What Blockbuster’s dwindling fortunes really mean

Blockbuster Video is becoming a dud of a business. Forbes, in What Blockbuster’s bankruptcy teaches us about economics, blames it for failing to recognize the innovator’s dilemma:

“Blockbuster concentrated on perfecting its existing service while beating competitors offering the same instead of looking into ways that outsiders might destroy its business model altogether,” writes John Tamny.

Wrong. Way back in the mid-1990s, Blockbuster was exploring how to deliver streaming video directly to customers. Its plan at the time was to use superservers from a startup called Parallan (later purchased by IBM) to handle the distribution. This was pre-Netscape IPO, but still an era when ‘convergence’ of consumer electronics and computing was expected to take over our living rooms (yes, Virginia, technology hype comes in cycles. Temper your hope with cynicism when considering the iPad).

Blockbuster obviously recognized the potential for having its business model destroyed. But the Parallan plan failed, not due to technology so much as the problems of getting distribution rights (or so I was told by my sources; Blockbuster never returned my calls and to my knowledge never publicly discussed the project). What it seems to have missed was the damage a more basic approach could do. Netflix added a return component to the book club/music club model and put a nice Web interface on it. Not nearly as cool as streaming video into the home, but it worked.

The economics lesson, then, is that simple twists take less time and investment (i.e., risk) than visionary leaps.