Blockbuster laughed at Netflix partnership offer

Netflix proposed in 2000 that Blockbuster should use Netflix as its online service and Blockbuster "nearly laughed us out of the office," recalled Netflix's outgoing CFO.

Netflix's toppling of the traditional video-rental market and especially the Blockbuster chain will likely be studied by business students for years to come.

Greg Sandoval/CNET

So, here's another fun fact to look at: Blockbuster CEO John Antioco was approached in 2000 by Netflix CEO and co-founder Reed Hastings about forming a partnership, recalled Barry McCarthy in an interview he gave to the Unofficial Stanford blog two years ago. I turned up McCarthy's interview while researching a story about why he's leaving Netflix after 11 years as chief financial officer.

"I remembered getting on a plane, I think sometime in 2000, with Reed [Hastings] and [Netflix co-founder] Marc Randolph and flying down to Dallas, Texas and meeting with John Antioco," McCarthy said in the interview "Reed had the chutzpah to propose to them that we run their brand online and that they run [our] brand in the stores and they just about laughed us out of their office. At least initially, they thought we were a very small niche business. Gradually over time, as we grew our market, his thinking evolved but initially they ignored us and that was much to our advantage."

It's easy to kick Blockbuster, which filed for bankruptcy protection in September, now that they're down, but the company's overconfidence regarding Netflix can provide lessons today. The past week saw executives from the cable and entertainment industries predict that the early success of Netflix's streaming service would be short-lived. They argue that Netflix's supply of content from studios and TV networks will soon slow down to a trickle.

Barry McCarthy departs his Netflix CFO post with $40 million and many triumphs. To read the story of why he's leaving, click the photo. Screen shot by Greg Sandoval/CNET

But ask Antioco. Netflix's management is not a group to take too lightly. There were signs of this in 2000 but apparently Blockbuster managers overlooked them. At that point, Netflix had just tweaked the business model and had begun selling subscriptions in September 1999.

"It was Reed's insight that the subscription model would resonate with consumers in a compelling way," McCarthy said. "He re-engineered the Web site and software to support a subscription model...we began to grow exponentially overnight. In 1998, I think the business did $1 million in revenue. In 1999, we did $5 million, then $35 million and then $75 million and $150 million and then almost $300 million...We were I think five years to $500 million and another three years to a $1 billion, all because of the subscription model."

McCarthy told the Unofficial Stanford blog that for Blockbuster it was a classic case of the innovator's dilemma: "You end up competing with a business that you initially ignored."

 

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