Chasing Stars in Hollywood

For Blockbuster, a chain primarily engaged in video rental, the most expensive part of the operation was the storage and logistics costs associated with videotapes. A rental tape might cost only $15 to procure, but over its operational life, storage and logistics could add another $50 to $60.

To speed up the circulation of videotapes among users and reduce both the number of tapes needed and the pressure on storage and logistics, as well as to generate additional revenue, Blockbuster implemented a late fee system.

Users typically had seven days to rent a tape; exceeding this period meant daily late fees.

In the original timeline, Netflix repeatedly attacked Blockbuster for this unpopular late fee system, even fabricating a story about its founder being inspired to start Netflix after paying a $40 late fee for "Apollo 13." Though entirely fictitious, Blockbuster nearly sued Netflix over it. Nonetheless, the strategy worked well for Netflix.

Late fees were indeed a significant weakness for Blockbuster.

After acquiring a stake in Blockbuster, Simon advised Nancy Brill and the management to be wary of the late fee issue.

In its early stages, late fees had been very effective, so the system persisted. However, as competition in the North American video rental industry intensified, the late fee system became increasingly inappropriate.

"In the past few months, I've conducted various experiments on both coasts in cities where late fees were eliminated. The results showed that after removing late fees, the frequency of video rentals increased significantly, and store revenue not only didn't decrease, it actually increased."

While a Blockbuster executive continued discussing Blockbuster Online on stage, Nancy Brill spoke softly to Simon about the late fee issue.

Blockbuster's second-quarter financial report wasn't out yet, but Simon knew that in the first quarter of 1992, Blockbuster's overall revenue of $730 million included $61 million from late fees, accounting for 8% of total revenue.

In Simon's memory, late fees accounted for more than 10% of Blockbuster's total revenue, almost equivalent to its annual net profit. This heavy reliance on fines for revenue was fundamentally unsound. 

Blockbuster undoubtedly understood this, but in the original timeline, the company was too cumbersome to make swift changes and lacked a strong stakeholder to push through necessary reforms. This hesitance in strategic shifts not only perpetuated the detrimental late fee system but also led to a disastrous decision to abandon the nascent online rental business, eventually causing the collapse of what was once the world's largest video rental chain.

Thinking about these issues, Simon asked Nancy, "Have you discussed this with the Blockbuster board?"

Nancy nodded. "Many have concerns, especially regarding franchise stores. Company-owned stores might comply, but franchisees are likely more resistant. We can't expect franchisees to have a long-term vision."

About 20% of Blockbuster's 4,300 stores were franchises, a proportion much lower than Simon remembered. After gaining full control of Blockbuster, the management, with Simon's support, gradually phased out the franchise model in favor of company-owned stores, resulting in fewer total stores but a more streamlined operation.

However, existing franchise agreements couldn't be immediately nullified, and franchise stores had more operational freedom. For instance, if Blockbuster decided to eliminate late fees, franchise stores might not necessarily comply.

"If you can ensure the accuracy of your experimental data, go ahead and implement it," Simon said after some thought. "I'll handle the board and shareholders. As for the franchise stores, that's your problem. But I advise you to proceed gradually and devise a well-thought-out plan."

Nancy nodded. "I plan to use this opportunity to expand Blockbuster's membership program further. Additionally, I want to distinguish franchise stores from company-owned stores more clearly, such as adding 'franchise' labels in prominent places to differentiate them. Franchisees won't participate in Blockbuster Online either."

Integrating Blockbuster Online with physical stores would complicate profit distribution if franchise stores were included.

"So, how will you address franchise dissatisfaction?" Simon asked.

"I'll offer them greater operational freedom and reduce franchise fees."

Simon laughed. "You want to spin them off, don't you?"

Nancy smiled wryly. "Yes, but it's very difficult."

Spinning off franchise stores or eliminating late fees would mean giving up a significant market share and revenue, seriously impacting Blockbuster's stock price.

The two continued discussing Blockbuster's late fees throughout the press conference, with Nancy sticking close to Simon even at the post-conference reception, continuously talking about various issues.

Nancy's persistent "attachment" naturally triggered a certain instinctive wariness in Simon's female assistant. Her desire to stay close to Simon while fearing his disapproval was noticeable, even to Nancy.

Finally, Simon sent his assistant to chat with Claire, who had also come today, then turned to Nancy, who was wearing a mischievous smile. "Is this really fun?"

Nancy tilted her head, her smile triumphant. "Very interesting."

"Be careful, Janet might make things difficult for you later. You know, men are easily influenced. If she badmouths you in front of me a few times, you might lose your job."

Nancy replied, "Do you really get influenced easily by women?"

Simon nodded seriously. "Yes, the prettier the woman, the less control I have."

Nancy rolled her eyes. "So, I'm sure Janet won't do that."

"Why?"

"Because if you know you're easily influenced by women, you wouldn't keep one who likes to manipulate you around."

Simon pondered this for a moment, then took a sip of his wine. "Seems logical."

Nancy stepped closer, seemingly ready to press further. "So, I guess you're very cautious with women?"

Simon looked down at the petite executive and ignored her previous remark. "You've breached my personal space."

"Does it make you uncomfortable?"

"No," Simon's tone turned dangerous. "It makes me want to hunt."

Nancy met Simon's gaze for barely a second before slightly retreating.

The arrival of the housekeeper broke the brief tension.

"What are you discussing?"

"The Blockbuster late fee issue."

As he spoke, Simon unabashedly admired Alice in her crisp white suit.

Since their night together, they had met several times, but had found no opportunity to get intimate again. Simon, although generally self-restrained, was closely monitored by the women around him. When traveling with his assistant, he had no chance for "adventures," and when in Los Angeles, he rarely stayed out all night if Janet was around.

Alice, feeling Simon's gaze, remembered his hands on her body that night and felt uneasy. She shifted her attention to Nancy. "Nancy, have you thought about what we discussed?"

Nancy's gaze flickered between Simon and Alice before nodding. "Yes, but even if it's feasible, it could lead to a shareholder lawsuit."

Simon, curious, asked, "What's this about?"

Nancy glanced at Simon. "Alice wants Blockbuster Online to cancel its video sales."

Simon immediately understood.

Amazon had been rapidly expanding in the past six months, and adding new product categories, including videotapes, seemed a logical next step. The housekeeper wanted Blockbuster Online to avoid competing with Amazon, likely with some form of reciprocal benefit. Amazon wouldn't expect Blockbuster to cancel this segment without something in return.

Although video rentals were Blockbuster's primary focus, the company had always been involved in video sales too.

Simon looked at Nancy. "What do you think?"

"I think it's a good suggestion," Nancy admitted. "Canceling online sales allows Blockbuster and Amazon to cross-promote, reducing retail overhead. Honestly, I'd even consider canceling retail sales in our physical stores to focus solely on rentals, but that's impossible."

While late fees might only account for 8% of Blockbuster's revenue, video sales contributed over 20%, making it impossible to eliminate.

As for Blockbuster Online, the new platform's retail prospects were still uncertain, so canceling sales might not matter.

However, such a move would anger other shareholders, who'd see it as sacrificing Blockbuster's interests for another company's benefit, potentially leading to collective lawsuits.

Managing a company, especially a public one, often meant making suboptimal decisions to balance multiple interests.

It ultimately boiled down to Simon not being able to fully acquire Blockbuster. With 100% ownership, he could dictate terms as he pleased.

Nancy quickly added, "Aside from eliminating late fees, I've also been considering cutting some peripheral businesses like movie merchandise sales."

Simon chuckled. "That was your idea."

Nancy didn't deny it. "Yes, but after recalculating costs and returns, it seems better to cut it and refocus on core video retail. This saves manpower and simplifies management, aiding further expansion."

She glanced at Simon with interest, as if daring him to oppose her. Blockbuster's merchandise sales mainly featured Daenerys Entertainment products, benefiting Simon's other interests.

Simon wanted to pinch Nancy's cute face but refrained in public. Instead, he said, "If you think it's the right decision, go ahead. But, Nancy, you'll bear the consequences. Also, remember your primary role as President of Daenerys Entertainment's Consumer Products Division."

Nancy's playful attitude vanished, and she seriously said, "I'll consider it carefully."

She suddenly realized that while peripheral sales might be less profitable for Blockbuster, they significantly boosted Daenerys Entertainment's earnings.

Nancy felt a mix of shame and irritation, blaming Simon for her confrontational attitude.

Yes, definitely Simon's fault.

She wasn't wrong.

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