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There was an excellent article recently on Netflix in Backbone. Apparently in its infancy Reed Hastings met with Blockbusters executives and offered a majority position in the company for $50 million. They said no and signed an exclusive video on demand deal with Enron for 20 years. Blockbuster is now worth $345 million, Netflix $1.9 billion.

Amazing. Think of what Blockbuster missed out on because they weren’t willing to believe in a new business model. Even if they didn’t buy the large chunk of Netflix, they could have easily worked out a partnership with them. Netflix’s business model is so effective because they have less employees and fixed assets. Back in the old days you wanted a ton of stores so you could get economies of scale. Nowadays that’s not always a competitive advantage. It’s a perfect environment for small business.

Neftlix earns about $1 million in revenue per employee because they don’t have tens of thousands of locations, Blockbuster earns about $100,000 per employee. So when you’re looking at your business look at adjustments to the business model and challenge the status quo. People thought Netflix wouldn’t work because no one would wait days for a DVD. People did. And now Netflix has become so good at distribution that they can guarantee one day delivery to 95% of the US. So Blockbusters main “strength” – locations everywhere – has quickly turned into its weakness. Too many locations tying up too much capital.

A great business model can make the business. For another great one check out our Threadless.com post.

-Craig Sharkton