VideoBlockbuster Corp. has looked at life from both sides now. When it leaped out of the gate in 1985, it quickly swallowed its mom-and-pop competitors to become the dominant player in the fast-growing video-store industry. Today, it faces the grimmer side of the corporate life cycle as emerging technologies and delivery systems threaten the demise of video stores altogether.
Industries have been dying at least since the Middle Ages, and often because a new technology (cars, in the case of buggy whips) or product (petroleum, in the case of whaling) made the old industry obsolete.
For Blockbuster, it is video on demand and digital downloading that threaten to make its business proposition obsolete. PCs put Smith Corona on the critical list. Electronic banking may spell the end of check printer Deluxe Corp., based in St. Paul, Minnesota.
As different as these companies are, each is facing or has faced the same conundrum: in a mature industry, should a company aggressively pursue transforming technologies or simply ride out its current business model? The choice is far from clear-cut. History shows, for example, that it is easy to get entrenched in existing technology—even when change is bearing down. "A lot of times, the train doesn't look like it's coming at you that fast, and sometimes that's because you're looking at it head-on," says Bert Ely, a banking industry consultant with Ely &Co., in Alexandria, Virginia.
Human nature is also a hindrance, since "people in a legacy business want to hang in there," adds Ely. Moreover, the cost to move to an industry-changing technology can be prohibitive to the company—and to its shareholders. As Deluxe CFO Doug Treff points out, sometimes "shareholder value is the ultimate driver of decisions—more important than survival of the company."
Blockbuster has every intention of surviving. Yet, while chief competitor Netflix is investing aggressively in pay video-on-demand (VOD) delivery, Dallas-based Blockbuster is mostly focusing on extracting every cent from the home DVD-rental market—seeking acquisitions, boosting its online DVD-rental services, launching a subscription program similar to Netflix, and creating a DVD trade-in program. And why shouldn't it? In its most recent quarter, the world's largest video-rental chain posted more than a 6 percent increase in revenue over the previous year. Sure, there have been rough spots: Blockbuster's planned acquisition of Hollywood Video was still under intense scrutiny by the Federal Trade Commission at press time, for example, and it is being sued by the state of New Jersey over its new "no late fees" policy. But publicly, executives say critics are just trying to throw cold water on a profitable business proposition.
"We've been hearing about the ultimate demise of Blockbuster for years," says Blockbuster CFO Larry Zine. "All we've heard about is the threat of video on demand and how that is going to put us out of business. What happened in the interim is something that gives us a lot of comfort in the future." What happened in late 1999 was Blockbuster's introduction of DVDs, which were cheaper to store, ship, and save than VHS tapes. More important, says Zine, people still love the "experience of the Blockbuster store," a habit that he says will keep Blockbuster's DVD-rental model viable for some time.
(Blockbuster did launch a highly publicized trial run of a video-on-demand joint venture with Enron Broadband Services, a division of Enron Corp., in July 2000. The trial was suspended after eight months, and Blockbuster has not reentered the VOD marketplace since that time.)
It's Just Not Happening
As Zine's comments illustrate, finance executives in challenged industries are in a precarious position. Publicly, they must tout their companies' commitment to innovation and long-term goals. Yet instead of investing in new technology, they can become enamored of their current business model—especially if it is successful. And their unrelenting focus on shareholder value can blind them to the fact that they may be facing a Waterloo moment.
That's partly what happened to Smith Corona. The company had been making typewriters for more than a century as it sank into the sunset—kicking the whole way. Despite tough times in the early 1980s due to overseas competition, Smith Corona was soaring late in the decade after it was acquired by Hanson Trust Plc, posting its best year in 1989. That same year, though, Hanson (apparently recognizing what Smith Corona's executives would not) spun off the typewriter division as a separate entity. Shortly thereafter, the company was run over by the personal-computer revolution.
It wasn't that Smith Corona didn't see the PC coming. In 1991, the company actually partnered with Acer, a Taiwanese manufacturer, to make what was lauded as one of the most user-friendly PCs yet built. But the market was already filled with Johnny-come-latelies when Smith Corona got in. The venture faced severe price competition, and most telling—the Smith Corona board killed it after a year because the product line wasn't growing fast enough. In November 1992, the company's CEO, G. Lee Thompson, told the Wall Street Transcript, "Many people believe that the typewriter and word-processor business is a buggy-whip industry, which is far from true. There is still a strong market for our products in the United States and the world." When asked what new products and services the company planned to introduce, he replied, "Nothing right now. They're still in the formative stages."
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