The Video Store Didn't Lose to Netflix. Not at First.

There was a right way to do it, and everyone who was alive and under forty in 1994 knows it by heart. You went on Friday, after dinner. You walked the New Releases wall first and you walked it fast, because the good copies went early and a row of empty display boxes was its own small heartbreak. You settled, eventually, on something. You argued about it in the car. And somewhere in the back of your mind, already, ticked the little clock of dread: it was due back Tuesday by midnight, and you knew — you already knew — you would not make it.

For about two decades that ritual belonged almost entirely to one company. Blockbuster opened its first store in Dallas in 1985 and grew into something closer to weather than a business: by its 2004 peak it ran more than 9,000 stores and employed some 84,000 people, a blue-and-yellow cathedral in every strip mall in America. And it ran, to a degree that is genuinely startling in hindsight, on your guilt. Late fees brought in roughly $800 million a year — about a sixth of the company's entire revenue. The thing customers hated most about Blockbuster was, structurally, Blockbuster.

The company's most reliable product was never the movie. It was the fine.

The offerThe meeting they laughed out of the room

Here is the scene everyone knows now, retold until it has the shine of a parable. In 2000, a small, unprofitable startup called Netflix was mailing DVDs around in red envelopes and losing money doing it. Its co-founder, Reed Hastings, flew to Dallas and proposed a deal to Blockbuster CEO John Antioco: let Netflix run Blockbuster's online arm, and take the whole company off his hands for $50 million. By the accounts of people in the room, the Blockbuster side struggled not to laugh. At the time it was a reasonable reaction. It is now the single most expensive laugh in the history of retail.

Not so fastThe part the parable leaves out

But the tidy version — plucky startup slays dim dinosaur — skips the interesting years, and the interesting years are the whole point. Because for a while, Blockbuster fought back, and fought back well. In 2004 it launched Blockbuster Online, a DVD-by-mail service that undercut Netflix on price; by 2006 it added Total Access, a trick Netflix simply could not match — mail your movie back or hand it to a kid at a store, either way, and walk out with the next one free. In early 2005 Antioco went further and detonated the company's own golden goose, ending late fees in a campaign that handed hundreds of millions in revenue back to customers on purpose. Subscribers climbed. Netflix's growth wobbled. For a real stretch of 2006 and 2007, the dinosaur was winning.

The video store, in other words, did not lose to Netflix. Not at first. It was beating Netflix at Netflix's own game — right up until it decided to stop.

The boardroomHow Blockbuster fired the plan that was working

The kill came from inside the building. The no-late-fees, bet-the-company-on-online strategy was expensive, and it drew the eye of the activist investor Carl Icahn, who bought a large stake and went to war with Antioco over the spending — and, famously, over the size of Antioco's bonus. Antioco left in 2007. His successor, Jim Keyes, looked at an online business bleeding cash to fight a war and made a call that reads, in hindsight, like a man bailing water out of a boat and into a second boat: he pulled back on Blockbuster Online, refocused on the stores, and let the late fees quietly creep back in. The one strategy that had actually frightened Netflix was shelved — by the company that had built it.

The fallSlowly, then all at once

After that it went the way these things always go. Streaming arrived and made the very idea of driving somewhere to rent anything look faintly medieval. The stores — all those thousands of leases — turned from an asset into an anchor overnight. In January 2010 Blockbuster was delisted from the New York Stock Exchange, its stock down more than 90% from the top. That September it filed for bankruptcy. Dish Network bought the carcass in 2011 for around $320 million, mostly for the name. By 2014 the last company-owned stores went dark.

What's leftOne store, in Bend, Oregon

What's left is a single franchised Blockbuster in Bend, Oregon — the last one on Earth, kept alive by a manager who refused to let it close and a steady traffic of pilgrims buying branded T-shirts and taking pictures in the aisles. It isn't really a video store anymore. It's a museum of a feeling: the specific Friday-night hope of the New Releases wall, the clack of a plastic case, the low civic shame of a tape three days overdue. The last store got famous enough that a documentary about it ended up streaming on, of all places, Netflix.

So whatever happened to the video store is not, in the end, a story about a company that couldn't see the future. Blockbuster saw it clearly, built it, and briefly ran it better than the startup that would bury it — then handed the shovel to a boardroom fight and a revenue line it couldn't quit. The late fee was the business model, right up until the business model was the late fee. Be kind, rewind. Nobody's checking anymore, on this side of the tape.