The Business of Broadband

I was reading about Blockbuster Video the other day and it made me think of an illustration every first-year business student hears. It’s one that highlights the importance of a company adapting their business model or mission statement in light of changes in technology.  It goes something like this:  If a company made buggy-whips during the advent of the automobile, and defined themselves only as a buggy-whip manufacturer, they would fail. If they defined themselves in a broader sense, such as a maker of accessories for the transportation industry, they would have a good chance for success as their customers inevitably moved from horse-drawn wagons to the “horseless carriage”. Live in denial toward the changes to come, and die. Don’t adapt to new competitive pressures and innovation, and you will be driven out of business.

Blockbuster  was an amazing success story. Their retail stores quickly spread far and wide, and are about as ubiquitous as Starbucks.  Small, “mom & pop” video stores, which dominated the landscape in the early days of the VCR,  were quickly outmatched when a Blockbuster moved in close by. Today, Blockbuster is closing hundreds of retail stores and recently announced that they may need to file for bankruptcy. Each day that looks more and more likely as their stock price now hovers around $0.20 per share.

It’s hard to imagine a company that once dominated the video rental market having such trouble, but it comes down to the demise of a buggy-whip service.  Blockbuster did not adapt quickly enough to threats from upstarts like Netflix, who out-innovated a firmly-entrenched market leader.  Netflix was able to reduce their costs by avoiding the need for expensive retail locations. They built a loyal following by eliminating the hassle of a special trip to the video store to return a movie and doing away with late fees. It took Blockbuster six years to offer their own video-by-mail service, but this was too late to overcome Netflix advantage, who had long owned that concept in the consumer’s mind. Then, when faster broadband connections made video delivery on-demand feasible, Netflix was able to leverage their popularity and out maneuver Blockbuster again with a better offering. Adding insult to injury, competitor Redbox has been stealing market share from Blockbuster on the low-end with ultra-inexpensive rentals via vending machines.

Blockbuster is trying its best to avoid Chapter 11, and is now focusing on the right things. From their latest 10-K statement filed with the SEC in January:

Through our alliance with NCR, we expect an additional 7,000 Blockbuster Express kiosks to be added in 2010. We also plan to grow the by-mail channel and further expand availability of our digital offering through BLOCKBUSTER On Demand.

But, the barn door has probably been open too long for these changes to allow Blockbuster to avoid a forced restructuring under Chapter 11.

What does all this mean for Cable Companies and Phone Companies?  Unlike buggy-whip vendors or Blockbuster, you must adapt quickly if you want to remain viable. You cannot define yourself as a provider of phone services or Cable TV. Even if you have changed what you call yourself, you need to change your actions. Don’t stubbornly hold on to legacy services without preparing for the future to come, because it will come quickly. Voice and Video Services have been moving to IP, and that trend will accelerate. Customers will be watching more and more full-length videos over the Internet, and they will be watching them on a big-screen, Internet-ready TV from the comfort of their couch, while they chat with their friend on a smart-phone connected through their home router.

In the end, for the consumer it will come down to a choice of the best provider of broadband service in their area. Play off your strengths. If your connections are double that of your competitor, you can leverage that. If you’re not the fastest in town, but are a locally-owned company, that’s an advantage.  Provide a higher level of reliability, customer service and technical support at a fair price, and you will have a chance to compete in the IP marketplace.