring production companies with large libraries of movies and TV shows. This gave them exclusive rights to a large number number of titles and gave their customers a wider variety of content to choose from. They also experimented with offering PC sales and upgrades which was a pretty significant jump from their original business.

Through the mid 90s, growth was starting to slow and it was looking like Blockbuster’s glory days were coming to an end. The company went through a few leadership changes and they downsized their workforce significantly laying off more than half of their entire workforce. They also attempted to expand their product offering in stores into CDs, snacks, toys, magazines and T-Shirts. By 1995 they were operating around 2,700 stores across the US.

But despite opening so many new stores, the company was actually struggling to turn a profit overall. The massive layoffs had left many of their stores and distribution centers understaffed. It was getting to the point where new release movies weren’t even making to the shelves in time which was starting to frustrate their customers.

In 1997, John Antioco took over as CEO. He immediately moved the focus back to their core business which was video rental. They ended their PC sales and upgrades business, and reduced the number of retail products sold in stores.

Antioco also signed revenue sharing agreements with major Hollywood studios which made them financial partners. Instead of Blockbuster having to pay the studios $65 a piece to purchase movies on VHS tapes, they would now pay just $4 and then give 30 to 40% of the rental revenues back to the studios. It was a win-win for both of them. On top of that, they invested in better data collection and were able to improve the selection of movie titles across different regions based on local customer tastes.

Around this time, DVDs were gradually starting to gain popularity. Warner Brothers approached Blockbuster with a deal that would allow Blockbuster to have exclusive rental rights over new DVD releases for a period of time before they would be available to the general public. Unfortunately, Blockbuster didn’t want to commit to a full scale DVD roll out across their nearly 4,000 stores and they turned down the deal.

In response, Warner Brothers significantly lowered their DVD wholesale price and then big box retailers like Walmart and Best Buy quickly took advantage. They purchased massive quantities of cheap DVDs and then sold them in stores with little to no mark up. This strategy is called the loss leader, and big box retailers often use this strategy just to get more customers in the door. Unfortunately this mistake cost Blockbuster a lot of sales over the long term.

In the year 2000, Blockbuster crossed paths with Netflix for the first time. The Dot Com bubble had just burst and Netflix was facing bankruptcy. Netflix founder Reed Hastings proposed a deal where Blockbuster would purchase Netflix for 50 million dollars and Netflix would continue to operate and grow their online DVD rental business under Blockbuster’s leadership. Unfortunately, Blockbuster massively underestimated the future value of the internet and they turned down the deal. As of 2020, Netflix is worth around 200 billion dollars and Blockbuster passed on the opportunity to buy them for just $50 million.

5,003 Stores in September of 2000
5,003 Stores in September of 2000

In the early 2000s, Blockbuster was profitable once again and were still rapidly expanding. They had gotten so efficient at opening new stores that a team of workers were able to pack all the signs, fittings and equipment needed into the back of a single tractor trailer. It would drive to the empty store location and then in a matter of hours, the team would be able to assemble and install an entire Blockbuster store.

5,430 Stores in August of 2002
5,430 Stores in August of 2002

In 2002, after seeing Netflix’s growing earnings, Blockbuster realized that Netflix was starting to make a meaningful impact on their bottom line. At that point, they decided to make their first move into the same online DVD rental market that they had turned down two years earlier. They acquired a small father and son company in Arizona called DVD Rental Central that had a small-scale online DVD rental program. Blockbuster paid one million dollars for the business and gave the founders another $25 million to expand their service to compete directly with Netflix. This business eventually became Blockbuster Online.

For a monthly fee of $19.99, Blockbuster Online allowed customers to rent up to three DVDs through the website and have them mailed to their house within a couple of days. There were no late fees and customers could mail the DVDs back whenever they were finished with them. It was the exact same thing that Netflix was doing except Blockbuster was able to undercut Netflix by two dollars per month. And it was actually working out pretty well for them.

In 2004, Blockbuster reached their peak US store count of just over 5,700 stores. The Blockbuster Online program was doing well, but they didn’t combine their online and in-store offerings. 90% of Americans had a Blockbuster store within a short drive of their homes. Their stores could have been used for a number of things, they could have promoted online rentals, they could have accepted online DVD returns instead of making customers mail them back, thus increasing the chances of the customer coming into the store and renting more DVDs. Stores could have even offered a way for customers to mail order DVDs that weren’t stocked in store this would have eliminated some customers’ frustration of not finding the specific movie they were looking for. Unfortunately, they didn’t do any of that and gradually customers moved to competitors with more convenient options.

5,734 Stores in January of 2005
5,734 Stores in January of 2005

Through 2005, Blockbuster began closing their most unprofitable stores while they struggled to return to profitability. By this point, in addition to Netflix, they were also facing competition from Redbox which pretty much offered the same product as Blockbuster, just as a vending machine instead of an entire store.

Around this time, Blockbuster stopped charging late fees in an attempt to be more competitive. If a customer didn’t return their DVD, Blockbuster would simply charge them the DVD’s sale price. This new pricing structure confused a lot of customers which resulted in a couple of lawsuits.

In 2007 Blockbuster launched a massive campaign called Total Access to directly compete with Netflix. Customers could rent a DVD through the Blockbuster Online website, then when they returned the DVD to a Blockbuster store, they would be able to rent another DVD at no cost. It was a risky campaign because they were losing about $2 on every free rental. However they expected that over the long term, Total Access would attract enough new customers to cover the loss. The campaign was very successful initially and it doubled Blockbuster Online’s subscribers in just under six weeks.

Unfortunately, there were some leadership troubles around this time which resulted in John Antioco being replaced with former 7/11 CEO Jim Keyes. Keyes didn’t see a future in Blockbuster Online and he wanted to continue renting and selling DVDs while also expanding into online streaming.

4,230 Stores in July of 2009
4,230 Stores in July of 2009

They purchased the video on demand service Movielink in late 2007 and throughout 2008 and 2009, they made efforts to turn Movielink into a Blockbuster branded streaming service. Unfortunately, in addition to Netflix, Apple, Amazon and Wal-Mart all had their own streaming services which made it especially difficult Blockbuster. They continued limping along and by the end of 2009, they had closed around 1,800 stores.

Throughout 2010, they continued downsizing and closing stores and by the end of the year, they filed for bankruptcy. Blockbuster was eventually acquired by the television provider Dish Network. Dish initially had plans to keep around 1,500 stores open and launch their own streaming service to rival Netflix, but these plans never ended up happening.

Dish struggled with the unprofitable stores and between 2011 and 2014, they ended up closing the vast majority of them. By the end of 2013, there were just over 100 stores left in the entire of the US. Today Dish still owns Blockbuster’s intellectual property but doesn’t appear to be doing much with it.

1,399 Stores in March of 2012
1,399 Stores in March of 2012

All of Blockbuster’s direct competitors like Hollywood Video and Movie Gallery also suffered a similar fate over the same timeframe. Many of Blockbuster’s last surviving stores were located in regions with slow and unreliable internet infrastructure.

The last Blockbuster in Bend Oregon
The last Blockbuster in Bend Oregon

The last surviving store is located in Bend Oregon, it’s not only the last store in the US, it’s the last one left in the entire world. They’re a small owner operated store which is supported by loyal local customers as well as tourists stopping by to experience the nostalgia of visiting a Blockbuster store.

In the end, Blockbuster’s competitors simply had a better product and Blockbuster was just too slow to innovate.

The per-state store numbers came from archives of Blockbuster Inc’s annual 10-K filings with the SEC between 1999 and 2011. The numbers outside of these years were collected from various business news articles with some linear extrapolation in between. All sources are linked below.

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