The Blockbuster Bankruptcy and the Physics of Spending

Today the word came down that Blockbuster Video had filed for chapter 11 bankruptcy protection. A company founded in 1985 and once the dominant video rental company in the country had fallen. The reason, of course, was Netflix and the physics of spending.

In Going Broke: Why American’s Can’t Hold On To Their Money I identified the five most important variables in what I called, The Physics of Spending. Blockbuster became victim to two of these: Time and Effort.

When videos came almost exclusively in VHS format we travelled to the store to rent them. Mailing these bulky tapes would have been difficult, and no company ever attempted that approach. Blockbuster offered us a wide variety of choices and a quick turnaround—a few minutes to the store and back—in return for the effort it took to go out and get the video. Yes, we were sometimes frustrated when we discovered that all the copies of the video we wanted were rented or that the store did not have the movie we were looking for. But often there was something else on the shelf that was suitable.

When DVDs became the dominant movie format and Netflix discovered a simple way to mail disks, Blockbuster’s days were numbered. True, you had to wait longer to receive your video, but it took almost no effort at all. The video was delivered to your mailbox and could be returned in the out-going mail. Furthermore, the selection was much larger than your local Blockbuster could possibly offer, and the frustration of delay was mitigated by offering the option of ordering more than one video at a time. Eventually Netflix made it possible to watch some movies instantly on your computer for no additional cost.

In today’s consumer world, the effort variable often trumps the time variable. People will gladly wait for a purchase that saves them effort. Amazon.com and the entire world of internet shopping is proof of this principle. If you need more evidence, go to your local fast food restaurant at lunchtime. In most cases there will be a very long line of cars waiting to be served at the drive-through window. See, for example, the picture in an earlier blog entry called “Drive-through Windows, the Large Muscle Hierarchy, & Spending.” Many of the people in these lines of cars could get their food more quickly by parking the car and walking into the store. But they don’t. They would rather wait in comfort.

Much has been written about the brilliance of Netflix’s DVD shipping system and its software designed to recommend videos based on your prior ratings, but the primary cause of Blockbuster’s defeat was the ability to mail DVDs and the physics of spending. Less effort is worth the wait.