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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.

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Growth of Netflix, downfall of Blockbuster shows tech’s lethal power

IT’S AMAZING to me that my 2-month-old daughter will likely never set foot inside a movie-rental store.

Everybody knows that new technology kills old businesses–it’s called creative destruction. But the downfall of the movie rental business occurred particularly quickly.

Most people reading this have likely experienced the thrill of walking into a movie rental store and finding the prized new release in stock. That thrill has now been replaced by movies on demand and DVDs by mail.

It was only 11 years ago that a company out of California starting shipping DVDs by mail. Now that company, Netflix, has a market cap of about $8 billion and is widely credited (along with Redbox and movies on demand) for killing movie rental stores.

Coincidentally, that $8 billion figure is also about what Viacom Inc. paid for Blockbuster Inc. in 1994. Last week Blockbuster declared bankruptcy, following in the footsteps of former No. 2 movie rental chain Movie Gallery (which also owned Hollywood Video).

Movie rental stores haven’t been completely eliminated from the landscape. Blockbuster still has two stores open in Stafford County, and Video Club also has a couple of area locations. DVDs On The Run has a drive-through movie rental business in Spotsylvania County. By contrast, there are dozens of Redbox kiosks inside area grocery stores.

Technology is changing so fast these days that today’s winners are at risk of quickly becoming tomorrow’s dinosaurs. Netflix has already started tearing down its DVD-by-mail subscription service and allowing customers to watch movies instantly on their computers or televisions. Wireless companies are building up their networks to allow people to watch movies and television shows on mobile phones and tablets. It’s not hard to envision a day when you’ll be able to watch live sporting events and TV shows on these devices.

Technology is fascinating to watch and enjoy, but investors need to be hyper-aware of its effects. Warren Buffett famously avoids technology companies–not because he hates technology, but because he finds it impossible to predict winners amid rapid change. Instead he tries to pick companies that have “durable competitive advantages” or “moats” that can survive and thrive regardless of which direction technology takes.

Buffett’s purchase of the Burlington Northern Santa Fe Corp. railroad for Berkshire Hathaway is a great example. Even if it were possible to duplicate Burlington’s rail network (which it’s not), it would take many tens of billions of dollars to do so. Buffett also has made major investments in utility companies, which will power and charge the newest tech gadgets, whatever they may be.

Great investors often talk about “killing their ideas.” That includes trying to figure out what technological changes could destroy the business model before investing.

It’s not easy to do. Blockbuster and Movie Gallery didn’t see the power of Netflix until it was too late (though Blockbuster is trying to reinvent itself with a competing DVD-by-mail service and kiosks).

Blockbuster may well succeed at this reinvention, but it seems highly doubtful that bricks-and-mortar movie rental stores will make a comeback.

And thus my daughter will have to make do in a world of movies on demand.

Permalink: http://news.fredericksburg.com/businessbrowser/2010/10/03/growth-of-netflix-downfall-of-blockbuster-shows-techs-lethal-power/

  • http://n/a mike rogers

    The drawback of Blockbuster going out of business is that no company will have new release movies for rent the day they come out. We’ll all have to wait for 28 days until we can rent them because of the Netflix/redbox agreements with the studios.

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