Rest in pieces Blockbuster

This morning sees news of video store rental chain Blockbuster’s bankruptcy declaration.  The closure of what was once one of the world’s most vibrant and exciting retailers makes for a good brief capitalist case study.

I want to use the Blockbuster story to highlight something important: just how quickly information and capital move these days.  Less than a decade ago Blockbuster was King Pig in the video rental world.  Then upstart Netflix was created and Internet connection speeds rapidly improved.

Blockbuster was stuck with a business model that was very illiquid capital intensive.  What I mean by this is that Blockbuster had a huge stake in its retail locations, as well as billions of dollars of investment in videos (VHS and DVD).  This made it hard for them to be very nimble vis-a-vis Netflix.

Netflix was birthed as an idea.  Then the upstart attracted millions upon millions of dollars in capital and very rapidly.  The years that Blockbuster invested in refining and perfecting its business model also meant that it could not change very quickly.  The giant video store chain’s lack of dexterity is really what killed it.  It could not divest itself of its illiquid investments fast enough to then reinvest that same capital to compete with Netflix.  Ouch!

Most importantly, this story is instructive of the dangers of investing in the modern era where ideas and capital move at Internet speed.  Business empires can fold in less than a decade when superior ideas find customers and are funded by investors.  Technology investments are particularly vulnerable to this form of capitalist assassination.  Think: the record industry vs. iTunes.

My point is that investors can no longer think of competitive advantage as something that is sustainable through multiple generations of consumers.  Instead, your thinking must always be that ideas and capital will move faster and faster.  In Blockbuster’s case, 30 years of superior effort was destroyed in less than 10.  In the record industry’s case, 80 years worth of (mediocre) effort was destroyed in less than 10.

As investors spend time focusing on the nimbleness of your investments and about their vulnerability to their products being digitized and delivered digitally.  Think about the intensiveness of their capital investments.  Are they liquid, or illiquid.  And importantly, pay very close attention to companies that actively are looking to exploit these vulnerabilities in other businesses.

Jason