Netflix vs Blockbuster - Sudden Death | 1

Audible subscribers can listen to all episodes of business wars ad-free right now. Join Audible today by downloading the Audible app. From Wondery, this is Business Wars. I'm your host, David Brown. Behind every successful business, there's always a hard fought war that the public rarely gets to see up close. In Business Wars, we're going to be delving into the most iconic and fascinating battles among rivals, like McDonald's versus Burger King, Nike versus Adidas or Coke versus Pepsi. Others may be less well known, but they'll be just as dramatic. You'll get a close inside look into the dynamic, sometimes commanding and cunning entrepreneurs who drive these companies. We'll learn about the strategies these business titans used to trump their rivals. Today, we take you to the front lines with an eight episode series on the battle between Netflix and Blockbuster, and eventually HBO. It was a war. It lasted eight grueling years. It left behind casualties, thousands of hollowed out buildings and economic losses in the billions. Maybe you or your parents remember those times back in the 90s when you get that itch for a movie and hop into your car, turn on the radio, head out for Blockbuster. You remember you pick out your VHS or DVD and stand in line trying to ignore all the popcorn and candy at every turn? If you were lucky, they actually had the movie you came for, but often you left with a second or third choice. And a lot of times, the rental fees turned out to be just a down payment because all too often they were hefty late fees too. Around 1997, along came a guy named Mark Randolph. He was a Silicon Valley marketing wizard with a mind like a wearing blender. And he had a mathematician friend named Reed Hastings, real forward-thinking guy, computer programmer. Well Randolph and Hastings came up with a whole new model for distributing movies to consumers. When Reed and Mark came up with Netflix, they knew they'd have to take on the mother of all movie rental chains, Blockbuster. What they didn't know, what they didn't even see coming, was that eventually their business model would up in network television too, and change the entire movie industry. Bottom line, if you like lots of movie choices at the touch of your remote or your smartphone screen, truth is you can thank Hastings and Randolph. Rider Gina Keating takes us to the moment when the possibility of all this crystallized. The dream comes true in the car industry, the industry is growing rapidly and rapidly, and the world is becoming more and more popular. And remember you get your podcasts. From Wondering, this is BusinessWords. I'm David Brown. It was January 2007, Park City, Utah. Place was packed with independent filmmakers, hoping to find distributors at the Sundance Film Festival. John Antiocho, the CEO of Blockbuster, peered out the windshield of his rented Cadillac escalade at the ski chalets, stacked up the mountainside. Antiocho was then in his late 50s, with a wreath of salt and pepper haired and aqua line nose that made him look like a short boxer or a Roman emperor. He can't remember what he wore that Sunday afternoon, but he favored plain, starched white shirts, open necked with a blue blazer and slacks. His mood was confident, exultant even, but he didn't want to get too far ahead of himself. The street was packed with impatient drivers and he was looking for a house number. The escalade's wheels crunched slowly over the snow-packed streets. Antiocho didn't want to be late for his meeting, but he also didn't want to maim one of the hipsters and designer boots and winter gear slipping and sliding alongside his car. They were all trying to get to the glitzy parties and film premieres on Main Street. The Sundance Festival that attracted all these LA types wasn't really Antiocho's thing. He preferred to spend his free weekends at his ranch outside Dallas, puttering, putting up deer feeders, inspecting fences, watching his wife Lisa Rider prize Arabian show horse. Every few months he visited New York to hang with pals from his own neighborhood. They'd spend hours in chic restaurants they couldn't afford in their salad days. Nick Shepherd is high strung but loyal chief operating officer and right hand man at Blockbuster. Had convinced him to attend this festival as a sort of victory lap. They had found the formula to kill Netflix, dead, once and for all. And then, as he and Nick drank coffee in an overcrowded cafe, gazed out at the cloud shrouded mountains. Nick's cell phone rang. It was Hastings from Netflix. He had an offer in mind for Antiocho and offer he said that Antiocho would be a fool to refuse. Ironically it wasn't just Hastings who thought he was holding the winning hand. Antiocho was convinced it was he that held the ace. In truth, they were both close to folding. But Hastings, the founder of Netflix, could not fathom how Blockbuster could replicate the complex intuitive online user interface that he and his co-founder Mark Randolph had slaved over for seven years. But Blockbuster's Antiocho thought he had done just that thing. Here's how Antiocho remembers that call from Netflix's Hastings. Hey, John, I heard you might be in town for some dance this year. As a matter of fact, I am. Well, listen, maybe we should get together and talk. I'm going to be in my shallay in Park City all day long. How does a lunchtime today work for you? Sounds like a good idea. When he hung up, Antiocho said with a slight sneer. Of course, a shallay in Park City. Antiocho and his Blockbuster team were at Sundance to place their orders for the latest DVD releases. And while schmoozing, he picked up a piece of intelligence. Word was, Netflix was not doing well. Possibly on the ropes, in fact. Hastings sat alone in his shallay, waiting as the grey day warmed a bit in the voices of festival goers echoed along the street outside. He loved Park City's quaint little town with its clock tower, swank shops, and an old-fashioned theatre marquee. He'd bought an old red brick meeting house with a steeple and stained glass windows and converted it into a vacation home. Here, he and his wife, Patty and their two children, now in middle school, could escape from overheated tech-obsessed Silicon Valley to ski, hang out during school breaks. That sort of thing. He hoped that the family trips made up for all the time that Netflix had sucked away. Hastings stayed home in Santa Cruz in Northern California when Patty took the kids to Italy for a study abroad year. Meanwhile, back in Wall Street. Blockbuster rolls out its online rental service, a new challenge to already struggling Netflix. When Word came out about Blockbuster online, Hastings opened his laptop to take a look. He shook his head and chuckled to himself. Wow, this is a shaggy dog of a website. I can do better than this sitting at any cafe in the world just using my laptop. But he had underestimated Antiochco. Or maybe he had overestimated his own hand. In truth, they had both miscalculated. The search for each other's jugular would become an acquired taste. Hastings had worked obsessively on the code for Netflix's powerful algorithms that track web visitors every movement and preference, amassing an unmatched treasure trove of information. Despite the supremacy of this powerful data sucking engine, Hastings would eventually learn that Netflix was a shakier vessel than he really did. His co-founder, Mark Randolph, had described the struggle to keep Netflix alive as pissing blood for years. Hasing's pace to the house alone waiting for Antioch. Whether the Netflix gurus had struggled for nothing, hinged on the outcome of this meeting. First, he would get Antioch to admit what Netflix's data showed that Blockbuster was going to kill Netflix with its new Total Access program. See, Total Access, let Blockbuster Online subscribers, return their DVDs to any of Blockbusters 7,000 American stores, and rent a new movie immediately. Netflix just couldn't match that kind of convenience. But Hasting's new Antioch's pressure point. Actually, Blockbuster was losing money on every transaction. The big chain was already a billion dollars in debt. And Antioch's board of directors, led by billionaire investor Carl Icon, they were yanking on the reins. Hasting's at dissuade was pride in beg Antioch to sell him Blockbuster Online, or both companies would die in a slow, murder suicide. Surely, Antioch would get this. But if Antioch refused, and Total Access continued, well, Hasting's would have to report Netflix's first ever loss of subscribers. Netflix stock price would start melting down along with its equity. By the second quarter of no growth, Netflix would be finished. The company's share price would collapse along with its ability to borrow money to sustain operations. Unless, well, Blockbuster went belly up first from its debt. And so, as he waited for Antioch to arrive, Hasting's reflected on the fact that he had repeatedly and publicly dismissed Blockbuster as technologically inept. He wished he hadn't said that. Most people who know Hastings well say that he is a genius and visionary. They also say he does not comprehend people all that well, especially when they act in ways that he considers illogical. And that's how he came to underestimate John Antioch and the boys at Blockbuster Online. They were illogical. Antioch's spotted Hastings' chalet and pulled up to the curb. Antioch took a few moments to savor his vindication, the sheer arrogance of Hastings. You didn't think we could figure this online thing out, did you, Reed? Warm by the heated seat. He paused and listened to the engine tick as it cooled. Then, put on his game face, walked up the snowy sidewalk to the wide wooden porch, and raised his fist. John Antioch had been through two years of hell. He had waited for seven years for Viacom to split off Blockbuster as a public company in 2004, so he could run it the way he wanted. Video stores were dying and Antioch knew it. Once Viacom cut him loose, he needed to catch Netflix, reduce the number of video rental stores and late fees and move into digital delivery before the $8 billion industry shrank to nothing. To do all that, he desperately needed control of the $6 billion that Blockbuster generated every year. But Blockbuster's overlord Viacom extracted a $5 per share special dividend. Finally after Viacom sucked the life out of Blockbuster, did it spin off in late 2004, leaving Blockbuster with $1.2 billion in debt? Corporate raider Carl Iconz sets his sights on Blockbuster. The question is whether he can actually ring profit out of this struggling movie rental company. Antioch wasn't too worried about the debt until a few months later. When his bid to take over Hollywood video caught the attention of billionaire hedge fund investor Carl Iconz. Iconz added a reputation for buying stock in companies that he considered undervalued and ruthlessly forcing management to cut costs, sell assets, or buy back their stock at inflated prices. This insured investors of quick and substantial profits, but often left his target companies mortally wounded. Antioch had tried to take over Hollywood video five years earlier, but ran into problems with federal antitrust regulators. This time he figured that competition from Netflix and video on demand would make his $700 million bid for Hollywood video look less anti-competitive and more like an attempt to consolidate a dying industry. After all, video store rentals were plummeting everyone knew that. From one time there were something like 70,000 video stores and by 2005 almost 80% of them were gone. Customers simply had more choices, video on demand, Netflix, and cheap DVDs. Antioch wanted to close the underperforming stores to boost sales at the healthy stores. That would give him cash to invest the hundreds of millions it would now take to catch Netflix. Then Icon said his sights on Blockbuster. As soon as Antioch met with Icon, he knew he was in trouble. Icon's opening salvo made Antioch's hackles rise. "You make too much money," he says. Icon planned to quickly profit on both ends of the deal. Hollywood video stockholders would get a premium price to sell their shares. Blockbusters stock would bump up in value just because Icon was on the scene, agitating management to squeeze more money out of the deal for investors. So Icon bought 150 million dollars worth of Blockbuster stock and 60 million in Hollywood video shares. Then sat back and waited for Antioch to buy Hollywood video. But the Federal Trade Commission had not warmed to the merger and there was a player in the wings no one was laying big odds on. For a three video rental chain movie gallery which offered 1.1 billion for Hollywood video. Antioch had no choice. He had to drop out with a company already deep in debt he just didn't have the money to make a counteroffer. Icon was furious. The 69-year-old Queen's native had made his name as a cutthroat corporate rater in the 1980s alongside corporate insider trading felons Michael Milkin and Ivan Bosky. The walls of his office in the General Motors building in Manhattan were lined with frame newspaper clippings and photos like so many hunted trophy heads of business titans and companies he had taken down over the years. They included the former executives of Nabisco, Texaco, Revlon, Time Warner, Motorola, Marshall Fields, Phillips Petroleum and Transworld Airlines. Carl Icon fails to get the blockbuster deal he wanted and now the movie rental company is struggling to stay afloat. Icon was now stuck with blockbuster and he was furious. He angrily called up Antioch and demanded that blockbuster either find a private buyer or pay him a special dividend totaling over $300 million. Antioch O'Cooley refused. So Icon demanded a shareholder vote to put himself in two hand-picked associates on the blockbuster board. But if Icon hoped to shake up Antioch O'Coo, he'd find out soon enough he'd tangled with the wrong guy. Instead of scaring Antioch O'Coo, the threats made him dig in harder. See Antioch O'Coo grew up the son of a milkman in the tough Brooklyn neighborhood. He knew how to deal with bullies. He sized up Icon and figured he could take him. During World War II, New York Communist Julius Rosenberg began spying for the Soviet Union. Soon he was persuading other Americans to betray their country as well. But when his wife's brother joined the Manhattan Project, Julius targeted him as a valuable new recruit and inadvertently set the stage for the ultimate betrayal. Hi, I'm Lindsey Graham, host of Audible's original show, American Scandal. We bring to life some of the biggest controversies in US history, presidential lies, environmental disasters, corporate fraud. In our latest series, two young New Yorkers, Meath and Fall in Love. Julius and Ethel Rosenberg's commitment to each other is matched only by their commitment to communism and the couple risks everything to help the Soviet Union develop an atomic bomb. uncovered, they have to make an impossible choice about where their loyalty truly lies. Follow American scandal wherever you get your podcasts. Audible subscribers can listen to all episodes of American scandal, The Rosenberg's, and free right now. - Icon mounted a vicious proxy battle to rest control of Blockbuster from Antiochco. He fired off public letters to shareholders. Painting Antiochco is a greedy spin-thrift who got an unconscionable $51 million in pay, but had no solid plan to pay down Blockbuster's debt or fix its drowning stores. Icon urged Blockbuster stockholders to put him and two cronies on the Blockbuster board and throw Antiochco off. On May 11th, 2005, shareholders did just that. But Antiochco turned the tables. He had a clause in his contract that gave him a $54 million payout if he was kicked off the Blockbuster board. He threatened to activate it. Icon had no choice, but to create a new board seat for his hated rival. Then Icon began a campaign of what amounted to psychological warfare, aimed at forcing Antiochco to quit. If the Blockbuster CEO left voluntarily, he'd have to bail without his $54 million parachute at every opportunity. Icon tried to publicly humiliate Antiochco and make his life difficult. Icon demanded that board meetings be held at his Manhattan office far from Antiochco's Dallas headquarters. At those meetings, he pushed aside Antiochco, Blockbuster's chairman, saying he would now preside over meetings. Icon seemed to take pleasure in letting Antiochco's proposals die from neglect, even more mortifying to Antiochco and his team, Icon insisted that his 26-year-old son Brett and aspiring filmmaker weigh in on any of Antiochco's business plans. Icon called Antiochco at his office after hours for long-winded discussions about Blockbuster business. When Antiochco stopped taking the calls, Icon complained that Antiochco spent more time drinking tequila on his ranch than running the business. Read Hastings over at Netflix, watch it all with wary glee. As long as Icon and Antiochco fought with each other, Blockbuster would not beat Netflix. Hastings followed Icon's lead, deriding Antiochco publicly. When Antiochco announced plans for Blockbuster Online, Hastings practically yawned. Blockbuster's track record in online technology and marketing is less well-developed. He told a reporter and then added dismissively, "We find it unlikely that Blockbuster will promote their online service effectively." That was the PR equivalent of a mic drop. Antiochco found Hastings insufferable and then it got worse. For two years, Netflix grew almost unchallenged. From two million subscribers in 2004 to six million at the end of 2006, Blockbuster stalled at just about a million subscribers as it struggled with dead and technology problems. In truth, both companies were operating on a razor's edge. Marketing dollars are the lifeblood of subscription businesses and Netflix and Blockbuster were pouring hundreds of millions into a grab for new subscribers. They cut their prices, bought ads, did deals for exclusive content, anything to set themselves apart from each other. They treated it as a battle to the death because no one knew yet whether there were enough customers to sustain two online rental companies. Then, Blockbuster's total access. Stop Netflix in its tracks. Somehow, Antiochco managed to win over icon with the ridiculously expensive total access that allowed customers to drop off movies rented online and pick up movies in a Blockbuster store. And that collaboration made them dangerous Hastings thought as he waited for Antiochco to arrive at his snowbound shell. In just six weeks, total access had nearly doubled Blockbuster subscriber account to two million. Hastings had to stop total access, whatever it took. A sharp knock shook Hastings out of his reverend. He met Antiochco at the door of the Red Brick Meeting House and settled him in the living room with a beverage. The two men sat, study in contrasts. Hastings tall and lean, wore a goatee. He was a rumpled nerd with a sharp mind, but he was short on emotional intelligence with a tendency to blurt out painful truths. Antiochco neat and stocky was a charming storyteller with a patience and reserve of a high stakes poker player. He was watching Hastings carefully. He waited for Hastings to come to the point. Hastings began awkwardly. John, congratulations on total access. It's a great program. I wish now I'd taken your team a little bit more seriously, but John, we are going to have a serious problem next quarter with subscriber growth. If you keep this stuff up, I'm sure you'd guess that, right? The word from the studios is you're losing subscribers as fast as we're picking them up, Reed. But you are giving away those store rentals. We figure that's got to be cost in your why. Two bucks per rental? Pretty soon, you're going to be spending yourself right into oblivion. You guys are going to be bankrupt. The minute you quit giving away store rentals and raise your prices, we're going to start growing again. There was a moment of tense silence as the two men weighed the stakes. Well, what do you suggest, Antiochco said? John, let us buy your subscribers. We are better at online rental. We are just better at technology. There it was, Antiochco thought. Even with Netflix's imminent demise, Hastings couldn't resist one last dart, could he? His arrogance was not dimmed in the least. So, Antiochco replied, "I had something else in mind. I want to keep the stores and the online business, but maybe there's a way for us to be partners, maybe in a joint venture to which Hastings replied, this is not even a business you wanted to be in, John." OK, stop right here for a moment. Now, your Antiochco and Hastings, will Hastings has just made a hail-marry move to buy your subscriber base from Blockbuster. So, Antiochco's thinking, "Wow, the hundreds of millions I've spent, the barbs I've taken from Wall Street, from Icon, from my very own board, from this Hastings fella. All that is about to pay off. I've got Hastings right where I want him." And what was that Hastings just said? This is not even a business you want to be in, John." You can imagine John Antiochco looking down at the carpet as a slow smile begins to creep across his face. I don't know about that, Hastings. I think we're doing all right. Antiochco agreed to bring the proposal to Icon and the board. He got up to leave with a sense of exultation. He knew they would show no mercy. On the next episode of Business Wars, Netflix and Blockbuster land near fatal blows on each other. While Antiochco battles against his own board, the stock has lost almost half its value in three years and you barely posted a profit last year. And you think you're entitled to this kind of compensation? I hope you enjoyed this first episode of Business Wars. Follow Business Wars on the Audible app or wherever you get your podcasts. You can listen to all episodes of Business Wars Add Free by joining Audible. Gina Keating, author of the book Netflix, wrote this story. Karen Lo is our senior producer and editor. Sound designed by Jeff Schmidt. Our executive producers are Ernan Lopez and Benadair Horwundri. Welcome to the new business trip. [Music]