Question

Did Blockbuster appropriately evaluate the risks they were or were not taking in their decisions about policy, in particular, the late fee charges and their impact on the company’s profits?

Answer 1

No, Blockbuster did not appropriately evaluate the risks involved with their decisions about the different policies in general and about the late fee charges decision in particular.

Blockbuster charged its customers late fees and this fee was an important part of the company’s revenue. In fact Blockbuster’s revenue became largely dependent on the income from late fees that it charged to its customers.

When new companies like Netflix emerged this weakness of Blockbuster was exposed. Netflix enabled its subscribers to keep the DVDs for as long as they wanted and thus eliminated the component of ‘late fees’ from the business model entirely. As a reaction to changing competitive landscape Blockbuster introduced the ‘Movie Freedom Pass’ in which there was no late fee component. But the profitability of Blockbuster’s new strategy failed to compensate it for the loss of late fees on which the company was highly dependent.

This move significantly led to deterioration of Blockbuster’s profitability and the company eventually went bankrupt in 2010.