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The Turning Point

What options do companies have when their industries are dying?

Blockbuster Corp. has looked at life from both sides now. When it leaped out of the gate in 1985, it quickly swallowed its mom-and-pop competitors to become the dominant player in the fast-growing video-store industry. Today, it faces the grimmer side of the corporate life cycle as emerging technologies and delivery systems threaten the demise of video stores altogether.

Industries have been dying at least since the Middle Ages, and often because a new technology (cars, in the case of buggy whips) or product (petroleum, in the case of whaling) made the old industry obsolete.

For Blockbuster, it is video on demand and digital downloading that threaten to make its business proposition obsolete. PCs put Smith Corona on the critical list. Electronic banking may spell the end of check printer Deluxe Corp., based in St. Paul, Minnesota.

As different as these companies are, each is facing or has faced the same conundrum: in a mature industry, should a company aggressively pursue transforming technologies or simply ride out its current business model? The choice is far from clear-cut. History shows, for example, that it is easy to get entrenched in existing technology—even when change is bearing down. “A lot of times, the train doesn’t look like it’s coming at you that fast, and sometimes that’s because you’re looking at it head-on,” says Bert Ely, a banking industry consultant with Ely &Co., in Alexandria, Virginia.

Human nature is also a hindrance, since “people in a legacy business want to hang in there,” adds Ely. Moreover, the cost to move to an industry-changing technology can be prohibitive to the company—and to its shareholders. As Deluxe CFO Doug Treff points out, sometimes “shareholder value is the ultimate driver of decisions—more important than survival of the company.”

Blockbuster has every intention of surviving. Yet, while chief competitor Netflix is investing aggressively in pay video-on-demand (VOD) delivery, Dallas-based Blockbuster is mostly focusing on extracting every cent from the home DVD-rental market—seeking acquisitions, boosting its online DVD-rental services, launching a subscription program similar to Netflix, and creating a DVD trade-in program. And why shouldn’t it? In its most recent quarter, the world’s largest video-rental chain posted more than a 6 percent increase in revenue over the previous year. Sure, there have been rough spots: Blockbuster’s planned acquisition of Hollywood Video was still under intense scrutiny by the Federal Trade Commission at press time, for example, and it is being sued by the state of New Jersey over its new “no late fees” policy. But publicly, executives say critics are just trying to throw cold water on a profitable business proposition.

“We’ve been hearing about the ultimate demise of Blockbuster for years,” says Blockbuster CFO Larry Zine. “All we’ve heard about is the threat of video on demand and how that is going to put us out of business. What happened in the interim is something that gives us a lot of comfort in the future.” What happened in late 1999 was Blockbuster’s introduction of DVDs, which were cheaper to store, ship, and save than VHS tapes. More important, says Zine, people still love the “experience of the Blockbuster store,” a habit that he says will keep Blockbuster’s DVD-rental model viable for some time.


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