The Birth of Blockbuster

Published Aug 15, 2018, 10:00 AM

TechStuff listener Paul wanted to know the story behind the company Blockbuster. How did this franchise emerge to threaten mom and pop video rental stores?

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Get in touch with technology with tech Stuff from how stuff works dot com. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with how Stuff Works in a love all things tech, and it's time to start a new short series series by two episodes. That's not really a series, I guess. Tech Stuff listener Paul asked that I would do if I would do an episode about Blockbuster, the mega chain video rental store that at one point had more than nine thousand locations worldwide. I'm instead gonna do two episodes on the company. This episode is called the Birth of Blockbuster, and spoiler alert, the title of the next episode is the Death of Blockbuster. So this is gonna be all about the founding of Blockbuster and its rise to dominate the video rental industry. And the next one is what the heck happened? Right? How did it? How did things go so wrong for Blockbuster that today only one Blockbuster video store exists in the United States, though I should say there are a few others that are actually an overseas locations, but only one US Blockbuster remains. So we're going to find out together. Let's dive right in and stop delaying. Wow, what a difference. Well, to understand the rise of Blockbuster, we need to look back at the development of the rise of the VCR. Sony's Beta Max and j VCS VHS standards debuted in the nineteen seventies, and both formats used magnetic tape to store video content, and they were incompatible with one another, so you could not put a Beta Max tape in a VHS VCR. They also were enormous disruptors. You know, we talked about disruptive technology. Videotapes were huge and disruptive. Media companies hated the idea of video tapes. They tried to stop the technology. They were worried that people would have the ability to tape content right off their televisions and then that would somehow eat up into their revenue, maybe there'd be piracy issues. It was just a big scare. And in fact, we see this all the time. Whenever there was a new media format that would allow people to put media onto some sort of storage device, we've seen companies react negatively, whether it's CDs, DVDs, whatever, And the same was true way back in the seventies with VHS and Beta Max. The first film to be released on VHS, meaning you could go and purchase a copy of the movie on VHS in the store would be a South Korean movie called The Young Teacher that became available way back in nineteen seventy six, but America wouldn't start having access to VHS tapes until nine. A company called Magnetic Video had a great idea. Well, the owner of Magnetic Video, Andre Blair, he had a great idea. He said, I'm gonna license movies. I'm gonna go to a movie studio. I'm going to pay a licensing fee and UH in return, I will end up producing videotapes of that studio's library of content. And ZI lands a deal with twentieth Century Fox, and the agreement was that Blay would pay a licensing fee of seven dollars and fifty cents per video that he sold and also give a three dred thousand dollar upfront advance to twentie century Fox. Magnetic Video had an organization called the Video Club of America that had a membership fee of ten dollars, and through that club you could purchase movies like Patent Mash, Hello Dolly, The Sound of Music, and The French Connection, among others. But the cost of every video was forty cents. Parently, some seven dollars and fifty cents would go to twenty century Fox and the rest would be divvied up between you know, Andrea Blay and whatever the expenses were. By the December of nineteen, an entrepreneur named George Atkinson got a crazy idea. He had already run a home theater system business, but now he thought, what if I bought copies of these movies and then offered them as rentals to people who own VCRs and Beta Max machines. I could get a lot of money. This way, I can generate a lot of revenue. It's gonna take a big upfront cost because you have to build out the inventory. You have to pay for all those videotapes. But then over uh sequence of rentals, for a low amount per rental, you can start making that money back. You you make back your investment and you start making a profit. Atkinson opened up a six d square foot storefront he called Video Cassette Rentals and he would later rename the Video Station. It was on Wilshire Boulevard in Los Angeles, California, and that's when the video rental business was born. Atkinson was a pioneer in this space, and he would even franchise his idea. He would license that out to other small business owners. Now, the media companies again hated this idea, but the license agreements they had made for videotapes they were intended for home sale, right, they were meant for the home theater enthusiast to go out and purchase a fifty dollar videotape of a movie. But copyright law was pretty clear there was nothing illegal about what Atkinson was doing. He was his rental business did not violate any laws. So while the movie studios didn't like the idea, they couldn't legally stop it. Later on, those same studios would totally come around to this rental industry. It would become an lucrative revenue source. But of course, at first it was brand new, and as we all know, big companies hate new things. They're scary. And across the United States, other entrepreneurs would follow Atkinson's lead. Some of them were independent mom and pop stores, so little, local neighborhood video rental facilities. And then one guy would start up a business that would become the giant of this burgeoning industry. Now that one guy's name might surprise you, because when you talk about Blockbuster, one name tends to pop up more frequently than others. There was a billionaire named Wayne Huizenga, and he made his fortune growing Blockbuster and then ultimately sold it to Viacom in the nineties, which I will cover in our next episode, and we will get to him. He is a crucial part of Blockbusters history, but he was not the person who started the chain. That honor goes to a guy named David Cook of Dallas, Texas. David Cook was a programmer and an entrepreneur, and in nineteen eighty two he founded a company called Cook Data Services, and this company built databases and software and some hardware tools for the petroleum industry. His company, UH was doing pretty well, but then the oil business as a whole, the whole industry took a huge hit in the early nineteen eighties, and so Cook started to look around for other opportunities. It was clear that the oil industry was not going to be a reliable source of revenue. His wife, Sandy, loved film, and she said, maybe you should look into video rental operations because we're starting to see these businesses pop up, and I think you could probably do a really good job with it. So Cook began to do research. He began to look into the business of video rentals, and he saw that most video stores were actually pretty small operations. They were limited to an inventory that represented some of the biggest move be titles because the cost per video was pretty high, so it was prohibitively expensive to aim for a really large inventory spanning niche genres and interests. Right, Like, if you sit there and say to yourself, well, E T is going to be huge, so I want to make sure that we have plenty of copies of ET. That's a bad example because of how long it took a t to get to the home video Marcord. But just assume that we're talking about something that was available in so you say, I want to have a whole bunch of copies of that because it's a big, big name. But there's this other smaller film. Maybe let's say it's a racer head. You know, it's a David Lynch movie and people have heard about it, but most people think of it, Oh, that's that weird art house kind of film, and I don't understand it. It's very independent and strange and surreal and absurd, and I don't. That's not for me. And so a lot of these video rental stores would ignore those other titles and just focus on the really big, most recent ones. But Cook thought there might be a way of appealing to a broader audience by including those titles. He also knowed that a lot of video stores had a pretty clunky way of actually renting titles. Movies typically would not be kept on shelves because there was a very legitimate fear that customers might come in, see a video tape on the shelf, get some sticky fingers, slip that video cassette into a bag, and just walk right on out. And then next thing you know, they have the latest copy of the most recent releases. And so that was something that you typically wouldn't see in your normal video rental stores. You would you might see cases, but there'd be no videotapes inside. You would have to take it out to the desk and then they would have to go find a copy of that movie and they would have to do the whole checkout process, which typically was not automated. It was laborious. It was slow. It was not good customer experience. So David Cook asides, He's going to take a stab at this, and he opens up what would become the first Blockbuster video rental store. This was still under the umbrella of his company, Cook Data Systems. He bought an inventory of movies and opened a store space, and that inventory included eight thousand tapes, which represented six thousand, five hundred different titles. And remember each of those is costing quite a bit of money per go. We're talking like around fifty bucks per tape, sometimes sixty depends on the title in the movie studio. But you multiply that by eight thousand, that's a lot of money. But he gave his store a much larger selection than most other stores and was significantly bigger to the competitor that was geographically closest to him, So he had an incredible advantage just from an inventory perspective. Cook also would outfit every single tape with a special magnetic strip, and he mounted sensors near the door of his shop to discourage theft. So if you took the tape through the sensors, an alarm would go off and Cook would know, or his employees would know that someone was trying to lift one of those videotapes. And I remember this set up vividly because I remember you would go to rent the tapes and the process would have the clerk actually put the video tape on the other side of the sensors, on their side of the counter, so you'd have to, you know, you'd have to complete your transaction, walk through the sensors, pick up your movie, and then you could leave. So good times that still it was still in in uh in place when I was renting movies or when my family was renting movies in the late eighties. He also incorporated a database that could actually keep track of all the rental titles, so pulling a title up on the system would tell you immediately where it was, whether it was out for rent, or if it should be in the store, so he could keep track of where everything was at any given time. It also meant that he could see which titles were getting rented more frequently, and if necessary, he could order another copy of a title if it was proving to be incredibly popular and consistently checked out. Checking out titles was actually computerized and automated as well. That was a huge advantage over other video rental stores. So a customer would first have to become a member of the store. You couldn't just rent anything. You had to first apply for a membership card, and you would get a membership card for you'd pay a fee get a membership card has a unique barcode on it that's tied to your account, so you have a customer profile, and whenever you scan your membership card, it links whatever transaction you are doing to your customer profile in Cook's computer system. And every videotape would also have its own barcode. So if you wanted to check out a video, you bring it up to the front, the clerk would scan your card, they would scan the video. This links the video to your profile. It tells the system, hey, Jonathan has rented Big Trouble in Little China for the eightieth time. So Jonathan's got Big Trouble in Little China on rent, and we know what's going to be due in X number of days. So that way they could actually keep track of all that information to and it meant that if you kept the movie longer than what the membership agreement allowed you to, you'd end up having to pay late fees which would become a very important part of Blockbusters revenue model. As it turns out, the business was a smash success. According to Cook, the night they opened, they had to close off and lock the doors to limit the number of people who are coming in and overcrowding the store. Cook found that people were really eager to rent all sorts of movies, not just the big titles, but other ones as well. So he discovered that that prevailing wisdom that you should really focus on the latest releases didn't really hold true. That a lot of people were interested in watching older films, things that they had heard about but never seen, or maybe they had seen it years ago but it hadn't seen it since, he found that those smaller titles had real value, so it turned out that his approach was more effective. The following summer, in x Cook would open three more stores. Not even a year had gone by since he had opened the first one, and already he was ready to expand. He also changed the company over to become Blockbuster Entertainment Corporation. In June. Things were looking up and Cook was seeking investment in the form of an I p O to fund this expansion because it was expensive but Just a few days before the offering was to take place, a financial reporter did a piece on Cook. That piece was kind of a hatchet job. It highlighted how the oil industry failure nearly tanked his company just a few years earlier, and it questioned whether Cook had the expertise in the video field to make his business a real success. And it was such a damaging piece that it tanked that equity offering that was planned, and due to that expansion and the high upfront costs, the company ended six with a three point two million dollar shortfall. But the story obviously doesn't end there. It could have this could have been the end of Blockbuster, and we never would have talked about it. The name never would have risen beyond Dallas, Texas, and we would just be ignorant of it. But of course things did not go that way. I'll talk more about what happened in just a second, but first let's take a quick break to thank our sponsor. So here's Cook with a business he knows can be successful, but he's got a huge cash flow crisis on his hands. In February, Cook sells off one third of the company to a group of three investors, and all three were from another big company that Cook had some experience with in the past. It was a garbage disposal business of all things, and it was called Waste Management. Side note, I once tried to launch a fitness company called waste Management spelled slightly differently, but it never did very well. But the other Waste Management was a different story, had done really well, and one of their co founders was was the guy named Wayne Wizinga, and Waizinga had retired from Waste Management in four He and John Milk, who was the president of Waste Management's international division, and Donald Flynn, who was the CFO of Waste Management, all went in to invest in Blockbuster, pouring more than eighteen million dollars into the company. Cook ended up handing over control to the company to Whaizinga later on that year that it just was clear that he was not going to be able to hold onto the company and Cook's business strategy was not the way that Oizinga and his his partners wanted to go. Cook wanted to create a franchise system. He wanted to license his computer system he had created the database system and Blockbuster's name to independent entrepreneurs and that way, he wouldn't have to oversee all the operations. He could benefit from the licensing fees, and these small independent video store owners could benefit from the work he had done building out the database. But wa Zinga had a different idea. He wanted the company to maintain ownership of as many stores as possible with direct control. Cook reportedly had issues with the new leaders of Blockbuster, and by one report I saw, he had a hearty disagreement with one of Zinga's direct reports. I believe the piece I read called it one of Whizinga's lieutenants. So Cook decides he's going to get out of the game, the guy who founded the company. So in April, Cook sells off his shares of the company he founded and he goes to work on other businesses. Has pailed amounted to something in the area of around twenty million dollars, somewhere between eighteen and twenty million, which isn't bad. Obviously, that's a lot of money. I mean, it makes you a millionaire, a multimillionaire, But that was a fraction of what he could have made had he stuck around. However, based on a little bit of information I can find about Cook, who is a pretty private person overall. He did not regret his decision to leave when he did. For one thing, it didn't sound like money was of a super high priority in his life. Like sure, money is nice, it's good to have it, but he's not consumed with the idea of constantly making more money. He's appears to have more of an engineering bent, where he likes to recognize problems and find ways to solve them. So he leaves the company behind, and the founder has gone. By April seven, not quite two years after the company started in the first place, the new leadership decides to pick up stakes from Dallas and relocate to a new headquarters. The new home base of operations for Blockbuster would then be Fort Lauderdale, Florida, so they move out from Dallas to Fort Lauderdale. By the summer of nine seven, Blockbuster had grown into a company with fifteen of its own stores and twenty franchised stores. Some things would remain the same as when Cook ran things. The standard rental period was three days, which is what Cook had established. Stores would open at ten am, they would close at midnight. There was another thing that Cook had established, and people could rent more than one film at a time. Other interesting things that Cook had learned and that the new owners were able to leverage to greater effect held some surprising data. For one thing, seventy percent of rentals were of non hit films. There were movies that didn't receive a wide release, or some that received no theatrical release at all, and that encouraged the company to follow Cook's example and make sure that new video stores, whenever they would open one up, would have a broad spectrum of titles across all genres. To capitalize on that trend, the company also made it a practice to choose its locations very carefully. They would scout out potential neighborhoods, not just to find a good storefront space, you know, not just to say, oh, well, this this land real estate here is ideal for us. But also they wanted to get a really good understanding of the demographics of the neighborhood because that would influence the choices the company would make for the inventory held by that store. So if you go to a location and has a really large immigrant population, then you might include more foreign films that represent the demographics of that area better, so that if there's let's say there's a large Russian population in a town, you might want to try and get as much Russian cinema as possible because you're going to appeal to the folks who live in that area. And one of their big decision the company directors made was that the video store would not carry X rated films. Uh. They decided they definitely wanted a family friendly company, a family oriented business, so that was right out. And in the video rental days, there frequently were video rental stores that would have a a surreptitious curtain hung up in the store and behind that was where all the the X rated material was. Blockbuster said, we're not doing that at all. That's totally against what we're gonna stand for, so we won't even entertain that thought. And then Wazinga directed his new company to expand in that old, tried and true way by buying up competition. Why open new stores if you can buy existing ones. Although to be fair, Blockbuster did both. They didn't just go out and acquire other companies. They also opened up new stores of their own, but they did do quite a bit of acquisitions. So one thing that they started to do under Wazinga was to try and buy back franchised stores. So the goal was to reduce the number of franchises to of all Blockbuster stores, so the company would operate the other six directly. Wasazinga started acquiring regional chains of video rental stores, so he would look for chains that held a strong position in their local markets and then he would go out and buy those So that way, instead of having to go into a market and compete against an established uh rival, they buy out the potential rival from the beginning and then just take their place. So in March seven, Blockbuster bought out a chain called Southern Video Partnership. In May of that same year, they acquired Movies to Go Incorporated. And that was just the beginning. By the end of nineteen eight seven, Blockbuster had risen to become the fifth largest video chain by revenue and they operated one hundred thirty three stores. Wasazinga also planned for the future. Blow Buster built an enormous distribution center in Dallas. This huge warehouse building, and it was essentially a videotape warehouse. It held industry so that a store would be able to ramp up almost instantaneously. Essentially, Blockbuster would be able to choose a location for a new store, secure that location to a build out for the store, and as soon as it was ready they could stock it. They could fill the shelves because they had this big distribution center that held massive numbers of tapes that were representative of multiple stores worth of inventory. In March was Zinga led the charge to acquire another video rental company called Video Library Incorporated, which was based out of San Diego, California, and had forty three locations at the time of the acquisition. Blockbuster paid six point for million dollars in cash plus some stock, and then in April night Blockbuster partnered with a company called the United Cable Television Corporation or U See t C, and you See TC would help Blockbuster open one hundred franchised stores over the course of nearly three years. You See t C also purchased twenty percent of ownership and Blockbuster, although they would not retain all of that percentage that stake over the years. By the end of Night, Blockbuster Video had more than four hundred stores and was already the largest video chain rental company in the United States. So it hit number one status just three years after it launched, and just really just one year after Whazinga took over, and it was still getting bigger. To celebrate the new year, in nine nine, Blockbuster made another big move. They made a bid for a company called Major Video, which was based out of Las Vegas, Nevada. Major Video was the fourth largest video rental company in the United States, and the deal was made official for ninety two and a half million dollars. Blockbuster kept buying up competitors and company is that we're running Blockbuster franchises and brought those stores back under the direct control of Blockbuster Corporate. By the end of nine just two years after Wazinga and his crew took over operations, Blockbuster had grown to more than seven stores, sales had tripled, and profits were almost four times larger than they had been before Wazinga came on board. The company's market value was seven times more than it had been before he came on board. And then the company hit a little roadblock. This is what we call a cliffhanger. I'll tell you what that roadblock was in just a second, but first let's take another quick break to thank our sponsors. So that roadblock came in the form of a financial analysis report which accused Blockbuster management of engaging in some misleading or maybe even shady accounting. According to the report, Blockbuster was hiding its expenses by spreading them out over long time frames. The company would end up spreading out the cost of acquiring and building stores over a forty year period. The implication there was that the company was planning on operating those businesses for at least forty years to generate revenue to cover those costs. And Blockbuster was also spreading out the cost of actual video tapes. They said, well, we're paying for video tapes over a three year period, so when we make a big purchase, we are giving ourselves three years to recover that. Now, according to the analyst who wrote this report, that was not realistic because a three year old tape would not hold the same value as a new tape and not generate as much revenue, So you would see a decreased or diminished returns on rentals. Right, you make a video of allable, and if it's a new film, it might be very much sought after over the course of the first couple of months of it being out, but that would start to taper off. And it was true that a large percentage of rentals were coming from smaller films, but it didn't mean that the same smaller film was constantly being rented, right. A single title might only get rented once or twice a month. It's just collectively across all of those small films, there was a lot of rentals going on. So the analyst was saying, you can't just spread the cost of a video over the course of three years, because it's making too many assumptions. And you would say, you know, this three year old tape is not going to have the same value as a brand new tape, unless, of course, the old tape was some sort of classic like I don't know, Barry Gordy's The Last Dragon, and the brand new tape was something not so classic, like Ernest goes to Amp because that's an easy call. Right. But on top of those charges that the analyst made against Blockbuster, the report also stated that Blockbuster was relying heavily upon the initial franchise fee for way too much of its revenue. The report found that twenty eight percent of blockbusters revenues came from these one time fees, so nearly a third of all revenue that Blockbuster was making came from this franchise fee that would be paid one time by each franchise. In other words, in order to keep that amount of revenue steady, you would have to open at least as many franchises the next year. Right if you make of your revenue from these one time fees. If you don't make, if you don't open as many franchises or more the following year, you're going to have a decrease in that percentage of revenue and you need to make it up somewhere else. So this would create a business plan that was incredibly aggressive and probably unsustainable because at some point you're gonna hit maximum market penetration. You're not going to be able to open up more franchises because the market would be saturated. There would already be enough franchises in various regions, and there wouldn't be enough demand to open up another one. So you can't count on one time franchise fees to be a third of your revenue. It was a short term strategy, according to this analyst, and because it was making up such a significant percentage of revenue, it was a big warning flag. Blockbuster had a prompt response to this. Well. First of all, their stocks took a hit their stock price debt because this report was pretty damaging, but their swift response was this, I don't care up. Management remained defiant. They refused to change the way they operated. They said, this is how we do business, and we're seeing a lot of success, So go for a long walk off a short pier. Gradually, the stock price recovered because sustainable or not, Blockbuster strategy was inflating the company's value. So the company's value was increasing, even if on the long term this strategy could not sustain itself. Maybe someday that would all come crashing down, but in the short term, Blockbuster stock look like a surefire ticket to profits. The company was dominating the home video space, and home video itself was performing like gangbusters. Not only were people eager to get their hands on movies that they might have missed during initial release, it also opened up a new industry where studios could either choose to offload titles to home video instead of going the theatrical release route, or even purposefully make movies with the intent of making them direct to video titles. Blockbuster had another hiccup in November. That's so I got a backtrack a little bit I mentioned earlier that they or at a partnership with United Cable Television Corporation. Well in, United Cable Television Corporation merged with United Artists Communications, Incorporated, and they formed a new company called United Artists Entertainment, Incorporated, and now United Artists was the largest shareholder of Blockbuster. Following the merger between those two companies, United Cable Television Corporation and United Artists Communications, United Artists wanted to restructure, right they had just merged two companies together, and I said, we need the streamline. We need to get rid of any redundant departments or systems and find out what works best for us as an entertainment company and streamline stuff. Part of that meant selling off the twenty eight Blockbuster franchises that the company owned and operated, and also divesting itself of the shares it had of Blockbuster, which by that time made up about twelve percent of all shares in the company. That again raised questions about Blockbusters business plans. Would the company be able to operate the way it had been indefinitely or was this the tipping point? Managements all one surefire solution to the challenges they were facing because expansion in the United States was slowing quite a bit, in part due to saturation. Right, there are a lot of markets that already had enough video rental stores to support that population. So growth in the United States was getting increasingly challenging. But overseas markets presented huge opportunities. And I've seen this happen with other companies, including companies I've worked for, where a company reaches a really big size within one country and then growth is just really hard to do because you've already grown so much in your home country you get you don't really have room to get bigger. So investors still want to return on their investment, right, they still want to make a profit from investing in the company. That means that the company has to not just do well in needs to grow year over year in order for investors to get a return on that investment. This is why we see so much emphasis on growth, not just performance, but how much did you grow this year compared to last year. So you are left with some hard choices. You can try to create more customers in your home country, but that gets more challenging the longer you go, because the larger you get, the fewer the smaller the pool is right, the fewer number of non customers you have, and it gets harder and harder to convince those to become customers. Sometimes it's impossible. Your other choice is to try and expand into other countries, and Blockbuster chose the foreign market strategy. John Melk, one of the three investors who came over from Waste Management back in n seven, traveled to the United Kingdom and he opened up a British subsidiary of Blockbuster. The store that he opened up in South London was called the Ritz, and once again Blockbuster went on a really aggressive path to open his many stores as possible. Before nine had ended, Blockbuster had more than one thousand stores, and by June they would have more than one thousand, two hundred stores in the United States alone. So they were still opening up locations very very quickly, and even though the United States was a tougher market, they were still opening up more stores there. The company also created ad campaign partnerships with fast food restaurants, you know, make a night of it, dinner in a movie, that kind of thing, And they continued reaching out to new markets like Japan, while continuing the old practice of gobbling up other video store chains, particularly big ones that were struggling to compete with Blockbuster. But while the company was growing in size, it was seeing earnings growth decrease year over year, So it was growing, but it was growing at a less accelerated rate. It's hard to say, you know, you're you're not getting smaller, You're just not getting as big as quickly. So the video rental business look like it was losing some team. In ninety eight, Blockbusters earnings were up one percent from the nineteen eight seven numbers, so seven earnings increased by one From eight to eighty nine earnings increased ninety three percent, so a drop in the growth rate. They're still growing, just not as fast. The numbers were even more dramatic, so from eighty nine to ninety it was a forty eight percent growth rate, So I went from one fourteen to ninety three to forty eight. So each year that was going by, the company was getting bigger by the number of stores and the amount of money it was making, but the earnings growth wasn't really keeping pace with the expansion of the company, like they were opening up more stores and more franchises, but it was a diminishing returns on the amount of earnings. Wazinga had an interesting explanation for the decline and growth. He said the Gulf War was to blame. Specifically, he said people were watching the news more frequently rather than watching movies, and so television was sapping his customer base, at least that was his take on it. So he's saying, no one's coming out to rent a movie because they are glued to the television to see what's going on with the Gulf. For Blockbuster was starting to see some new competition. To pay per view had been around for a bit, and on demand content was just kind of getting started around this time, but they were starting to gain traction. And these were very convenient offerings because there was no need to leave the house to go get a tape or to return one, and you didn't have to worry about late fee and you didn't even have to rewind a videotape at the end. Uh In the early days pay per view, you had to tune in at a specific time. It wasn't on demand early early on, but on demand was starting to come out with things like satellite television. Management noticed this and so some Blockbuster stores began offering new services beyond video rental. You know, it wanted to so fi a bit appeal to a broader audience, a broader customer base. So they started renting out video games and even video game consoles like the Sega Genesis, and if You began to sell music, mostly in the form of audio cassettes and then CDs. The company also changed its rental policies for new movies, and this was an effort to increase volume or increase the rate of rentals. So for brand new movies, the idea was, we're gonna reduce the rental fee. It's going to be cheaper to rent a brand new movie than it is other films. However, the do date is earlier, so you can rent a movie, a brand new film that's just come out, and it's going to be less money than it would be for something else, but you have to return it to the store earlier. And the idea here was that they would be able to rent the same films out more frequently and keep that revenue stream coming in. Blockbuster also began to look around in the retail world for senior level executives with a lot of experience in retail to bring them on board. And enhance company leadership because you know, the guys who were in charge, they all came from waste management. They wanted to find other people who had this bigger, big experience with bigger retail companies to help advise UH the senior level of management. By Blockbuster head stores, numerous countries including Spain, Venezuela, Japan, New Zealand, and more. Phillips Electronics would invest more than sixty million dollars in Blockbuster in and across the company. Blockbuster made one point five billion dollars in sales. Now, that is a phenomenal amount of money. One and a half billion dollars in sales. However, when you look at earnings, while they sold one and a half billion dollars worth of product, they earned only eighty nine million dollars out of one point five billion in sales. That's amazing. You know, to to have a one point five billion in sales, but you're earnings are eighty nine million dollars. That shows that this was a very expensive business to be in. The those upfront costs of opening up those stores. The acquisition cost was incredibly high, so was Zinga and Company. They were really growing very quickly but they weren't making that much money once you factored in all the costs. Compared comparatively speaking, I mean a nine million dollars is still a huge amount of money, it's just dwarfed by one point five billion dollars in sales. Blockbuster would make more acquisitions and video rental stores. No surprise, they're same as it ever was. But the company also entered a new phase. It acquired companies called Music Plus and Sound Warehouse. This warehouse is spelled w H E R E. And this was an effort to expand Blockbuster into a multimedia company that not only rented videos but also would act as a music store, so expanding that cassette tape and CD business they had started earlier. Blockbuster also foreigned a partnership with Virgin Group. That's the UK company that uh, it's a big media company over in England. And the goal was to create mega stores. Was Zinga had a vision of these huge box stores that you would go into, kind of like the big electronics or big media stores things like think about Best Buy or Circuit City something like that, but really big store and it would offer not just video rentals, but it would also sell stuff like that might sell movies, computer software, video games, music, and even have like an an Arcade type experience with virtual reality attractions. That was his idea, and he had sort of a prototype open up in Florida, but it never really took off the way he had planned the way. Zinga also had a interesting idea that foreshadowed the digital media age. He ended up starting a project with IBM. He worked with folks over at IBM. He wanted them to develop a system that would burn music tracks to a CD very very fast. And the idea he had was that customers would come into his store, they would be able to go to up to this machine and they would be able to browse through a huge digital database of songs, and then they'd be able to select songs from that digital database, which would then get burned to this c D. You would get a custom mixed c D made up of the tracks that you had chosen from all these different albums. As it turned out, music studios were not too keen on that idea, just as they would heartily resist the digital revolution in music a couple of years later. Uh So, there was a lot of of disagreement on that particular approach in Blockbuster had more than three thousand, four hundred stores around the world, and about the thousand of those were in international markets. Wazinga purchased controlling shares in a movie and television production studio called Republic Pictures. That one owned a large library of films and TV series, and they also bought nearly fifty of the shares in Spelling Entertainment. That's a television production company. And that's set the ground for what would happen in which we could call the beginning of the end. In the next episode we will cover that. We will talk about the death of Blockbuster, how it went from this enormous peak, and we haven't hit peak Blockbuster yet. It continues to grow unsteadily, but it continues to grow until things kind of come to a crashing halt. That will be in our next episode. If you have any suggestions for future episodes of tech Stuff, whether it's a company, a technology, a person in tech, maybe it's just a specific product that you think needs to have a good profile, let me know. Send me a message the email I addresses tech Stuff at how stuff works dot com, or drop me a line on Facebook or Twitter. They handle at both of those is tech Stuff H. S W. Don't forget we have a merchandise store over at t public dot com slash tech Stuff. Go get yourself a tech stuff coffee mug, be cool like me, and remember everything you buy there, a little bit of that comes to the show, so you help support the show and you end up with something cool for yourself, which is awesome. And don't forget to follow our Instagram account. And that's all for me today. I'll talk to you again really soon for more on this and thousands of other topics. Is that how stuff works dot com

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