The Blockbuster Offer Netflix Begged It to Accept

In the spring of 2000, Reed Hastings flew to Dallas to meet Blockbuster CEO John Antioco and propose a deal: Netflix, then a fledgling DVD-by-mail company with about 300,000 subscribers and a string of losses, would sell itself for $50 million and run Blockbuster's online business. Antioco reportedly laughed. His lieutenants called the number absurd. The meeting ended quickly.

Blockbuster had a reason for its confidence. Late fees — the $1.50-per-day charges on overdue rentals — brought in an estimated $800 million a year, nearly a sixth of its total revenue. That revenue stream was also its biggest customer-service liability: surveys consistently ranked late fees as the primary reason people disliked Blockbuster. When Antioco finally did eliminate late fees in 2005, under pressure from Carl Icahn and falling subscriber counts, he discovered the fees had been cross-subsidizing the store network. The move cost $400 million in the first year.

Blockbuster launched its own online service, Blockbuster Total Access, in 2004. By 2007, it had signed up 2 million subscribers and was briefly outpacing Netflix on new customer growth. Then Icahn, who controlled a large stake and objected to the online unit's losses, forced Antioco out. The incoming CEO, Jim Keyes, said in a 2008 interview that he didn't see Netflix or Redbox as competition. Blockbuster filed for Chapter 11 in September 2010. By that point, Netflix was worth about $3 billion.