Reed Hastings: The Man Who Killed Blockbuster

I am jealous of Reed Hastings because, like him, late video rental fees plagued me as a young man. But unlike him, I never realized that solving that problem could not only create a great business, but a billion dollar empire. Damn!

In 1997, Reed Hastings returned a rented copy of Apollo 13 to his local Blockbuster Video store and got hit with a $40 late fee.

It wasn’t the first time, but this time, something clicked.

Late fees were a big thing at the time (just ask me!) But the thing was, they weren’t just annoying, they were the foundation of Blockbuster’s business model.

With thousands of stores and a near-monopoly on home entertainment, Blockbuster was pulling in a whopping $800 million a year from people like Reed and myself, folks who forgot to return their rentals on time.

It was a perfect trap. People kept renting because they really had no alternative, and Blockbuster kept charging because they could. Hastings realized something simple:

If late fees were the problem, then the real opportunity was eliminating them.

Birth of a Killer Idea

Big ideas are great, but they take execution, and typically small execution.

The Netflix we know today is a far cry from where Hastings and his co-founder, Marc Randolph began.

Back at the beginning, in 1997, high-speed internet barely existed. So what they did was, they started with something much smaller: DVDs by mail.

The concept was simple but different: Instead of making people go to a store and rack up gobs of late fees, Netflix would let customers rent DVDs online and have them shipped to their homes.

To test if it would even work, Hastings and Randolph mailed a CD to themselves and waited to see if it would survive the trip intact. It did. That was all the proof they needed.

Slow Growth . . . and then a Big NO!

The idea was on target and Netflix grew, albeit slowly.

It turns out that the real breakthrough wasn’t mail-order DVDs—it was the subscription model.

Instead of renting movies one by one and worrying about late fees, customers could pay a flat monthly fee and rent as many movies as they wanted. Keep a DVD for a night or a month—there were no due dates, no penalties, no stress.

It was the exact opposite of Blockbuster’s model.

And because it solved a problem many, many people had, it was an idea whose time had come. Netflix quickly became a thing and it started to take off.

In fact, at one point, Hastings even tried to sell Netflix to Blockbuster. 

Blockbuster’s CEO laughed him out of the room.

Last Laugh

But Hastings understood something Blockbuster didn’t: Technology was about to change the game.

By the early 2000s, DVD players became mainstream, online shopping exploded, and high-speed internet started spreading. Netflix then really caught fire. Suddenly, not going to a store felt normal.

Then came the knockout punch. In 2007, Netflix launched a streaming service. No more waiting for DVDs in the mail - just instant access to movies and TV shows, anytime, anywhere.

Blockbuster tried to pivot, but it was too late. It still had stores to maintain, executives clinging to outdated business models, and a company culture that wasn’t built for change.

In 2010, Blockbuster filed for bankruptcy.

And today? Well, you know. Netflix is worth over $200 billion and has reshaped entertainment forever.

All because Reed Hastings saw a customer problem and solved it brilliantly.

Takeaway

Breakthrough ideas don’t always start big. Sometimes the are simply born by solving one painful problem in a small, simple way (hint, hint!)

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Steal This Strategy!

📖 Book - No Rules Rules
Reed Hastings shows how he did and how you can too!

🎥 Video -How Netflix Changed Entertainment
A masterclass on branding and business growth from the man himself.

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Overnight Challenge

What irks you? What business problem gets your goat? Do some quick research to see if other people have the same reaction - a Google search, ChatGPT, Reddit - they all would work. If so, how can you easily solve it?

About Steve

Steve Strauss is the best-selling author of The Small Business Bible (and 17 other books), Inc.’s small business columnist, a lawyer (non-practicing), and an entrepreneur. He sold his last venture, TheSelfEmployed.com to Mark Cuban & Zen Business. Need a ghostwriter or a newsletter for your business? Contact Steve!

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