The Netflix case covers the period since the inception of Netflix (1997) until sometime in 2007. I will admit, it is difficult to put myself in the shoes of “2007 Jonathan”, while not allowing my knowledge of Netflix’s future stunning success and Blockbuster’s ultimate bankruptcy to influence my decision making process. Let’s try anyways.

By 2007, Blockbuster had made it abundantly clear, whether via actions or words, about their perceived vision of the future of the video rental industry. In 2002 they claimed that there was no “financially viable long-term” online rental business. They also claimed there was “not enough demand” for a mail order business model as well. Finally in 2004, they started to take things seriously with the introduction of Blockbuster Online. That was essentially the beginning of the end for Blockbuster, with many analysts noting in hindsight that it was too little too late.

During the early 2000s, Netflix was driving forward by using the power of the internet (the usage of which is a great example of disruptive innovation), innovating an entirely new industry right under the nose of Blockbuster. While they started out as a “mail order” video rental company, they ultimately thrived due to the use of innovative algorithms, a website, a search engine, and a novel pricing structure; one that Blockbuster couldn’t even imagine working. During this this time, Blockbuster’s absorptive capacity was so low that they were unable to harness the power of the internet when they saw what Netflix was doing. By 2004, Blockbuster was still a massive company and an industry leader with plenty of cash on hand to execute any changes they desired. Yet, they failed to see that changes in technology, such as streaming video and efficient online queuing and ordering, would drive the future of video entertainment.

By 2007, Netflix had already been investing millions of dollars into VOD for several years and again, Blockbuster was caught with their pants down. Netflix had all the content AND the infrastructure to distribute the content. So, when it came to making my stock purchase, in 2007 I went short Blockbuster with over $100m of investors’ money, and now I have a net worth of $2.6B and spend time flying between my 5 vacation homes.