Video rental company Blockbuster filed for Chapter 11 bankruptcy this Thursday, September 23, citing unsustainable levels of debt (nearly $1 billion,) increased market competition, the emergence of new distribution channels, and an economic climate where consumer sensitivity to changes in pricing and convenience has increased. It’s been a long time coming. Over the last few years competitors like Netflix, Roku, Redbox, and Hulu have undercut Blockbuster’s market share with innovative new offerings that continued to catch the brick-and-mortar giant flat-footed.
It’s a familiar story in economic theory, what Schumpeter called “creative destruction.” A new entrant proves better equipped to survive in the market, and out-competes the incumbent. Over time, this results in economic growth— thanks to competition and innovation, our businesses are more advanced that in the agrarian economy of the 18th century, or the medieval guild systems, for that matter.
Despite all this turnover, Schumpeter considered innovative entrepreneurs as the force that sustains long-term economic growth, even as they destroy the value of established businesses and laborers. Startups are the engines of job creation and economic recovery. Blockbuster’s three decades of brand value did not prevent the likes of Netflix from capturing the video rental market. Since the market is free and open, disruptive innovators always have the opportunity to outcompete larger, more established rivals.
And competition is fierce, especially when the available marketshare is limited by an economic crisis. Consumers look for ways to cut spending, particularly on non-essentials like entertainment, and many of Blockbuster’s competitors offered a better service with less overhead. Blockbuster once dominated the market with brick-and-mortar stores; these are now a burden. Blockbuster once reaped $500 million from late-fees each year; this led to customer dissatisfaction and eventual abandonment. Netflix and Redbox exploited both of these weaknesses with cheaper, more convenient distribution through the mail and kiosks, and a no-late-fee service model. As revenue increased, Netflix reinvested in innovation, developing streaming video delivery to further consolidate its market share and reach customers the way customers wanted. Netflix took off, and Blockbuster couldn’t catch up, losing 75% of its market value from 2003 to 2005.
Blockbuster’s bankruptcy doesn’t mean the company has gone out of business. Creditors are taking over, and some stores will stay open, and they’ll still rent videos. But when Blockbuster emerges from bankruptcy, it will probably look much like its rivals, focusing on its digital presence and kiosks. Netflix and Redbox have reshaped the market in their image. However, the process of creative destruction never ends. Successful innovation is a source of temporary market power; it erodes the position of the old, but is always threatened by new entrants. Who knows? The next disruptive innovation might be yours.
Visit rocketlawyer.com to find out how to position your company for growth. Protect yourself from legal liability with a Rocket Lawyer membership.
Come Join us at Article 3
What Role Should States Play in Immigration Policy?
Episode 63: When Will We Be Voting Online?
Can Online Voting Become the Norm, Democratizing the Election Process?
