James Ledbetter at Slate writes:

Some Netflix skeptics have been honest enough to admit their errors. In October 2006, Jim Cramer memorably donned sackcloth and ate a piece of a hat with the stock symbol NFLX on it. His sin: He told his viewers to sell Netflix at $19 a share. Today, it's trading at more than $130.

While its critics were flailing away, the company has continued to grow steadily and spread its influence well beyond the red envelope. One of Netflix's direct competitors, Blockbuster--which for years was supposed to put Netflix out of business--is teetering on the edge of bankruptcy.

It wasn't an unreasonable bet, though.  It's very common for innovative new companies to introduce a concept, and then go broke as established competitors, or owners of complementary assets, exploit their invention. Think of CAT scans, which made lots of money, but ultimately not for the company that introduced them.  TiVo, which has revolutionized cable provision, but struggled to make money itself.  Or Netscape, which went public with dreams of unseating Microsoft, but ultimately succumbed when Microsoft realized that it could offer free browsers forever in order to protect its other lucrative software markets--and Netscape couldn't.


So why did Netflix succeed where other innovators have failed?  My initial suspicion is simply that Blockbuster wasn't a very good company--management was too slow to react.  But I wonder if Blockbuster was even in a position to dominate Netflix.  Blockbuster had enormous capital investments that it could not easily shed: stores, a zillion copies of every movie, employees, and so forth.  Those costs meant that Netflix had a pretty significant cost advantage.  Ignoring all those and making another huge capital investment in Netflix-like service was a huge risk--one that Blockbuster didn't take until it was obvious that they had to, at which point it was too late.

On the other hand, Blockbuster had a lot of assets, especially brand name and a relationship with movie distributors.  I have to suspect that if they'd taken the threat seriously, early enough, they could have killed off Netflix.  So the problem wasn't so much that analysts underestimated Netflix, as that they overestimated Blockbuster.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.