On this episode of “One Leader, One Story, One Lesson,” hosted by Chicago Booth’s Harry L. Davis Center for Leadership, producer and former McKinsey consultant Mark Mitten recalls his experience working with video-rental company Blockbuster as it struggled to adapt to the changing technological and competitive environment of the early 2000s.
John Paul Rollert: We’re living right now in a time of just tremendous change. And even in a moment like this, when as a leader you feel that you’re at the top of your game, you always have to be asking yourself, “What are the blind spots in my leadership? What opportunities may lie down the road and what challenges are there as well too?” In situations like this, the central question is, “What advice do I need to hear and is there advice that I may be unwilling to take?” Mark Mitten found himself in a place 20 years ago where he was trying to give just such advice to a leader who was at the top of his game. And I wanted him to join us today to share that story. Mark, it’s great to have you here.
Mark Mitten: Thanks, John Paul. Thanks for having me.
John Paul Rollert: So long before you were an Emmy- and Oscar-nominated producer, you were a partner at McKinsey dispensing strategic brand advice to companies all over the world, including one that’s particularly notable to all of us and that you’re actually able to talk about for one very specific reason.
Mark Mitten: The company was a household name, and I’m sure most of your audience probably that’s over 35 used the services of this client, but that client is now gone. And it’s a company called Blockbuster. There’s only one Blockbuster store left because the chain has essentially gone out of business. But back in the early 2000’s, they were thriving. There was a Blockbuster on every corner, just like there was a Starbucks on every corner. And I think that every Friday night it was pizza and a movie night where people would go and peruse the shelves of Blockbuster and pick out a movie and take it home and then watch it. And then hopefully not incur any late fees and bring it back in the next couple of days.
But Blockbuster became my client and it was somewhat of a dream client because of the very reason I just mentioned. They were everywhere. They were dominant in the marketplace and they were bringing entertainment into the home that you couldn’t get anywhere else. So remember, no streaming services, you know, there was cable, but for the most part, they were offering first run movies. And this—
John Paul Rollert: Mark, just so that we’re all on the same page, what exactly is the time period when you were beginning to work with Blockbuster?
Mark Mitten: So this is in the early 2000’s. This is back, and again, this will date me and probably members of the audience, but it was people who had VCRs and had not quite switched to DVDs yet. So they were still using those big plastic bricks and putting it in a VCR to watch. And it was a time of transition because, as I mentioned, Blockbuster was the dominant player in that marketplace and the studios loved Blockbuster because they basically were buying all the product that the studios could be putting out. Because they’d made a decision, the studios, early on, to rather than have people buy VHS tapes and watch them at home, they would sell them to Blockbuster for an extraordinarily high price. You know, back in the day, Blockbuster was paying anywhere from $79 to $110 for a movie. I mean, can you imagine?
John Paul Rollert: So for each VHS tape it was $75 to $100?
Mark Mitten: Yes, it was remarkable. And it was a whole new revenue stream for the studios. They were excited, and it was kind of a marriage made in heaven—until it wasn’t, because just like in many instances, as you mentioned in your foreword, the technology changed. So suddenly VHS became obsolete because DVDs came into play. So CDs would come out with audio, and then there was a transition to be able to put video on those CDs and became DVDs.
Studios went back and they looked at their spreadsheets and they made a decision that, “You know what, Blockbuster actually has been a bit of a gatekeeper. They’ve been kind of strangle-holding us with regards to how much we can charge for our product, what they’re willing to take. And maybe we need to change that model.” So Blockbuster was overly confident that they had a relationship with the studios that was unbreakable, and the studios decided to break that relationship.
They have a little bit of a breakup. And they decided instead, “We’re going to sell directly to big box retailers like Target, like Best Buy”—and again, I’ll date myself—"Circuit City, and other retailers like that.” And they’re going to sell it for a price that people can buy. No one will have to rent, you can buy. “So I’ll release it on a Tuesday for $19.99. And by the way, the stores may take that price down just a little bit more so that you’ll come in to look for Die Hard 2, and it’s $15.99. And by the way, when you’re there, you might pick up some soft drinks, snacks, and so it loads up my basket.”
Big box retailers, really happy. Blockbuster, not so happy because suddenly, “I’m stuck in a chasm. I have all this old VHS inventory and people are adopting DVD technology at a much faster rate than anybody ever expected.” So they were trying to figure out, “What do we do?” Because many instances they had five-year leases for their stores, and the stores suddenly had a lot of empty space as they got rid of VHS tapes and they brought in DVDs because DVDs are obviously much smaller. And it was a real challenging time for them in that they weren’t exactly sure what to do.
And it was challenging from the standpoint that they always saw themselves in the rental marketplace. So they were renters, but the real revenue stream that spiked out for them was late fees. You know, they were basically the library that you always forgot to bring the book back to, but at the library it’s a couple bucks. When you forgot to bring back that VHS tape, if you went about a week, you basically would buy the tape. So it was extraordinarily profitable for them, and shock, people didn’t like it. Consumers were not happy. Customers were not happy with the service. There was just no forgiveness. And so they were looking for a way to break up with Blockbuster too.
And suddenly this whole dynamic shifted where, “I don’t have to go there.” So my client was Blockbuster as I mentioned, and it was the C-suite. And they were very much attached to the whole short-term mentality of, “We’re making all this great money from late fees. Isn’t that going to continue in perpetuity? Even when we have DVDs, people are still going to forget to bring them back and they’re not really going to buy them.”
John Paul Rollert: Wait. So just so that I understand it, you’re telling me that Blockbuster was so immensely profitable basically because it was charging its customers all of these fines?
Mark Mitten: Yeah, that’s just totally it. If you look at their customer segmentation and the different types of customers they had, the heavy users would come in and they would rent frequently and they would rent a lot of movies all at once. And oftentimes those people wouldn’t watch the movies. They would say, “I’m going to do it tomorrow.” And then tomorrow came and they said, “I’ll do it tomorrow.” So they would leave those movies around, forget to bring them back because they were procrastinators. So that target segment was very profitable for Blockbuster. It’s the classic 80 percent of profits come from 20 percent of the clients, or from the customers in this case.
And they had ancillary goods. They were selling candy and treats. And they started getting into the business of selling DVDs. But for the most part, they still were stuck on, “How do I rent? How do I rent these DVDs or VHS?”
So it was a very challenging time for them. And they were like an ostrich with their head stuck in the sand. They just didn’t want to change. And it’s a classic, “The train is coming out of the tracks, we better do something.”
So our counsel was that, “We need to start to rethink your business,” because if you looked down the line further, you could see that the technology was going to evolve even faster, that ultimately people were going to stream movies at home. So instead of being a rental company that rented content, we suggested to Blockbuster, “Your frame of reference should be that you basically are a distributor of content, that you should be making content, that you should basically be in the same business as the studios, but look for different distribution vehicles that will allow you to take over that position.”
So we offer them a number of different suggestions to migrate them to that format. We said, “Get out of bricks and mortar because you’re not going to need it. Or let’s shrink the footprint size of your store because you don’t need that much space. Let’s think about alternative distribution channels. What about buying direct TV?” And that was something that they had a difficult time comprehending because my suggestion to them was, “Let’s think about if we rebrand all the pay-per-view channels to be Blockbuster channels.” Didn’t want to do that.
You know, the classic story is that Reed Hastings, who had gotten a foothold in the DVD rental market with Netflix, which was then a mail-order subscription series, was doing quite well. And there was every reason to believe that he was going to continue to grow his business and be extremely successful. And he was willing to come in, only to talk to Blockbuster about, “Let’s possibly buy 51 percent of Netflix.” Again, early 2000’s. Reed made a compelling presentation, he was open-minded, he was welcoming with Blockbuster. And then the classic, he walks out the door, we say, “Buy. Buy it.” “No, we’re going to do it on our own.” And you know, we know where Netflix is today, obviously, but Blockbuster couldn’t do it.
John Paul Rollert: So Mark, is this just a situation where you are trying to get Blockbuster, which has a very strong sense of brand identity, they know who they are, they know what it is they do, and you’re trying to get them to reorient themselves to look for new opportunities for revenue, to kind of embrace the technological changes that are going on, and they’re just not listening to you?
Mark Mitten: That’s exactly right, John Paul. The CEO really set the tone for the company, as you would expect. The CEO had come from 7-Eleven, so he was very much about price and promotion and looking at promotional items that they could sell quickly, but it would be for a short-term, bottom-line hit. And his mentality here was the same. He was looking at next-quarter profits.
So it was very, it was frustrating from the standpoint that the board and the CEO all welcomed our suggestions, they trusted us, they understood that we could have impact with regards to their supply chain and other executional elements, but when it came to fundamentally changing the business, didn’t want to do it.
Now, the CEO also happened to have a golden parachute, and he knew that regardless of what happened, he was going to be fine. So this is really a situation where the C-suite and the board, the board should have been much more aggressive in assessing what the future was.
But it wasn’t all bad at Blockbuster from the standpoint of we did start to crunch the data as Netflix does now and we were looking for opportunities for, “How do we create our own content?” And we came to the conclusion that a lot of the heavy users of Blockbuster were males who liked action flicks. And one of their favorite stars was Jean-Claude Van Damme. And Jean-Claude had not had a hit for a while, hadn’t made a movie for a while. So Blockbuster approached him. They came up with a film for a million dollars and we put that on the shelves and it flew off the shelves. So there was definitely movement in trying to be a content creator. And it evolved down just to be popcorn fare that they would sell against the heavy user.
They also started looking at the award circuit. So they produced a movie called Monster with Charlize Theron, that Charlize won the Academy Award for best actress. So it’s not like it was all negative for them, but obviously, ultimately, fundamentally their business model just didn’t evolve.
John Paul Rollert: So it was a bricks-and-mortar business model, and they really just didn’t want to take advantage of the new technologies that were kind of fundamentally reorienting the video-delivery landscape around them.
Mark Mitten: It didn’t, they really didn’t. And it’s still surprising to me that they had all the answers. And I think this is the key takeaway is that while change can be challenging and there’s risk involved, the upside is if you’re the dominant player, you’d better be aggressive in continuing to maintain that dominant position by looking at how you extend your value proposition across different business opportunities. So could they have bought Netflix? Absolutely. And it would have been as much a defensive move as an offensive move. Even if they did nothing with that, it still would have kept their dominance.
You know, Walmart went into the same business as Netflix probably six months after Netflix started. They were in it for 18 months and then they were out because they recognized it was too hard for them. And Blockbuster had really had a... They never mended their customer relationship. People just didn’t care. That was the other problem. They were not good to their customers because they abused them and they thought that they had a monopoly. Not good.
John Paul Rollert: And so with regard to this consulting engagement from McKinsey, how long were you actually working with Blockbuster?
Mark Mitten: I was there for about two years. And my background for that was, you know, the first day I came into this C-suite and met with the CEO and the COO and all the Cs. There was a question about whether they should... They wanted to meet up to answer whether they should go into a certain kind of content, which was pornography. And I was a little taken aback by that. And my question to them was, “Do you want to go into it? Because while it’s certainly very profitable, you’re a publicly traded company. And no matter how you try to hide that, it’s always going to show up.” And part of that was a question that they just wanted to see our response. And they knew they couldn’t. They knew they wouldn’t, it wasn’t their business.
But we were brought in to help think about how they make the transition to the new technology, but it was also what they could do to take advantage of any kind of short-term opportunity in their stores. So we were looking at could you repurpose any of this space in the stores to be a pizza joint, for example, because they had these leases that they couldn’t get out of. At the same time, they had missed the boat on another big trend that was going on, which was video games. So they were trying to figure out, “Should we be able to provide customers with video games?” And the answer was a resounding, “Yes, because you’re in the entertainment business and video games are about entertainment.”
But what they could never wrap their minds around, and this was another solution we gave them, was you should be able to rent, buy, or trade anything at the store. So you and I decide, John Paul, that we’re going to rent a movie. Great. You can watch it at home, bring it back, and then we basically buy or rent another one. Or it’s a movie that I think I’m really going to like after I watched it and I say, “I want to buy it.” I call the store and say, “I want to buy it.” Great. I watch it a few more times. Don’t like it as much as I thought I would. I could bring it back in and trade it in for something else. And that was the model that was probably their best shot to maintain any kind of real velocity with their current bricks-and-mortar model. But you’re absolutely right. They needed to get out of the bricks and mortar. They just needed to be a distributor.
John Paul Rollert: So it’s a two-year engagement. Was there a point in the process where you said to yourself, “Look, I’ve done my best. I’ve given them the advice that I have. I just know that they’re not going to make the changes necessary to realize these new opportunities.”
Mark Mitten: Yes, it happened frequently. It was... You know, as a consultant, you obviously want to help your clients succeed. You want to diagnose what the problem is and oftentimes clients think they understand what the problem is, but an outside consultant can be more objective and synthesize what the situation is, and then play it back with what the real problem is, and then provide a prescription, which you want them to basically take the medicine and get better. With Blockbuster it was... I kept writing prescriptions and they never went to the pharmacy to go take the medication out and then take it. So we were two steps behind. So it’s frustrating because the answer was there. I mean, we see it now with what Netflix has done. And Netflix basically out-Blockbustered Blockbuster.
John Paul Rollert: What was it like to be in this position where you’re giving this advice? You can see these extraordinary changes that are coming down the road, and yet the CEO of Blockbuster simply won’t take the advice you’re trying to give him.
Mark Mitten: Yeah. As a consultant, you get paid to give advice. And McKinsey was such a unique environment, it was extraordinary with regards to the clients we serve, the problems we would solve or attempt to solve. And the people I worked with were just some of the best people I’ve ever met. Smartest and just really engaged in trying to solve problems. And for the most part, we were successful in helping our clients do just that. You know, Blockbuster was really an anomaly.
It was extremely frustrating for me because I could see it so clearly. And it just was something that they were unwilling to accept. And part of this, I think, was the politics of Blockbuster in that the CEO heard what we said, understood the recommendations, but made a decision to do something different. And this is kind of an anomaly because oftentimes there’s the old adage that a company will bring McKinsey in because they can always point to the fact that McKinsey said, “Go do that.” So if it goes wrong, they could blame McKinsey.
He really was very committed to this short-term profitability goal of doubling down on late fees. Even as the environment changed from a technology standpoint and the transition to DVDs was happening faster. For me, it was my last client at McKinsey. I just felt that it was... I was not using my talents the way that I really wanted to. And I had no satisfaction. And, you know, lo and behold, I never thought that Blockbuster would cease to exist, but you know, it tells you how mired in the politics and unwilling they were to change. So for me, it was my last client and I left after I was done with the engagement.
John Paul Rollert: So with the benefit of hindsight, we know that on the one hand Netflix is this once-in-a-generation success story and Blockbuster is this once-in-a-generation failure. Thinking about the advice that you tried to give the CEO, advice that he clearly refused to take, do you think there’s any kind of central lesson that you draw from that experience, from his leadership, or the failure thereof, that you think people watching today should take to heart?
Mark Mitten: Yeah, I think there’s a couple of lessons. One is don’t be afraid to take a risk if you see the market changing, and understand that if it’s going to benefit your business, depending on what the economic downside/upside is, you better make that change. And in the time of COVID that we live in now, what I think has really happened is there’s a lot of trends that have already been ongoing prior to COVID, but there’s an acceleration, a rapid, rapid acceleration that is making those trends move so much faster. So you need to be bold, but understand that at the same time, you need to be pragmatic in what those decisions are.
And I think that you need to basically go back and every year—it’s kind of like when you do your taxes, I’m not equating this to taxes, but every year you should go back and say, “How’s my business doing? What business am I in? Is it the right business to be in? Or should I be looking at it differently given what’s going on in the marketplace?”
The second lesson here is for publicly traded companies, which is, I really put a lot of the burden on the board. The board really should have been much more stalwart in pushing the CEO to seek change. I don’t know if he ever reported back that Netflix had come in to the pitch, but certainly that’s something that if they knew in hindsight, which they obviously know now, they might’ve said, “Think about it differently.” But again, they were looking at what next quarter’s earnings are.
Here’s the last lesson. Last lesson is that we need to get away from publicly traded companies looking only at what next quarter’s earnings are. It’s great to make sure that we’re profitable and that we’re growing, but we need to be able to present a vision. There has to be a vision about where we’re going, because otherwise that growth is short term and short lived. And having a vision is much more compelling. And I think investors feel more strongly about that than just seeing the numbers.
John Paul Rollert: Well, what I would say is that in a time of often terrifying transformation, these are powerful lessons indeed. Mark Mitten, thank you so much for sharing them.
Mark Mitten: Thanks, John Paul, it’s been a real pleasure.