How Blockbuster Plans to Beat Netflix

With a new business strategy and fresh IT, Blockbuster is attempting to reinvent the DVD rental business for the age of movie downloads and video on demand.

Fri, February 27, 2009

CIO — Action! Adventure! Thrills! Spills! The high-stakes drama of fixing the money-losing Blockbuster movie rental company has it all, except a happy ending yet. Can the duo of CEO Jim Keyes and CIO Keith Morrow, together again after a highly successful run at 7-Eleven, remake Blockbuster?

This storied CEO-CIO team wants to translate the technology-enabled retail ideas they developed to sell snacks and Slurpees to rented entertainment—on land and online. That is, using IT to make sure the right amount of the right product is available at the right time. "You can do it anywhere," Morrow says. "The lifecycle on a sandwich or doughnut is measured in hours and days. The lifecycle of a new movie or game title is not very much longer."

At 7-Eleven, legend has it, the most loyal customers visited an average of twice a day, such as for morning coffee and a snack for the commute home. But Blockbuster patrons are deserting to competitors including Netflix and video-on-demand. Under Keyes' leadership, 7-Eleven cultivated customer loyalty by giving local managers control over their merchandise. With near real-time access to customer activity and inventory data, a manager could see that, for instance, he couldn't keep bear claws on hand for two days running—and he could change his bakery order for day three. The insight to use IT to fine-tune local inventory came from Morrow, but Keyes supported it—pushed for it even. "Jim's a believer in trying things to see how they work," Morrow says.

Their partnership played a large part in turning 7-Eleven into the United States' largest convenience store chain, with sales of $12.2 billion at the time Keyes left in 2005. By reprising their roles at Blockbuster, which has posted $4.8 billion in losses since 2000, Keyes and Morrow are betting that, even in this economy, they can turn the company around.

The pair is nearly two years into a three-tier transformation to stabilize Blockbuster's core rental-store business, diversify sales and build an online distribution system to handle growing demand for downloadable and streaming media. Keyes expects to show a profit this year, but Wall Street remains doubtful about the future: Blockbuster's $258 million market valuation is a fraction of Netflix's $2.2 billion. Even with IT and business in lockstep, that skepticism portends a nail-biter.

Stars in Their Eyes

At its founding in 1985, Blockbuster ruled video rentals. Its blue-and-yellow signage stood for VHS tapes, and later DVDs, to rent for a few days then pay a late-fee when you didn't return them on time. Remember those "Be kind, rewind!" stickers?

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