I was researching Marc Randolph’s role in founding Netflix when I came across a chapter of the Netflix story that rarely gets told. Most people know the ending: Netflix won, Blockbuster died. But between those two facts lies a brutal price war that nearly destroyed both companies — a period when Blockbuster was actually winning, Netflix was panicking, and the outcome was far from certain.

The Netflix-Blockbuster war was not a one-sided slaughter. It was a genuine fight, and Blockbuster came closer to winning than anyone remembers.

Blockbuster Strikes Back

By 2003, Netflix’s DVD-by-mail business was growing rapidly, and Blockbuster was finally paying attention. Netflix had 5.6 million subscribers and was adding more every quarter. Blockbuster, which still operated roughly 9,000 stores worldwide, was watching its customers migrate to the little red envelopes and decided to fight back.

In 2004, Blockbuster launched Blockbuster Online, a DVD-by-mail service designed to compete directly with Netflix. The subscription model was similar: pick your DVDs online, receive them by mail, send them back when you are done, no late fees. But Blockbuster had a weapon that Netflix could never match — physical stores.

The killer feature was called Total Access. Blockbuster Online subscribers could return their online DVDs to any Blockbuster store and receive a free in-store rental on the spot. This meant that while Netflix customers were waiting two to three days for their next DVD to arrive by mail, Blockbuster customers could walk into a store, drop off their online rental, and walk out with a new movie immediately. They got the convenience of online selection with the instant gratification of a physical store.

Netflix headquarters in Los Gatos, California Photo: Wikimedia Commons. CC BY-SA 4.0. Netflix headquarters — the company that survived a price war most people never knew happened.

It worked. Blockbuster Online grew rapidly, reaching over 2 million subscribers by 2006. Netflix, for the first time in its history, lost market share — roughly 2% in a single quarter. Reed Hastings, Netflix’s CEO, later admitted that this was one of the most stressful periods in the company’s history. He responded by slashing subscription prices, triggering a price war that would burn cash on both sides.

The Price War Heats Up

The dynamics of the price war were brutal. Netflix cut its most popular plan from $21.99 to $17.99, then further. Blockbuster matched the cuts and in some cases undercut Netflix entirely. Both companies were spending aggressively on marketing, customer acquisition, and content. Neither could afford to blink.

For Netflix, the calculus was straightforward but painful: every dollar spent on price reductions and marketing was a dollar not spent on the technology and content investments that would define its future. For Blockbuster, the calculus was more complex. The online service was cannibalizing its own stores. Every customer who switched from renting in-store to renting online reduced in-store revenue and foot traffic, even though Total Access was supposed to bridge the gap.

Both companies were bleeding. Netflix’s margins compressed. Blockbuster’s online division was losing hundreds of millions of dollars per year — money that the company was effectively pulling from its still-profitable (but declining) store operations. It was a classic innovator’s dilemma: invest in the future at the expense of the present, or protect the present at the expense of the future.

Carl Icahn Changes Everything

In 2005, activist investor Carl Icahn began accumulating shares in Blockbuster. By 2006, he had joined the board and began pushing for changes that prioritized short-term profitability over long-term strategic investment. Icahn’s argument was that Blockbuster was burning too much money on its online service and needed to focus on extracting profit from its existing stores.

The board listened. Under pressure from Icahn and other shareholders focused on quarterly results, Blockbuster cut the marketing budget for Blockbuster Online. The Total Access program, which had been Blockbuster’s most effective weapon, was scaled back. The free in-store rental that came with returning online DVDs was modified and eventually made less attractive.

The impact was immediate and catastrophic. Blockbuster Online’s growth stalled. The subscribers who had been flocking to Total Access — many of them former Netflix customers — began drifting back. Netflix, which had been genuinely worried about Blockbuster’s competitive threat, watched in disbelief as its rival retreated just when the battle was most intense.

John Antioco, Blockbuster’s CEO who had championed the online strategy, was pushed out in 2007. His replacement, Jim Keyes, came from 7-Eleven and had no experience in entertainment or technology. Keyes focused on in-store retail, essentially abandoning the online strategy that had been Blockbuster’s best chance at survival.

The last Blockbuster store in Bend, Oregon Photo: Wikimedia Commons. CC BY-SA 4.0. The last Blockbuster store in Bend, Oregon — the final outpost of a chain that once had 9,000 locations.

Netflix Pivots to Streaming

With Blockbuster retreating, Netflix had breathing room to execute the strategy that would define its future. In 2007, Netflix launched its streaming service, initially offering about 1,000 titles that subscribers could watch instantly on their computers. The streaming library was tiny compared to the DVD catalog, and the technology was clunky. But it was the beginning of a transformation that would make Netflix one of the most valuable media companies in the world.

By that year, Netflix had 7.5 million subscribers and was growing faster than ever, no longer constrained by the price war that had consumed so much energy and capital. Reed Hastings, who had built a culture of radical candor and talent density, redirected the company’s resources toward streaming technology, content licensing, and eventually original programming.

Blockbuster filed for bankruptcy in September 2010. Its remaining stores were sold to Dish Network, and they were closed one by one over the following years. Today, a single Blockbuster store remains open in Bend, Oregon, operating as much as a tourist attraction as a rental business.

What the Price War Actually Did

I think the conventional reading of the Netflix-Blockbuster story misses the most important lesson. People tend to frame it as a narrative about innovation versus complacency — nimble startup beats lumbering incumbent. But the real story is more nuanced. Blockbuster did innovate. Blockbuster Online and Total Access were genuinely competitive products that were winning customers. The failure was not a failure of innovation. It was a failure of commitment.

When the price war was at its fiercest and the costs were highest, Blockbuster blinked. The decision to prioritize short-term profitability — driven by shareholder pressure and boardroom politics — killed the very strategy that could have saved the company. Netflix, by contrast, endured the pain. It accepted the margin compression, absorbed the market share losses, and kept investing in the future.

The competition itself made Netflix stronger. The price war forced Hastings and his team to think harder about their long-term strategy, and it accelerated their commitment to streaming. Without Blockbuster’s competitive pressure in 2004-2006, Netflix might have been content to remain a DVD-by-mail company for years longer. Instead, the threat from Blockbuster pushed Netflix to bet on streaming earlier than it might have otherwise — and that bet turned out to be worth hundreds of billions of dollars.

The war that almost killed both companies ended up killing only one. And the survivor emerged not just intact but transformed, ready to reshape how the entire world watches entertainment.

Sources

  • Keating, Gina. Netflixed: The Epic Battle for America’s Eyeballs. Portfolio, 2012.
  • Randolph, Marc. That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea. Little, Brown and Company, 2019.
  • Antioco, John. “How I Did It: Blockbuster’s Former CEO on Sparring with an Activist Shareholder.” Harvard Business Review, April 2011.
  • Hastings, Reed, and Erin Meyer. No Rules Rules: Netflix and the Culture of Reinvention. Penguin Press, 2020.
  • Gandel, Stephen. “How Blockbuster Failed at Failing.” Fortune, October 2010.
  • Netflix Inc. Annual Reports, 2003-2007.
  • Blockbuster Inc. SEC Filings, 2004-2010.
  • Poggi, Jeanine. “Carl Icahn and the Battle for Blockbuster.” The Street, 2010.