by Gina Keating
Shortly before Randolph and Lowe left for Las Vegas to test the kiosk idea, Hastings assigned Randolph’s product development duties to chief technology officer Neil Hunt.
“What if this pilot doesn’t pan out?” Randolph asked. “What happens then?”
“Then you will leave the company,” Hastings said. And to Randolph’s surprise they began discussing the terms of his severance.
The going-away party took the form of a roast done in Randolph’s favorite form of verse—the limerick. When the others’ had all been read, Netflix’s cofounder turned the tables on his roasters with his own long and well-metered offering;
I’m almost surprised
I expected some toasts and instead I get roasts
Well, two can play at that game. . . .
Randolph began. The limerick went on to good-naturedly skewer his coworkers. Finally, he turned to Hastings.
And to Reed, well the guy can’t be beat.
Whether pitching to us or the Street.
But that late-returned movie?
Apollo 13—Phooey.
It was actually Teen Vixens in Heat.
More than one person watched this exit with sadness, wondering whether Randolph and Lowe’s departures would rip the heart and soul from the company.
CHAPTER FIVE
THE PROFESSIONAL
(2003–2004)
THE FINANCIALS WERE THERE IN black and white for all to see: reliable, triple-digit growth in a mature industry where single-digit revenue increases were the norm; the devoted subscribers; the growing market share.
When Netflix announced it had reached one million subscribers in March 2003, John Antioco realized he had made a mistake in trying to bypass online DVD rental, even though Blockbuster’s own studies continued to show limited consumer appeal and Wall Street still scoffed at Netflix as a niche player.
But with another round of investor meetings scheduled in anticipation of Blockbuster’s pending split from Viacom, and Viacom chief operating officer Mel Karmazin denying all requests for capital-intensive projects until after the split off, Antioco kept putting off a decision about how best to shut down Netflix for good.
Certain that they could buy their way out of the problem—and still believing that Hastings’s $50 million asking price for Netflix was preposterous—Stead, who oversaw Blockbuster’s business development operations, found and purchased an Arizona online DVD rental outfit run by a father and son for $1 million in 2002. The company, called DVD Rental Central, had about ten thousand subscribers.
Stead handed the information about DVD Rental Central to Sam Bloom, whose job as vice president of business development was to find start-ups that had developed technology that could advance Blockbuster’s digital ambitions.
Bloom served on a charity board with Stead’s wife and had met Blockbuster’s irascible general counsel through her. Stead had previously spent eight years as Apple’s general counsel but had come away without learning much about online technology, then in its infancy.
Bloom and Shane Evangelist, the vice president of strategy, who occupied the office next door, often joked that Stead had never actually figured out how Google worked. Nevertheless, Stead knew enough to realize that Blockbuster had to have an online strategy.
Bloom was keenly interested in the new digitized video and video-on-demand technologies, and he leafed through the packet of information on DVD Rental Central and checked out the little company’s Web site with growing dismay. The Web site worked, but its Microsoft-based code would never accommodate more than a few thousands users.
“We just bought this company, and you’re going to run it,” Stead told him. “Tell me what you need to make this beat Netflix.”
“Ed, this is never going to beat Netflix,” Bloom said, startled. “You need to use this as an experiment to learn about the business: about turnaround time; customer behavior; and costs to acquire customers. That should be the ultimate goal of this.” Bloom and Evangelist took the data from the company, which they renamed Film Caddy, and combined it with store data to see how customers were shifting between the two forms of rental.
A key piece of information that emerged from the Film Caddy tests—customers who rented online still liked to rent movies in stores. These movie lovers went online for back-catalog titles and used the stores for impulse rentals of particular titles. Bloom later reflected that the Film Caddy tests failed to reveal nuances about online rental that could have helped Blockbuster assess how big a threat Netflix actually posed.
First, the test run of about one year was too short to pick up on the fact that a significant percentage of subscribers cycle in and out of their online subscriptions—quitting the service and coming back later in the year. Blockbuster counted these as straight cancellations and miscalculated the average revenue per subscriber, making the online business look less lucrative than it was. Second, Bloom and his colleagues underestimated how valuable word-of-mouth recommendations would become on the Internet and how strongly consumer evangelizing would drive Netflix’s growth.
Antioco still took the position, as late as 2003, that the online DVD rental market was limited. His instincts and every data point his team had developed showed that Netflix would not be a serious or long-term challenge to Blockbuster’s market share.
The Blockbuster executive team could not fathom what customers saw in Netflix: The older titles that drove most of its business never moved at Blockbuster stores; renters had to wait days for movies; and the big chain’s research showed that a large segment of its customers had no interest in going online to rent movies.
In mid-2002, Bloom listened in with rising alarm on a Netflix conference call with investors that highlighted the online DVD rental company’s growing penetration into the San Francisco Bay Area. Bloom knew that Blockbuster store traffic in the same area was ebbing. The penetration charts that Hastings shared that day made it clear to Bloom: Wherever Netflix offered overnight delivery, its market penetration grew rapidly. Stead had been pestering Bloom for a report on Film Caddy, and Bloom decided it was time to do battle with Netflix.
Bloom doubted that Blockbuster could win in a head-to-head matchup against Netflix’s superior Web site and customer service—it would be too expensive and far outside the company’s core strengths. “Blockbuster has a long history of sucking at technology, and people don’t think of it as an online brand,” he told Evangelist. And Viacom was keeping such a tight rein on cash expenditures that Antioco was having trouble investing in the stores.
They settled on a hybrid store-and-online rental program that would cost far less than building their own Netflix. They would use the existing Movie Pass store subscription program and add a Web site to it through which members could order movies from Blockbuster’s vast inventory. The Web site would assign available DVDs to customers from inventory in stores, whose employees would ship out the orders each day. Blockbuster could boost lagging store traffic and tear customers away from Netflix by allowing Movie Pass subscribers to exchange movies they rented online in their local stores. As a value proposition, it could not be beat, Bloom thought.
Bloom set up a meeting to discuss the fate of Film Caddy with Stead and Antioco. When he showed up at the appointed time, they were headed out the door.
“Let’s do this over lunch,” Stead said. “Meet us down in the parking garage.”
Antioco pulled up in his Porsche convertible and invited Bloom to shoehorn his burly, six-feet-two-inch frame into the tiny backseat, clutching the report he hoped to walk them through close to his chest so the wind wouldn’t take it.
Antioco screeched out of the Renaissance Tower to a Bass Pro Shop, where he and Stead perused deer feeders, cattle troughs, and other supplies for their neighboring ranches as Bloom tried in vain to focus their attention on his proposal.
Frustrated, Bloom han
ded the idea off to Evangelist and told him to run with it. If anyone could get an online service going at Blockbuster, it was Evangelist, he thought.
Evangelist, then twenty-eight, was a rising star at Blockbuster whose audacity and preternatural financial savvy had immediately commended him to Antioco. The Blockbuster CEO had aroused plenty of veiled jealousy among his senior executives by showing the younger man every mark of favor and indulgence.
A former college student body president and gymnastics champion, Evangelist displayed a drive for success expected in an ambitious young man of modest upbringing. His parents both worked as gym teachers in upstate New York. He had grown up a gifted athlete in the competitive household despite his wiry build.
Evangelist had suggested a vice president’s title when Zine expressed interest in hiring him, having interacted with Blockbuster’s vice presidents as an IBM consultant and knowing that the title conferred the authority he needed to get things done at the big chain. Besides, he was easily as smart as his older counterparts.
One of his mentors at IBM, where he had started his career as a client representative for Blockbuster, once warned Evangelist to control his tendency to pretend to know more than he did. But overconfidence would serve him well as he plunged headfirst into online commerce—a field about which he knew almost nothing—cheerfully learning from each disaster as he rectified it.
Evangelist embraced the need for an online rental service, correctly seeing it as critical to protecting Blockbuster’s market share. Market tests he conducted on Netflix customers showed off-the-charts levels of loyalty to the service—a metric that alarmed him.
But the testing also showed that Film Caddy customers were still renting, on average, three times a month at Blockbuster stores. There was no doubt in Evangelist’s mind that he could come up with something better than Netflix.
He set up a cross-functional team within Blockbuster to lay the foundations for an integrated subscription program that would divide the country up into online fulfillment zones, each with its own distribution center.
He tried, over a six- or seven-month period in 2003, to get each Blockbuster department—store operations, marketing, merchandising, product, and franchise—to come up with specifications for participating in the online plan. The project hit roadblock after bureaucratic roadblock. Every department wanted to put its spin on it, or held it up with deal-breaking conditions.
Part of the problem centered on Antioco’s demand for store tests of several other nationwide initiatives at the same time. Manpower was stretched in every department, as Blockbuster rushed to meet to-market deadlines on retail, gaming, and trading programs that their chief executive wanted to test.
• • •
AT A LATE 2003 planning meeting in Phoenix, the company was divided into two camps. One faction, led by chief content officer Nick Shepherd, responsible for provisioning the stores and in charge of relationships with the studios and vendors, pressed Antioco to make a choice between the integrated online/in-store subscription service and the store initiatives. Shepherd argued that there was no doubt the Blockbuster brand was tarnished but the company still had huge equity in its nearly 9,000 worldwide stores—and they needed to figure out how to fix them instead of throwing up their hands. The other, led by Evangelist, argued that poor initial results for all of the proposed store programs called for focusing the company’s efforts into the integrated subscription plan.
Zine confirmed that they had all the cash they needed to fund all the proposals under consideration—but Antioco had to winnow the initiatives to a handful that the executive team and store managers could test effectively. It was up to Antioco to decide. Facing a rebellion among his trusted and battle-hardended store operators, Antioco turned to Evangelist.
“Shane, how much money do you need?” he asked.
“I need twenty-five million dollars,” Evangelist said.
“All right—you’ve got it. Now leave, and don’t bother the store operators,” Antioco said. “You can take three people with you.”
Evangelist tapped two analysts from the corporate strategy group and a technologist to help him put the plans on paper. He brought in programmers from technology consultant Accenture, and spent the first month working out specifications for the business. Instead of the original plan to charge one monthly fee for a hybrid in-store/online service, he was forced to replicate Netflix’s online-only rental model, adding coupons for free store rentals as an incentive.
He planned to build and launch the Web site within six months, as a clone of Netflix called Blockbuster Online, and open it in least ten distribution centers. Once they launched and got it operating smoothly, they would figure out how to integrate it with the stores.
Evangelist found office space on two floors of an old red-brick pile called the Paramount Building in Dallas’s bohemian West End district. The new offices were within walking distance of Blockbuster’s Renaissance Tower headquarters but a world away from the upscale business district. The Paramount Building’s lobby adjoined a sandwich shop, and often the smell of lunchtime cooking wafted into the atrium shared by all of the floors. The train stop about a block away attracted strange characters who frequented the tree-shaded benches at all hours of the day and night.
But it also was surrounded by some of Dallas’s hippest restaurants and bars, where Blockbuster Online’s young staff went regularly to ease the effects of working sixteen- and twenty-hour days.
One of Evangelist’s first hires was Ben Cooper, a twenty-eight-year-old Internet marketing specialist who had worked for JCPenney.com and had helped Bloom publicize Film Caddy to customers who bought DVD players from JCPenney. Cooper was tall and slim, and had curly brown hair and a soft Louisiana accent; he became chief of subscriber acquisitions for Blockbuster Online after essentially writing a launch plan for Evangelist during his job interview in September 2003.
While he and Evangelist finalized the plan, Cooper continued to report to a marketing manager at Blockbuster’s corporate offices. At his first lunch his new boss assured Cooper that he would easily find another job at the corporate headquarters when the online service fell through.
“We have a history of getting excited about projects like this, and they kind of don’t pan out,” his supervisor said.
“I didn’t come here to do marketing for Blockbuster. I came to launch a business to compete with Netflix and revolutionize the industry, and if that’s not what I’m doing, then I’m not going to be here,” he told the man.
Cooper’s father had owned a small video-rental chain in Lafayette, Louisiana, and Cooper himself had grown up behind the counters of those stores—serving customers, listening to their opinions, observing the stores’ demand patterns, developing an intuition for how the business worked and made money. He worked at a Blockbuster store in high school, in the pre-Internet era when the clerks were mostly movie geeks who regarded the VHS screeners the stores received as the job’s main perk.
Unlike Evangelist and Antioco, Cooper was comfortable with the technology underpinning the user interface that Blockbuster Online needed to build. He was not intimidated by Netflix’s advantage in development time and subscribers, but he realized that its attention to detail and the recommendation engine would be difficult to replicate with the time and budget allotted to build their service.
Antioco’s command that they develop Blockbuster Online separately from the Blockbuster stores meant that the stores’ customer mailing lists were totally off-limits to the online marketing department, and that any online activities couldn’t steal the spotlight from the stores. Blockbuster Online’s ads could not mention, for instance, that the service did not charge late fees, as Netflix did in its advertising, because the comparison could cast a negative light on Blockbuster stores. Evangelist and Cooper had to establish their own relationships with movie studios and negotiate their own terms for buyin
g inventory. When it became clear that corporate headquarters’ benign neglect would not kill the online business, Blockbuster’s franchisees threatened to sue to stop it from going live.
It seemed to Cooper that the store operations wanted the online service to fail as quickly as possible so Antioco could turn the focus away from the latest fad and back to his core business. Their myopia was understandable: Corporate employees received free rentals in any of the scores of Blockbuster stores in the Dallas metro area. There was no reason for them to consider renting anywhere else.
In late 2003, Cooper moved to the Paramount Building with Evangelist and a team of four other young executives who headed the as yet unstaffed retention, marketing, Web site, and IT departments. At first the entire founding team interviewed every job applicant to select the strong-willed, competitive types they would need to beat Netflix.
Cooper shared a large, oddly shaped office with Evangelist’s second in command, a former Blockbuster business development executive named J. W. Craft. The office, which was furnished with beanbag chairs, a NERF football goal, and a dartboard on which they had pinned up a photo of Hastings, became a haven for Evangelist to come and brainstorm about the day’s problems.
Craft, a twenty-seven-year-old Oklahoma-born Yale graduate, had helped Evangelist salvage the online project at the Phoenix meeting by backing up his boss with facts and statistics. In five years Blockbuster would have nothing else, they warned, if it did not invest in online rental. At Blockbuster Online he oversaw finance and distribution as well as content acquisition; Evangelist had charged him with acquiring at least twenty-five thousand titles for launch day so that they could advertise that Blockbuster Online had more titles than Netflix.
First he worked with post office data to settle on locations for ten distribution centers and used a minidistribution center he had set up at the Paramount Building to test equipment, floor plans, and processes. In contrast to Netflix’s slow, organic growth, Blockbuster Online planned to spread its tentacles fast and far into the online rental industry.
