The story of the people who took down the biggest video rental company in the world is an inspiring one, because they used nothing more than imagination and persistence to take down the company.
George Pimentel is pictured.
But what if you are the gorilla? It is a different story, isn't it? The moral is a little different. The people coming after you are going to look nothing like you, according to the story. They aren't going to come after the things you do well. They are going to target the things that don't work. Can't do. Are unwilling to do so.
That is the nature of disruption. You don't know where it's coming from. It is almost indefensible if it is done correctly.
In the spring of 1998, the thought that we might eventually disrupt the video industry and take down Blockbuster was laughable. There were 7,000 stores of the big box store. There are more than 75,000 employees. There is nearly 5 billion dollars in revenue. A dozen people were in an old bank building with dirty green carpet, while we were in a different building. The bank had an old walk-in safe that we stored our videos in.
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It was our goal to get to the size of a single store, which meant doing about $650,000 in annual revenue. Even that was ambitious. In 1999, the store boasted of being within a ten-minute drive of virtually every major neighborhood in the United States. Why would someone wait so long for their video to arrive?
We had reasons for confidence because the customer experience was not up to par. Most customers preferred the New-Releases wall because it was hard to find things to watch. The company wanted to spread the demand for new titles over several weeks. This was called managed dissatisfaction. You always want to compete with a business that has a core business model.
Late fees were their biggest problem. The people hated late fees, but the company made more than $700 million a year from them. The person was addicted to the store.
We had confidence in our future because we planned to disrupt their business by doing something they couldn't do. We were going to stop renting video tapes. We were going to rent the movies.
It was crazy to start with DVDs. The universe of DVD owners was less than half a million households. The VHS universe was much larger.
Our advantage was the lack of DVD players. We could serve the entire United States with our single internet store. It made sense to have a single online store. There were 7,000 stores for Blockbuster. Each store served less than 100 DVD owners. It didn't make sense to serve so few people with all of the things they needed.
You've got a great invention. How do you get people to buy it?
It was only two years, but it was all we needed. We were the only game in town that was available on DVD. It allowed us to forge relationships with the DVD manufacturers that we would use to drive our early acquisition efforts. We got more press than we deserved. It gave us a lot of customers to work with and gave us time to come up with a no-due-dates no-late-fees subscription model.
Stories of disruption start this way.
I recently consulted for a large manufacturer who used a classic distribution model in which they sold their product to distributors, retailers, and end- users. Everyone was happy. To support so many tiers of distribution, the price to the end- user had to be high. They had a monopoly. A customer was going to go somewhere else.
The inevitable happened after that. A start-up launched a similar product, but instead of taking the leader on directly, they bypassed the usual channels and sold directly to end- users. The product wasn't as good, but by cutting out distributors and high-priced salespeople their prices were half as good.
The CEO of the larger company knew how to respond to this. They would launch their own direct-to-consumer division and use their larger marketing budget to fight this threat. All good.
Their VP of sales heard about it. Are we going to compete with our own distributors? You are going to make my job harder? I'm out of here!
Their biggest distributor called. Are you going to compete with me? You should find another distributor.
The retail network was up in arms. The idea of a direct-to-consumer division was shut down before it even started.
What about the start-up? They got three years of market share gains before the larger company decided to launch the D2C division. It was too late.
There are always ways to attack this way. When Burger King took on McDonald's, they chose a way to compete that they knew customers would prefer, but that McDonald's wouldn't be able to respond to.
When Apple took on IBM, they didn't focus on the business market. Apple exploited a gap in IBM's interest in education and desktop publishing to become the second-largest PC manufacturer.
Every large company has an under-defended niche. In an annual revenue of over $25 billion,Salesforce is a leader in a variety of products and services. Going after their core business? Good luck. There has to be a small corner of their business that is ripe for the taking. If that corner is 1% of the company's revenue, it's a $250 million opportunity. More than enough to justify your full effort. What resources will datememe datememe use to defend only 1% of their business?
I made an investment in CardLess, a company that allows small brands to easily offer their own credit cards. The large banks don't provide this service. It is not worth their time to setup and manage small accounts when they can devote more time to growing and servicing larger ones. Winning the niche that no one else wants is the first step towards taking even bigger bites of the nearly 5 trillion dollar credit card market.
The Canada Principle says that any effort spent chasing small opportunities is almost always better focused on growing your core business. New competitors have an edge because of the Canada principle. Every moment the incumbent is focused on their core business, is the chance for a new entrant to start by building the product and service that the larger company ignores.
Do you want to be a disruptor? The parts of the market that nobody else is interested in are the ones that you should focus on. That is where the opportunities are.
