Blockbusted: The History of a Video Rental Giant Gone Small to Nill

The harshly redacted sign facing Route 35 barely conceals the fact that Blockbuster Video once anchored the small Middletown strip mall near New Monmouth Road.

Outside, the logo is blacked out on the wall of the storefront. Inside, the gutted shop is being split, and the section to the right is in preparation to become a 7-11 convenience store.

The home entertainment industry, specifically the video rentals market, has seen drastic changes in only a handful of years, first with the NetFlix DVDs-by-mail business model, followed by RedBox’s vendor machines.

RedBox, a subsidiary of CoinStar which brought coin-sorting machines to grocery stores across the country, initially posed a major challenge to NetFlix by combining the convenience of a drop-off network (a RedBox DVD can be returned to any other RedBox machine with no penalty fees) with the locality of a chain store.

That has been seriously challenged by NetFlix’s video streaming capabilities, where with an internet connection and/or an HDMI cable from computer to digital television, a customer can have the resources of the NetFlix library — the convenience and instant gratification rolled into one package. It has become a movie rental store giant slayer.

It wasn’t always so. The original video stores were, most often, mom and pop operations with limited means at their disposal. In the VHS years, and before the concept of buying, then keeping videos took hold, the tapes were sold upward of $100 a piece.

The owners had to shop judiciously, allotting no more than two tapes per title on average, breaking that constriction when guaranteed hit movies made their way to home video. In those circumstances, many stores stocked five to seven copies.

The Blockbuster model had bigger budgetary pockets and could not only afford to have a larger consistent library at their disposal, but could offer fifteen to twenty copies of any major hit movie, ensuring more customers the chance of renting them closer to the day of release.

It was simply a case of a more ample supply to meet the demand which most small stores could not match. Blockbuster locations spread as fast as their competitors went out.

Brian Shoff, now with Listrak, an e-mail marketing company, had employee experience with the company. “I worked at Blockbuster two times in my life, once near the tail end of their peak in 2003 at the Pennsylvania State College (main campus)," he reminisced. "As you'll recall, this was around the time Napster began making waves. In my experience, the stereotype stands, most Blockbuster employees were elitists.  I haven’t worked with more than twelve (of them), but that part of the culture didn’t change.”

Other large companies sprouted to challenge Blockbuster, but they had the name recognition and advertising funds to hold upstarts like The Movie Gallery and Hollywood Video at bay. Being the big name allowed the company to be difficult when it came to fees on videos, specifically levied when tapes were late or returned un-rewound.

The DVD changed the latter by utilizing the video-disc medium, but the former remained and became prohibitive, opening a door of opportunity.

Netflix launched its subscription service in 1999 and was slow to find its footing. After all, the business model was supported by the US mail delivery system which, on its face, would seem much less convenient than renting from a store.

However, they based their campaign on the promise of zero fees. The customer would pay for the subscription, set up their queue of rentals online, receive the discs through the mail and return them with no shipping fees (thanks to Netflix’s prepaid envelopes). There would be no late fees incurred, either.

Blockbuster was confident that the upstart would comprise only early-adopters, and their own business model would stand. But, in the early 2000’s, the competition was recognized as stronger than initially thought, causing Blockbuster to alter their fee structures and enter rentals-by-mail as well. Rather than exploiting a competitor’s opening flaw, they themselves had left the opening and were scrambling to catch up. 

“One big difference in culture was the removal of late fees,” Shoff said. “They didn’t go away entirely, but they gave them a new name.  Instead of charging you $4-ish a day, they simply checked the movie out for you again.  This wasn’t much help for two-day rentals, but a slick way to change 'late fees' to 'extended viewing fees.'

“There was also a change from enforcing late fees relentlessly, including sending them to a faux collection agency, to allowing credits if a customer made a fuss and didn’t have an extensive history of abuse." 

In the days of late fees, Blockbuster would send postcards that appeared to be from a collection agency.  This would anger and scare customers into paying the exorbinant fees, as they felt it would affect their credit score, Schoff added.

In 2004, another company jumped into the fray. RedBox brought vending kiosks into grocery and convenience stores and made waves in the industry. However, studios like 20th Century Fox, Warner Brothers and Universal have filed suits against the company, saying this business model will adversely affect their current DVD and rental structures.

The three studios now withhold new releases from RedBox for at least 28 days to attempt to remedy this. RedBox’s primary draw is having new movies available in their machines, so this has compromised their viability. Netflix, on the other hand, was only beginning.

With the introduction of video steaming, Netflix had taken almost all the opportunities off the table, wrapping affordability, convenience and access all in one package.

Blockbuster had been closing down under-performing locations for several years, and in September 2010 formally filed for Chapter 11 bankruptcy protection.

Brian Shoff recalled, “I also worked for (Blockbuster) a year ago part-time for extra money. This is in a smaller town, Lititz, PA and was there for its closure a few months ago. I'm very familiar with the comment, 'I have Netflix now.'"

For Shoff, none of this is surprising. “When we saw a bigger store close, we had a feeling we’d be next," he said. "We saw patronage drop.  We had no illusions. People came to Blockbuster for one reason: selection. Netflix was great if you wanted new releases. The same held true for RedBox. If you wanted a back catalog, Blockbuster won hands down.”

As for what contributed to the downfall, “Blockbuster wasn’t as agile,” Shoff said. “Netflix was the first hit, and RedBox cleaned out the rest.  Lower prices for a commodity product, Blockbuster had their time and they were slower to change with the times.”

Blockbuster’s Corporate Communications department sent this response to Middletown Patch’s request for a comment on their current situation: “As part of the recapitalization process, Blockbuster will be evaluating its U.S. store portfolio with a view towards enhancing the overall profitability of the store operations.  No decisions have been made at this time.  Decisions will be made on a store-by-store basis over the next several months.”

For the Middletown location, it is already too late – in the “little fish, bigger fish, biggest fish” scenario, it has already been devoured.