Introducing Land of the Giants: The Netflix Effect

This week we’re sharing an episode of Land of the Giants, a podcast from our friends at Recode and the Vox Media Podcast Network that examines the most powerful tech companies of our time. The second season is called The Netflix Effect, and it’s hosted by Recode editors Rani Molla and Peter Kafka. The Netflix Effect explores how a company that began as a small DVD-by-mail service ultimately upended Hollywood and completely changed the way we watch TV. It’s a fascinating look at what really goes on behind the scenes at Netflix, one of the few companies that’s actually growing during the pandemic, and how they’re continuing to transform entertainment for you and me. New episodes are released every Tuesday morning. listen and subscribe to Land of the Giants: The Netflix Effect wherever you get The Vergecast. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  College football is back. So Hilton called to me, the superstition concierge, to make your fan rituals a reality. Need a room to match your lucky number? We got you. Want to make sure our team doesn't wash your lucky jersey? Oh, that smells lucky. Hilton's unmatched hospitality can keep up with any superstition. Even a marching band wake up call at 5:55 and 55 seconds. Hit it! When you need a team that will do whatever it takes on game day, it matters where you stay. Hilton, for the stay.

• 0:31Speaker 01

  This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required. Compatibility and availability varies, 18 plus.

• 0:56Nilay Patel?

  Hey, everybody. It's Sam from The Vergecast. We're taking a break from the interview show this week. It's holiday week, but we've got a little treat for you. We're going to share an episode of the show Land of the Giants from our friends at Recode and the Vox Media Podcast Network. Land of the Giants examines the most powerful tech companies of our time. Last season was all about Amazon, but this new season is all about Netflix. It's called The Netflix Effect, and it's hosted by Recode editors Ronnie Mola and Peter Kafka. The Netflix Effect explores how a company that began as a small DVD by mail service ultimately upended Hollywood and completely changed the way we watch TV. This episode that we're going to run right now is all about how Netflix disrupted Blockbuster, the video store chain, and how a company so big and dominant lost to a tiny tech startup. You can listen and subscribe to Land of the Giants: The Netflix Effect in your preferred podcast player every Tuesday. The show is really fun.

• 1:41Nilay Patel?

  Peter has been covering Netflix since the very beginning. Ronnie's a great reporter. Just check it out. I think you're really going to like it. It's Land of the Giants: The Netflix Effect.

• 1:52Speaker 03

  One of the analysts asked John Antioch, the CEO of Blockbuster, "What do you think of Netflix?" And he was furious. He's like, "Do not ask me about that stupid little company. They're a gnat, they're nothing, they're nobody, and people are never going to give up their video stores."

• 2:12Speaker 04

  It's almost impossible to imagine now. But not very long ago, if you wanted to watch a movie at home, you had to leave your house to go rent a movie from Blockbuster. Ridiculous, right? Reed Hastings thought so too. So he created Netflix, which lets you sit at home, hit a button, and have a movie delivered to your living room. We all know what happened eventually. Hastings was right. Netflix won, and Blockbuster went away. But it sure didn't seem obvious back then. Blockbuster was the giant that owned video rentals. It should have squashed Netflix. Just ask Hastings.

• 2:43Speaker 05

  It was 20 times larger than us, which is not a good place to be. Okay, so in many, that's why I feel so randomly lucky to have survived. They were the dominant firm in video rental. And we were this tiny, little upcreek. And normally, as you grow, there's lots of ways to get beat.

• 3:05Speaker 04

  I'm Peter Kafka.

• 3:06Speaker 06

  And I'm Rani Molla.

• 3:07Speaker 04

  And this is Land of the Giants: The Netflix Effect, a podcast about how Netflix disrupted Hollywood, changed the way we watched TV and movies, and how it should have been squashed by a giant competitor, but ended up turning the tables and killing the video store.

• 3:24Speaker 06

  Okay, Peter, let's go back in time. Long before we had Netflix and chill, we had Blockbuster nights. Remember those?

• 3:31Speaker 07

  Tonight, make it a Blockbuster night.

• 3:36Speaker 06

  In the 90s and early aughts, Blockbuster was the world's largest video rental chain. It was a huge part of American culture. At its peak, it was bringing in $6 billion a year in revenue and had more than 9,000 stores around the globe. It was the place to rent movies.

• 3:50Speaker 08

  It was a social place. Like, teens would meet there, you know? People, you know, because that was one of the few things that you could always do as a high school student, was, you know, you could get together with your friends and rent a movie and go to the cool parent's house and watch it.

• 4:04Speaker 09

  Remember, there's a copy of The Wiz that I would, like, hide in a corner at Blockbuster because I always wanted it to be there when I would come back for it.

• 4:10Speaker 10

  And we would go in her car, then go into Blockbuster, and we'd pick out a movie, and then we'd get a little treat, you know? I don't know, we'd pick two, two, three movies, a scary one, a funny one, and then an action one.

• 4:21Speaker 11

  Nobody has the movie I want. Hey, if it's on video, Blockbuster probably has it. I mean, we have over 10,000 videos. Wow.

• 4:28Speaker 08

  5, 6 o'clock on a Friday night, phones are ringing off the hook. It's never, what do you have that's good? It's always, what do you have that's new?

• 4:36Speaker 06

  That last voice is Jason Bailey. Nowadays, he writes about movies for places like Vulture and The New York Times. But years ago, he used to work at a bunch of video stores, including Blockbuster, which he says wasn't as great as we might remember.

• 4:47Speaker 08

  I have much more nostalgia for the video store than I do for Blockbuster in particular, which really, in a lot of ways, killed the video store, flattening it into the sort of McDonald's version of the video store.

• 5:02Speaker 04

  Right, that's what I remember about Blockbuster. It killed my local video store and it replaced it with Blockbuster, which I did not like.

• 5:09Speaker 06

  Blockbusters were everywhere and everyone rented from there, but that didn't mean it was a great customer experience.

• 5:15Speaker 08

  One of the big things that you always hear people who don't remember Blockbuster through a golden glow of nostalgia talk about were the late fees, or as they tried to rebrand them, additional day fees or additional rental fees. They were outrageous.

• 5:29Speaker 06

  Blockbuster made a ton of money on late fees.

• 5:32Speaker 04

  Those are additional day fees, Ronnie.

• 5:35Speaker 06

  At one point, late fees made up 70% of Blockbuster's profit. And along with those high late fees, there were a long list of other problems: limited new releases, long lines, shitty customer service.

• 5:46Speaker 04

  All of which is lousy for customers, which also made it lousy for employees.

• 5:49Speaker 08

  I got cursed out a fair amount, again, for, you know, just trying, doing what I was told to do by corporate. But yes, I would, I would be told that, you know, that we were monsters, that we were bloodsuckers, I had that effing thing back on time, I saw you take it out of the box. I was like, I got called out like that. I had people tell me, I saw you in here when I dropped it off. You tell me you didn't check it in on time? I'm not paying that. It got heated.

• 6:12Speaker 06

  But this was all factored into Blockbuster's business model. The company even had a term for it: managed dissatisfaction.

• 6:19Speaker 12

  Managed dissatisfaction is a term that John Antiacco, the CEO of Blockbuster, explained to me. And that is, as long as you give a consumer enough of what they want, they will ignore the fact that they're not always getting what they want.

• 6:34Speaker 06

  This is Gina Keating. She's a journalist who covered Netflix for Reuters. She also wrote a book and made a documentary about Netflix's history.

• 6:41Speaker 12

  Blockbuster understood that only 20% of customers who came in would get the movie that they wanted. And they would have to get something else the other 80% of the time. They weren't happy, but they weren't horribly angry.

• 6:57Speaker 04

  Managed dissatisfaction is one of the great corporate euphemisms for screw you, give us your money, that you are ever going to hear. And if you can't remember what it was like to go to Blockbuster, a current analogy would be like an airplane. You know what airplanes are like? Where it sucks in every way. And if you want to improve it in any way, you have to pay additional fees for everything. That is Blockbuster in a nutshell in the 90s.

• 7:17Speaker 06

  Yeah, customers felt trapped. And with all the smaller mom and pop stores being squeezed out, they didn't really have a better alternative. And then, all of a sudden, they did.

• 7:28Speaker 04

  Again, you've got to remember that Netflix emerged in the late 90s, when the internet still felt pretty new. Amazon was just becoming really successful selling books online. They were doing it cheaper than the competition, and they didn't have to operate stores. So Reed Hastings and Mark Randolph, two tech guys in the Bay Area, are surveying the landscape. And they thought, hey, we could be the Amazon of something else.

• 7:48Speaker 07

  There's a better way to rent movies, as many as you want. Go to Netflix.com. Make a list of the movies you want to see. And in about one business day, you'll get three DVDs. Keep them as long as you want, without late fees.

• 8:01Speaker 06

  DVDs had just come out. And suddenly, there was this new way to watch movies that didn't involve these bulky VHS tapes. DVDs were smaller, more durable, and you could ship them for the price of a postage stamp. So Hastings and Randolph thought, hey, we could be the Amazon of movies.

• 8:16Speaker 04

  This may seem obvious now, but at the time, this was a big deal. Suddenly, instead of having to go to the store and deal with a crummy customer experience, you could stay home. You could hit a button, and someone, somewhere, sent you the DVD you wanted, instead of the one you had to settle for, which Netflix customers loved, by the way. They tended to order the kind of movies that Blockbuster didn't feature or even carry at all. They had all the indie movies and older movies, and Blockbuster was focused on what was new.

• 8:44Speaker 06

  And Netflix had another big advantage. While Blockbuster's business model was based on late fees, the things customers hated, Netflix didn't have any late fees. This was a huge part of Netflix's marketing pitch. Hastings even made a part of the Netflix origin story. Here he is on Charlie Rose.

• 9:00Speaker 05

  Frankly, I got a big late fee, a $40 late fee. And it was no one's fault but my own. And why I remember it so clearly is I paid it and was going home. And I remember I didn't want to tell my wife about it. And I thought, oh, great. Now I'm kind of compromising the integrity of my marriage over this late fee.

• 9:22Speaker 06

  In the year 2000, Netflix was growing. It had a small but loyal customer base. But keep in mind, this was also right around the time of the dot com bubble bursting. And Netflix was going up against Blockbuster, which was gigantic.

• 9:33Speaker 04

  In tech, anytime a new startup shows up, they have to explain why the big guys who are already there, the ones they're supposed to disrupt, aren't going to crush them instead. And Netflix got asked this all the time. This wasn't a dumb question, by the way. Turns out Netflix was making contingency plans for this very scenario.

• 9:49Speaker 06

  Hastings and his co-founder Mark Randolph spent months trying to get a meeting with Blockbuster's top executives so they can make this pitch. They would sell their company to Blockbuster for $50 million. Then Blockbuster would keep running its stores, and Netflix would run Blockbuster.com. They basically got laughed out of the building.

• 10:05Speaker 04

  And keep in mind, Blockbuster is a $6 billion company at the time. This is what it would call a tuck-in, right? $50 million bucks means nothing to Blockbuster, its surrounding area. So it easily could have bought Netflix if it wanted to, and it still ignored it.

• 10:16Speaker 06

  Blockbuster was acting totally unconcerned about Netflix. But Netflix did have some reasons to be optimistic. It was the first to do online rentals, and it was growing really fast.

• 10:26Speaker 04

  And Blockbuster was underestimating it.

• 10:30Speaker 06

  Hattie McCord, Netflix's former head of HR, remembers hearing Blockbuster executives talk about Netflix on an earnings call. Actually, she remembers hearing them refuse to talk about Netflix on an earnings call.

• 10:41Speaker 03

  One of the analysts asked John Antiocho, the CEO of Blockbuster, what do you think of Netflix? And he was furious. He's like, "Do not ask me about that stupid little company. They're a nat, they're nothing, they're nobody, and people are never going to give up their video stores. So stop asking me about them."

• 11:01Speaker 06

  Back at the Netflix office, McCord was thrilled.

• 11:04Speaker 03

  I'm looking at my CMO, and behind her head are our subscriber numbers on a whiteboard. And, you know, I mean, and that graph is just like up into the right. But we looked at each other and went, "They don't know. They don't know." And we got all the people in the company together, and we were like, "Seriously? Don't brag. As far as they're concerned, we're nobody. Lay low, lay low, lay low."

• 11:32Speaker 06

  The thing is, Blockbuster CEO John Antiocho did want to build his business beyond the physical stores. And despite telling Netflix no, he did want to get online. He wanted to build his own DVD-by-mail company, just like Netflix.

• 11:43Speaker 04

  So he tells Wall Street, "Stop asking about Netflix." And then in 2004, he turns to his company and says, "Let's make a Netflix, but don't tell anyone."

• 11:52Speaker 06

  To do this, he did what a lot of older companies do when they need a tech fix. He found the youngest person in the room, and he gave him the job.

• 11:59Speaker 04

  "Hey, you over there, you can turn on a computer. Make me a Netflix."

• 12:05Speaker 06

  That person was Shane Evangelist. At the time, he was working on strategy for Blockbuster, and he wasn't even 30 years old.

• 12:11Speaker 13

  I mean, the reality is, there wasn't a lot of skilled resources at Blockbuster at the time that knew much about the internet. I like to say that I could spell it, so I got to go ahead to run it. And so basically, John said, "It's yours. Go get it up and operational."

• 12:28Speaker 06

  Shane was young, but he was also really smart, and he really looked up to Blockbuster's CEO. And he loved the idea of bringing Blockbuster into the future.

• 12:35Speaker 04

  And because Blockbuster was behind, it needed to get online fast. The quickest way to do that was to straight-up copy Netflix.

• 12:42Speaker 13

  We looked exactly what they were doing. We re-engineered it, and we built it.

• 12:45Speaker 06

  Blockbuster copied everything about Netflix, from the way it mailed DVDs across the country, down to its website. Everything but the colors. Instead of Netflix red, the color scheme was Blockbuster's signature blue and yellow. They even sent people to Netflix warehouses pretending to be customers to figure out how they sorted and shipped DVDs.

• 13:05Speaker 04

  I still cannot believe they sent spies.

• 13:08Speaker 06

  Yeah.

• 13:08Speaker 04

  To the warehouse.

• 13:09Speaker 06

  Posing as fans.

• 13:11Speaker 13

  The door opens up, the warehouse person or manager is there and they say, "Look, we're Netflix subscribers. We'd love your service. We'd love to see it." And they invited us in. And not only did they invite us in, they let us take pictures.

• 13:22Speaker 04

  It's like Mission Impossible: Blockbuster.

• 13:24Speaker 06

  Eventually Netflix figured out what they were doing.

• 13:27Speaker 04

  Who are these Netflix fans hanging out in our warehouse and taking notes about our delivery system?

• 13:32Speaker 06

  And why are they so interested in distribution systems?

• 13:42Speaker 06

  Netflix was a smaller business, but it was better at the internet. It had been working on sending DVDs by mail for years at this point. Blockbuster, in a way, was acting like it was the startup.

• 13:51Speaker 13

  And what we did a very good job on, the online team, is painted them as Goliath and we were David. They were pretty belittling of us at the time. They believed that Blockbuster had no chance to compete with them.

• 14:02Speaker 06

  Evangelist and his team launched Blockbuster Online in 2004, four years after Netflix had tried to sell itself to Blockbuster. It was basically Netflix, except it had more titles, was cheaper, and it had the Blockbuster name.

• 14:14Speaker 04

  It got off to a strong start. Blockbuster Online priced the service at $15 a month, which is cheaper than Netflix at the time. And Blockbuster was good at marketing. They had a great ad in the Super Bowl.

• 14:23Speaker 14

  I'm gonna pick up a movie from Blockbuster.

• 14:25Speaker 05

  Okay, drive safely.

• 14:26Speaker 04

  So in the ad, a guy tells his wife he's going to get a movie. He gets in his car, he backs down the driveway, he opens the mailbox, he pulls out a Blockbuster DVD.

• 14:34Speaker 15

  Now Blockbuster is as close as your mailbox. Introducing Blockbuster Online. Choose your movies online, receive and return them by mail. Enjoy.

• 14:42Speaker 13

  And I remember when we launched the Super Bowl commercial the first time out of the gate and the numbers went crazy.

• 14:50Speaker 04

  This is the 2005 Super Bowl when Tom Brady and the Patriots beat the Eagles by three points.

• 14:55Speaker 09

  And the New England Patriots will be the first dynasty of the 21st century.

• 15:01Speaker 04

  It was a great game, which was really good for Blockbuster because it meant a gazillion people saw the ad.

• 15:05Speaker 13

  You know, 40,000 people that signed up in a day. In the first year, we went from zero to a million people in nine months. And that was the fastest growing subscription business that the market had seen at the time.

• 15:16Speaker 06

  Netflix took five years to get to a million subscribers. It took Blockbuster less than a year. This was a huge win for Blockbuster. It was successfully fighting back, landing this big punch. And then they landed another one.

• 15:30Speaker 03

  No more late fees. No more late fees.

• 15:40Speaker 06

  Blockbuster got rid of its late fees.

• 15:42Speaker 04

  Which was the main reason everyone hated Blockbuster. And the whole reason Netflix could exist, it did not have late fees. And now Blockbuster said, yeah, we don't have them either. So you see Blockbuster was doing the thing that the established company is supposed to do when a challenger comes for it. They were responding correctly. They were doing the right thing.

• 15:59Speaker 06

  Right. It was acting like Blockbuster was the nimble startup. This big giant company was willing to say, okay, we were wrong and we're going to turn this giant ship around.

• 16:07Speaker 04

  So the big guys are starting to scare the little guys. And while Blockbuster CEO didn't want to talk about Netflix on investor calls, Blockbuster sort of became the only thing Netflix was talking about on its calls.

• 16:18Speaker 16

  It would have been the Q1 earnings call for 2005.

• 16:21Speaker 04

  This is Steve Swayze. He had just started as Netflix's head of PR at the time.

• 16:25Speaker 16

  I literally went through the transcript the next day and highlighted Blockbuster versus Netflix. We use the word Blockbuster, I think, three times more than we use the word Netflix. We were fixated on Blockbuster. I mean, obviously, it's a competitor. We've got to acknowledge them. But let's not talk about Blockbuster. Let's talk about how much Netflix has improved.

• 16:43Speaker 06

  But in 2006, Blockbuster did something that everyone at Netflix had to talk about. It made its strongest power play yet and launched a new service, Total Access.

• 16:53Speaker 14

  Blockbuster Total Access, Netflix. Essentially, they work the same way. You order movies online, they come right to your mailbox. You watch them, they mail them back in a prepaid envelope. But what if you're thinking, let's watch another movie right away? With Netflix, you mail them back and wait. But only Blockbuster gives you the option of bringing them back to the store and exchanging them, no extra charge. Here's your new movie, sir.

• 17:15Speaker 04

  So Total Access was Blockbuster's Netflix killer. Mary Blockbuster Online, their Netflix clone, with Blockbuster's huge base of stores. So if you're a Blockbuster customer, you get two services for the price of one. That is a very, very strong deal.

• 17:29Speaker 06

  Again, Steve Swayze.

• 17:31Speaker 16

  Blockbuster did everything. And in one of the, one of the earnings calls, Reid said, Blockbuster's throwing everything at us except the kitchen sink. And John Aliaco, the CEO of Blockbuster at the time, had a sense of humor because a couple of days later, in UPS arrives, a kitchen sink, a huge box, and you opened it up and there was a kitchen sink. So they literally threw a kitchen sink at us as well.

• 17:54Speaker 04

  You don't normally think of CEOs of giant companies having a sense of humor.

• 17:57Speaker 06

  You don't, but Antioch could afford to crack jokes because Total Access was working. For the first time ever, Netflix lost subscribers and its stock plummeted. Most new online DVD subscribers were going to Blockbuster. So just a couple of years after launching online, it was well on its way to catching up to Netflix.

• 18:16Speaker 04

  Blockbuster was doing everything right. It was pivoting quickly. It was defending itself from a startup that was trying to eat its lunch. It was making moves that would keep it from becoming obsolete as everything moved online. And this was all beginning to work. It looked like nothing could stop Blockbuster.

• 18:31Speaker 06

  Except for one major problem that threatened everything Blockbuster had accomplished, or more accurately, one angry investor. That's after the break.

• 18:52Speaker 00

  College football is back. So Hilton called to me, the superstition concierge, to make your fan rituals a reality. Need a room to match your lucky number? We got you. Want to make sure our team doesn't wash your lucky jersey? Oh, that smells lucky. Hilton's unmatched hospitality can keep up with any superstition. Even a marching band wake-up call at 5:55 in 55 seconds. Hit it! When you need a team that will do whatever it takes on game day, it matters where you stay. Hilton, for the stay.

• 19:23Speaker 01

  This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required. Compatibility and availability varies 18 plus.

• 19:56Speaker 04

  Okay, we're back.

• 19:58Speaker 06

  So in 2006, Blockbuster had just launched Total Access, its new service that combined renting DVDs online with renting DVDs in stores.

• 20:06Speaker 04

  It's Netflix plus Blockbuster.

• 20:08Speaker 06

  And it's cheaper, and Blockbuster got rid of its late fees, the thing people hated most about Blockbuster, even though those late fees were hugely profitable for them.

• 20:16Speaker 04

  So again, if we're studying this in business school, we say, "Good job, Blockbuster. You are doing everything right. This is how you stamp out a challenger."

• 20:23Speaker 06

  Right. It's working out. Netflix was losing subscribers, and its stock had taken a beating. All these new subscribers were going to Blockbuster. But the big problem was that it's just really expensive to start an online business. It's something Blockbuster would have to lose money on until it reached a certain number of subscribers.

• 20:38Speaker 04

  Meanwhile, Blockbuster had another problem. It had a billion dollars in debt, which at the time was a huge number. Blockbuster used to be owned by Viacom, which at the time was this giant and powerful cable company. But Viacom spun it out and turned Blockbuster into its own publicly traded company. And as a going away present, Viacom said, "Here's an extra billion dollars of debt. Good luck to you."

• 20:59Speaker 05

  They were owned by Viacom, and Viacom was managing them for short-term profits.

• 21:04Speaker 04

  Again, this is Netflix CEO Reed Hastings.

• 21:06Speaker 05

  So they set the company up as weak. And if they hadn't put that debt on them, Blockbuster may well have had enough to overwhelm us.

• 21:13Speaker 04

  Which meant that Blockbuster had to pay down this debt at the same time it was spending money, investing in a thing that's supposed to stomp out Netflix.

• 21:20Speaker 06

  While all this was happening, Netflix tried a bunch of different tactics: dabbling in in-store kiosks, where you rent and return movies, ads on its website, even Facebook-style sharing, where you could tell your friends what you were watching. None of it worked. But luckily for Netflix, that wasn't what customers cared about.

• 21:36Speaker 05

  What they really cared about was 97% delivery rate instead of 95. Okay, and so it got us to realize, "Oh, we should really focus, probably now by '06, '07, on just like manic focus on the core and have confidence."

• 21:49Speaker 04

  Yes, focus. This is the keep-it-simple, stupid version of corporate strategy, and it worked.

• 21:55Speaker 06

  Netflix knew how expensive it was to run a DVD by mail service. Steve Swayze, Netflix's former head of PR, says the company knew Blockbuster, with all that debt, couldn't afford to keep losing money with Total Access. Here he is talking about Barry McCarthy, Netflix's chief financial officer.

• 22:09Speaker 16

  Barry had a team that just analyzed the daylights out of Blockbuster. And we knew they couldn't continue at that pace. It's unit economics. You can't spend $130 and make $100. We fundamentally knew that they couldn't continue providing all these services and make money to stay viable. So we just, we hunkered down.

• 22:33Speaker 04

  The Netflix folks say they had figured out that Blockbuster could not win. And if Netflix could just hang on, it could tire them out. But Gina Keating remembers it a little bit differently. She says Netflix was working really hard, maybe a little too hard, to convince outsiders like her that its strategy made sense and that Blockbuster was going to fail and that Wall Street shouldn't give Blockbuster any money.

• 22:52Speaker 12

  The funny thing was, in the middle of all this stuff, when they started losing subscribers, I went into Barry McCarthy's office in Los Gatos and he sat there with a whiteboard for about an hour and showed me how there was no way in hell that Blockbuster was ever going to be able to survive this long term. Because they were running, I think it was $2 they were losing for every in-store exchange on Total Access. You know, it's kind of funny now when I look back at it, but they were super desperate to call a journalist in and spend all this time explaining why Blockbuster should not be able to access the capital markets anymore because it wasn't going to work.

• 23:32Speaker 04

  But remember, the reason Blockbuster needed more money from Wall Street was because it was losing money trying to beat Netflix.

• 23:38Speaker 12

  So they can say that all they want. And in hindsight, that is correct, that all they had to do was wait. But they were scared and it wasn't a done deal. If Blockbuster had continued to get financing and stolen all of Netflix's subscribers, they would have been dead.

• 23:56Speaker 06

  And Blockbuster also had another really big problem. Activist investor Carl Icahn.

• 24:02Speaker 04

  So today, we call someone like Carl Icahn an activist investor. In the old days, when Carl Icahn started out, we called them green mailers. This is someone who buys a big position in a company's stock so he can have influence over the company. And then he wants the company to make changes so the stock goes up and he makes more money.

• 24:17Speaker 17

  And the reason I made so much money over the years is that... You hold these people accountable.

• 24:24Speaker 04

  He'll say a bunch of stuff about how the company's mismanaged and they should do this and that and follow a strategy. And none of that really matters. All that matters is that he bought the stock at X and he wants it to go up to Y so he can make money. He does not really care how it gets there. Carl Icahn has been great at this over his career. He's a billionaire many times over, but it doesn't always work.

• 24:44Speaker 06

  Just as Blockbuster got its online business off the ground, Carl Icahn came in and bought a bunch of shares of Blockbuster and got several seats on its board.

• 24:50Speaker 04

  So he just busts in Kool-Aid Man style and goes, "I'm here. Now you gotta deal with me because I own part of your company. Listen to me on Carl Icahn."

• 24:58Speaker 06

  Right, and it's bad news when Carl Icahn comes a-knocking.

• 25:01Speaker 04

  It is not cool when Carl shows up.

• 25:04Speaker 06

  Through his shares and board seats, Icahn was able to gain a lot of influence over the company. And true to the activist investor playbook, he started picking a bunch of different fights with Blockbuster's leadership team. He said they screwed up an attempted acquisition of Hollywood Video. He said they shouldn't have ended late fees. He said they were spending too much money on Blockbuster Online.

• 25:22Speaker 04

  You're doing it all wrong. I want my stock to go up and I'm gonna tell you how to do it.

• 25:26Speaker 06

  Icahn wreaked havoc at Blockbuster, which was an incredible break for Netflix and Reed Hastings.

• 25:31Speaker 05

  They were attacking us and the shareholders decided to elect Carl Icahn to the board. And it was like so great for us and so bad for them.

• 25:41Speaker 12

  He had these board members who were completely clueless and who were saying stuff like, "Oh, we need to put jeans in the stores, you know, to make people come in."

• 25:49Speaker 06

  Again, Gina Keating.

• 25:50Speaker 12

  They just had no understanding of what was going on at Blockbuster and the technology change that they were right in the middle of. So, you know, John Antiocho's fighting those guys.

• 26:02Speaker 06

  So Antiocho is fighting with Netflix on the outside.

• 26:05Speaker 04

  And then on the inside, he has Carl Icahn.

• 26:08Speaker 06

  And Icahn was really difficult to work with. At one point, he refused to attend board meetings. So Blockbuster was headquartered in Texas and Icahn would only call in. And when he did, he's really disruptive. He'd like talk over people and just generally be a pain in the ass. Eventually, to appease him, Blockbuster moved its board meetings to Icahn's office in New York City.

• 26:29Speaker 04

  Oh, man, can you imagine that?

• 26:31Speaker 06

  It's an incredible power move and it sort of shows who's bossing whom around. This went on for a while, Icahn second guessing everything Antiocho did. Things eventually came to a head during a phone call over Antiocho's bonus. He was supposed to get $8 million that year, but Icahn didn't want to pay him. We know this from Antioch's retelling of the event in an article for the Harvard Business Review. Icon argued that Blockbuster's stock was struggling and shareholders had lost money. So you don't deserve this.

• 26:57Speaker 04

  And Antioch is saying, no, no, this is what we agreed on. I hit my numbers.

• 27:00Speaker 06

  At some point in this phone call, Antioch realized that this was never going to end, and he decided to quit. They agreed on a severance package and a smaller version of this bonus, which, by the way, he donated entirely to charity.

• 27:13Speaker 04

  So it's not about the money, it's about the principle.

• 27:15Speaker 06

  Right. We reached out to both Antioch and Icon for the story. Neither chose to participate. After Antioch quit, he sold all his Blockbuster stock, and you'll never guess what he invested in next.

• 27:26Speaker 04

  I'm gonna guess. He bought Netflix stock.

• 27:29Speaker 06

  Correct.

• 27:29Speaker 04

  So this time, it was about the money.

• 27:31Speaker 06

  Right. So after all that, in 2007, Icon brought in James Keyes to be Blockbuster's new CEO. Before that, Keyes was running 7-Eleven. And Chain Evangelist, who's running Blockbuster's successful online business, was pissed.

• 27:44Speaker 13

  So here's a guy who had never done anything digitally previously. Certainly difficult to deliver a slurpee through a digital connection. He decides that we're not going to go online any longer, that the mail order business is too expensive. He said, we're going to shift our focus back to the stores. We're not going to focus online any longer. He pulled all of the marketing out of that business.

• 28:08Speaker 06

  Evangelist thought that defunding the online business would be the death of Total Access, and maybe even for all of Blockbuster. So when Keyes decided to strip down the business that Evangelist had worked so hard on, Evangelist felt like he was left with no other choice. So he quit.

• 28:21Speaker 13

  And I just started crying. It was three years of a lot of work, felt like we finally had them, felt like we were truly going to pivot this business, and it was effectively dismantled by the new guy that came in. And really, it was dismantled by a bonus structure that Carl wouldn't pay.

• 28:42Speaker 06

  From Evangelist's perspective, it wasn't just that the project was shut down, it was when his project got shut down, right when it was about to work.

• 28:50Speaker 13

  Netflix basically went from having a gun to its head to as much wind behind your back as you could possibly imagine.

• 29:05Speaker 06

  When former 7-Eleven head James Keyes came in as CEO, he was focused on two things: the physical stores and the debt. This is Keyes.

• 29:12Speaker 18

  When we were dealing with over $1 billion of debt at that time, I don't think Netflix had much of any debt. The challenge with a company with debt is you have to pay it back. And we had a payback due in 2009. The difference is that when you're trying to manage a public company, you have a responsibility to all the shareholders and to protect the integrity of that equity and that shareholder base and your debt holders. We were growing the online business, yes. We were competing with Netflix, but we were competing in a very different way with a very different balance sheet.

• 29:45Speaker 04

  So I'm going to translate that. We had to grow the company and make Carl Akon happy, and we also had to pay down this debt. We had to do two things at once. And Netflix didn't have this problem. It didn't have debt. It just had investors that wanted their stock to go up. So even though we are the much bigger company, we're not really in a fair fight. That is what James Keyes is saying.

• 30:04Speaker 18

  If we had continued investing in the online business the way we had, it would have forced us to restructure the company.

• 30:12Speaker 04

  One more thing. While all of this was going on, there was a huge recession. This was 2008. Financial institutions like Lehman Brothers and Bear Stearns went under. Wall Street guys lost their jobs. They were sobbing on the trading floor. The US government had to bail out Wall Street and the auto industry at the same time. It was suddenly the worst time to have debt.

• 30:30Speaker 18

  The banks were virtually shut down, not lending any new debt. It was the timing of the payback that was required, which then forced us to have to refinance that debt in extreme conditions. So in other words, if you didn't meet certain performance criteria, the bank had the right to force you into bankruptcy or to take back that debt.

• 30:54Speaker 06

  And by 2010, the biggest video store in the world, Netflix's biggest competitor, hit rock bottom.

• 31:00Speaker 19

  Blockbuster's business is a flop, so to speak. The movie-rental chain is getting ready to file for bankruptcy as early as next month.

• 31:08Speaker 09

  This really is the end of an era.

• 31:13Speaker 04

  Yeah, this was a tough day for James Keyes, who, remember, had only been CEO of this company for a couple of years.

• 31:19Speaker 18

  I remember one day waking up and seeing my, my full color picture with a Pinocchio nose in the New York Post. You haven't lived until you've been, until you see your own image with a Pinocchio nose in the New York Post. And I think the big headline was Blockbuster.

• 31:35Speaker 06

  The same year Blockbuster filed for bankruptcy, Netflix hit 20 million subscribers. It also started expanding outside the US. So Netflix's plan to wait Blockbuster out worked.

• 31:45Speaker 04

  Well, they had a little help.

• 31:47Speaker 12

  It was so lucky. I mean, so lucky. And I think that they need to thank Carl Icahn every single day because that right there is the number one reason why Blockbuster lost.

• 32:04Speaker 06

  There are two things that Blockbuster could have done differently. First of all, Blockbuster could have bought Netflix for a mere $50 million back in 2000. End of story. Or it could have refinanced its debt long before 2009, when no one would lend the company money.

• 32:18Speaker 04

  A nerdy note about debt here, but an important one. This whole story is about how Blockbuster was just crushed by a billion dollars of debt in 2009. Today, as we're recording this in 2020, Netflix has about $15 billion in debt. It runs the entire company on debt. Wall Street seems totally cool with it. Different companies, different times. But I know it upsets the Blockbuster guys to hear about it even now.

• 32:41Speaker 06

  But this also didn't happen in a vacuum. There was a lot of stuff going on in the economy and the culture that really shaped how this panned out. The way people consumed media and everything was changing.

• 32:51Speaker 04

  So think about what was happening in 2009 and 2010. A lot of things were really changing in a significant way. The internet had gone from novelty to ubiquity. Broadband was coming to most people's homes. Lots of folks now had cell phones. They've got iPhones where you can hit a button. You can watch something on a screen immediately. Physical stores were starting to go away because you didn't need to get in a car or go on a subway to get something. You could have that thing delivered to you because you were using the internet.

• 33:17Speaker 06

  Netflix got its timing right, and it got out of a near-death experience. It also figured out eventually that it had to stick to what it did best, getting people videos to watch. Here's Hastings again.

• 33:28Speaker 05

  And that lesson got seared into us. And then since then, you know, we're like crazy manic. We're going to do the best movies, the best series, you know, global internet. Why haven't we acquired 15 companies like everybody else? Why haven't we gone into video gaming and news and sports and advertising, you know? And so it's this maniac focus of let's have the self-confidence to believe in the size of the opportunity and that we're going to really help consumers if we focus on doing the thing we do better and better as opposed to a little bit of everything.

• 34:01Speaker 04

  This is a standard business lesson and it's a standard business lesson that people always overlook. If you want to do something well, do that one thing.

• 34:13Speaker 06

  But that one thing almost wasn't enough. Not long after Shane Evangelist, the former head of Blockbuster Online, left the company, he ended up at a dinner party with his former arch-nemesis, Netflix CEO Reed Hastings.

• 34:24Speaker 13

  And we're sitting across from the table. This is the first time I've met Reed. And it's pretty cordial for the first hour. And then it's what were you thinking when? And we went back and forth and back and forth. And it was a fascinating evening to hear their logic behind what they were doing, for him to hear our logic behind what we were doing.

• 34:44Speaker 06

  Evangelist said Hastings told him that when Blockbuster combined its online service with its brick and mortar stores, it almost tanked Netflix.

• 34:50Speaker 13

  The thing that was satisfying for me is he said, you had us in checkmate. We had no response to the value proposition. Blockbuster had a chance to be that retailer who truly pivoted and moved online and could have been the Harvard Business Case Review story of how you succeed in what would be very difficult headwinds instead of being how you get run over by Netflix.

• 35:16Speaker 06

  In other words, Netflix didn't kill Blockbuster.

• 35:19Speaker 13

  Blockbuster killed Blockbuster.

• 35:25Speaker 06

  So Peter, Blockbuster's not actually completely dead.

• 35:28Speaker 04

  There's still a little trace element left?

• 35:30Speaker 06

  Yeah, at the end of last year, I went to a Blockbuster pop-up shop in lower Manhattan.

• 35:35Speaker 04

  Okay, this sounds like you're describing a fake Blockbuster store, is that right?

• 35:39Speaker 06

  Yeah, it's a store that's around for one week only, that's dedicated to selling Blockbuster memorabilia.

• 35:46Speaker 04

  Whoa.

• 35:47Speaker 20

  We have a 14-foot wall that is 5,000 VHS tapes. We have the shelves made to look exactly like the shelves used to in like the early 90s.

• 35:58Speaker 06

  It even smells like Blockbuster in here. Like, I guess it's the popcorn, but it's like something else to you. I don't think it's just the popcorn. It's like, you guys got everything. Like, the movies are right, the like, the look. Before this podcast, I hadn't really thought about Blockbuster in years. The customers at this pop-up shop were full of fond memories of it. Blockbuster videos, like, my Friday nights. So it immediately brought me back to like 92.

• 36:20Speaker 10

  You miss the feeling of just going there like on a Friday night and then just like picking out movies?

• 36:24Speaker 21

  I'm here because I used to go to Blockbuster every Friday with my family and with my brother. And so I was trying to figure out a Christmas gift to get him, and this seemed like the perfect gift because we used to do this all the time.

• 36:34Speaker 04

  Wait, what are people doing here? Are they renting movies?

• 36:37Speaker 06

  You can't actually rent movies there. They're buying Blockbuster swag.

• 36:42Speaker 10

  I just bought a Blockbuster shirt. It's like the LA Rams color, like maize and blue, I guess. So, yeah. And it has a little Blockbuster logo in the middle, so it shows, you know, that you're repping Blockbuster. And then they gave me a membership card, too.

• 36:58Speaker 06

  Wow.

• 36:59Speaker 10

  True nostalgia.

• 37:00Speaker 06

  It's kind of crazy how this once huge company and cultural institution has dissolved into nothing but nostalgia. All that remains are a few sweaters and tote bags and a membership card you can't use.

• 37:12Speaker 04

  Ronnie, your trip down memory lane sounds fun, but I am not going to miss the light fees.

• 37:16Speaker 06

  Peter, there are additional day fees.

• 37:25Speaker 04

  Ronnie, we are done. That's a wrap. But come back next week because we are going to talk about the Netflix algorithm and how it helps you figure out in an endless sea of content just what the hell to watch.

• 37:35Speaker 06

  And we're also trying to figure out if Netflix recommends shows you want to watch or just shows it owns.

• 37:40Speaker 22

  The analogy I use is we are a matchmaking service, but instead trying to introduce the perfect love story between two people, we're making the perfect love story between a person and a piece of content.

• 37:52Speaker 06

  This podcast is a production of Recode by Vox and the Vox Media Podcast Network. This episode was produced by Bridgette Armstrong and Zach Mack. Our editor is Charlie Herman. Gotham Shrikishan engineered and scored this episode and composed our theme. Zach Mack is our showrunner and Shat Kirwa is the executive producer.

• 38:10Speaker 04

  Quick disclosure, vox.com and Vox Media make shows for Netflix. None of the people working on this season of Land of the Giants are involved in productions of those shows. Land of the Giants is a production of Recode by Vox and the Vox Media Podcast Network. I'm Peter Kafka.

• 38:25Speaker 06

  And I'm Ronnie Molla. Thanks for listening.