The Blockbuster late fees of ad tech
Lucrative products reviled by consumers are a dead end for innovation
By the time Blockbuster closed the last of its video-rental stores in 2014, its main competitor Netflix had amassed 57.4 million members and was generating $5.5 billion in annual revenue. For Blockbuster, a series of bad business decisions sunk the video-rental OG, including one that was universally despised by its customers but lauded by its shareholders: late fees.
Blockbuster charged its customer $1 for every day a movie rental was late, which could double or even triple the cost of seeing a movie in your PJs. In 2000, Blockbuster raked in $800 million in late fees, representing 16% of its revenue. Consumers, of course, hated the late charges. So did Reed Hastings, who, annoyed with once having to pay $40 in late Blockbuster fees, came up with the idea to launch Netflix, whose main selling point in the early days was that you could rent DVDs by mail and keep them for however long you wanted — with no late fees whatsoever. Netflix credits some of its early success to its ability to attract Blockbuster customers who were fed up with those $1-per-day charges. In its heyday, Blockbuster operated more than 9,000 video-rental stores, but in 2010, it filed for bankruptcy. It now largely serves as a cautionary tale in MBA programs.
What’s telling here is that once there was an alternative to Blockbuster and its despised late fees, many consumers flocked to it — even though the model was radically different and completely unproven. A similar story plays out in other industries time and time again. Take, for example, financial services and challenger TransferWise, which was launched in 2008 to counter the exorbitant bank fees charged for wiring money overseas. The founders of TransferWise — Estonians living in London — learned the hard way that banks may tout low transfer fees but then actually use terrible exchange rates in a system that was anything but transparent, replete with middlemen that sometimes emerged to take yet another cut. TransferWise — now only called Wise — still charged fees as part of its business model that weren’t necessarily lower, but the key differentiator was that the fees were transparent, with no surprise charges levied after a transfer was completed. In 2016 , the fintech startup became a European unicorn with a $1.6 billion valuation. In July 2021, Wise began trading on the London Stock Exchange at an $11 billion valuation.
We can’t talk about detested business models without mentioning another industry whose model has been massively disrupted in recent years: cable TV. In the golden days, subscribers and subscription costs reliably increased every year and can now easily cost a household hundreds of dollars each month. Other than maybe adding on special packages or premium channels, consumers have historically had little say in what was included in their basic service plans, even if some of the channels included were never watched — ever. Once video-on-demand options hit the market, giving consumers more flexibility to subscribe to more affordable individual services — which often provided a better user experience than cable to boot — consumer attitudes toward cable subscriptions changed. In 2021, 56% of Americans watched TV through cable or satellite, down from 76% in 2015, according to Pew Research. Most people who ditched cable or satellite said the costs were too high and that they could just access the content they liked online. Cable TV’s hidden fees are, again, one culprit: After studying cable bills, Consumer Reports concluded that cable company-imposed fees added up to a 24% surcharge above the advertised price for services. That adds up to about $450 in cable company-imposed fees per year per customer. The highest tier Netflix subscription clocks in at around $220 per year.
The Blockbuster late fees of ad tech
Blockbuster, banks, and cable companies focused on business models that were very lucrative but abhorred by their customers. There is a similar phenomenon at play in ad tech, where it seems companies can’t help but continue focusing on things that are very profitable but absolutely despised by consumers. Once there is an alternative, consumers flock to it — yet many companies fail to learn a lesson.
What are the Blockbuster late fees of advertising? We can think of a few.
First, there is retargeting of something you’ve already bought. How many times have you heard someone complain — or have complained yourself — about a pair of shoes that followed you around the internet after they were purchased? Marketers love all forms of retargeting, but consumers largely hate it. The worst offender is retargeting for items you’ve already purchased: Its origins date back to when brands didn’t want to put any sort of tracking pixel on the checkout success page because of the perception that it would slow down the page and alienate customers. As a result, customers aren’t removed from retargeting segments once they’ve completed the purchase. Advertisers put a lot of effort into retargeting consumers based on what they’ve browsed but zero effort in removing them from the process once they’ve purchased. Although retargeting can perform 10 times better than a standard display ad, there is also a tremendous amount of waste involved in advertising to people who have already converted.
Another offender: chumboxes, those thumbnail recommendation boxes for garbage content at the bottom of pages on many legitimate publisher websites. When content recommendation vendors initially went to market, they struck very lucrative deals with marquee media companies to appear on the bottom of their webpages in exchange for guaranteed income. For publishers with lofty mastheads, this would often be well into seven figures — a sum few publishers could afford to pass up even at the expense of user experience. While this was good for the publisher’s bottom line, chumboxes provide the opposite of what most users would hope for in terms of the quality of content and reputation of the publisher, therefore diluting the publisher’s brand.
And don’t forget pre-roll and mid-roll ads that appear during video-on-demand content. Whether they’re getting bombarded with the same ad over and over or being forced to watch irrelevant ads, consumers find those unskippable video ads off-putting. When the “skip ad” function became a reality, viewers didn’t hesitate to click because these two concepts — on-demand viewing and advertising — aren’t compatible. That wouldn’t change if the world’s best ads were targeted in the best possible way. Again, this is an insanely lucrative product, and YouTube is essentially printing money based on mandatory pre-rolls, but from a user perspective, it’s the worst.
Be Netflix, not Blockbuster
As we’ve said in previous Ones, the way that advertising — especially digital advertising — has worked up until the platform era isn’t how we expect it to continue working. Obviously, there are major systemic changes underfoot, such as third-party cookies finally going away and Apple’s aggressive entrance to advertising and its IDFA privacy changes. Clearly, we are in store for much disruption.
At the same time, however, there are potential opportunities and pockets of creativity in which it may make sense to focus innovation in the next three years. Lest we forget, in 1994, three years before Netflix launched, Blockbuster had $3.3 billion in revenue and looked like an incredibly solid business without major challengers. We believe that we are now in a similar moment in advertising and could see truly tectonic changes in the next three years. Just because we haven’t yet seen something radically new emerge on the same level as Netflix, in terms of success, doesn’t mean that it’s not just around the corner.
Would you have taken a job at Blockbuster in 1997, the year Netflix was launched? Where do you as an advertising professional want to spend the next three years of your career?
Blockbuster and its one remaining store
Watch ‘The Last Blockbuster’ on Netflix (of course)
Thanks for reading,
Ana, Maja, and the Sparrow team
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Who we are: Sparrow Advisers
We’re a results oriented management consultancy bringing deep operational expertise to solve strategic and tactical objectives of companies in and around the ad tech and mar tech space.
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Founded in 2015 by Ana and Maja Milicevic, principals & industry veterans who combined their product, strategy, sales, marketing, and company scaling chops and built the type of consultancy they wish existed when they were in operational roles at industry-leading adtech, martech, and software companies. Now a global team, Sparrow Advisers help solve the most pressing commercial challenges and connect all the necessary dots across people, process, and technology to simplify paths to revenue from strategic vision down to execution. We believe that expertise with fast-changing, emerging technologies at the crossroads of media, technology, creativity, innovation, and commerce are a differentiator and that every company should have access to wise Sherpas who’ve solved complex cross-sectional problems before. Contact us here.