R.I.P. Blockbuster

With today's unsurprising news that Blockbuster Inc. will file for Chapter 11 bankruptcy protection in the immediate future, we prepare to say goodbye to another brick-and-mortar company done in by industry changes brought on (in part) by the internet. While Blockbuster is not officially closing its doors, it has plans to close nearly half of its retail stores, while expanding its self-serve kiosk business (those Redbox-style things you see at gas stations and grocery stores). Nevertheless, the handwriting is clearly on the wall for Blockbuster, and their competitive responses might be a case of too little, too late.

Ultimately, Blockbuster was caught sleeping while Netflix and iTunes took over the rental market, with Redbox further eroding its margins. Much like Circuit City before it, Blockbuster was slow to respond to obvious changes in the way that consumers used their product, and it will likely meet the same end. Ironically enough, Blockbuster tried to step in and buy Circuit City before its failure.

Of course, what I choose to focus on in this news is what happens to an industry when its biggest player is allowed to become bankrupt. It would be hard to argue that the media industry is less robust or consumer-friendly than it was when Blockbuster was in its heyday. Rather, the death of Blockbuster is an instance of creative destruction, a necessary step in the evolution of the rental business. Why, then, do we feel compelled to respond differently when the company in question is a bank, airline, or car company? Are we holding back progress in those industries simply to preserve the comfort of the status quo?

Bankruptcies might not be pretty, and they might in some cases create painful frictional periods as we adjust to a new reality (and as displaced workers find new jobs). I, for one, wish I knew what our economy would look like if we allowed for institutional failures in all industries. What would be the car industry analogue to Netflix, if GM were allowed to fail? Who would become the Amazon.com of the airline world? Unfortunately, as long as we continue to selectively protect certain large failing businesses, we will never know.

[Wall Street Journal]