They Scoffed at a $50 Million Offer, Now It's Worth $500 Billion... What Really Brought Them Down [AI Mistake Notes]

The Fall of Established Companies: Is It Really Because of Startups?
Blockbuster, Once the Leader in Video Rentals, and the Downfall of BlackBerry
Undermined by Internal Resistance and the Defense of Vested Interests

Editor's NoteExamining failures is often the shortcut to success. "AI Mistake Notes" explores cases of failure related to AI products, services, companies, and individuals.

Even Netflix, the world's largest video streaming company, once considered selling itself. In the early 2000s, faced with mounting deficits and an uncertain future, Netflix's management proposed an acquisition to Blockbuster, their competitor and the number one company in the video rental market.

The Blockbuster executives rejected the proposal outright. In fact, they scoffed at it. Blockbuster had built an extensive offline store network across the United States, while Netflix was just an uncertain startup with unclear prospects.

If the deal had gone through at that time, today's Netflix would not exist. The proposed sale price was $50 million (about 68 billion KRW). In May of last month, Netflix's market capitalization reached an all-time high: $500 billion (about 700 trillion KRW).

It Wasn't Netflix That Brought Down Blockbuster

AI chatbot image. Getty Images

Blockbuster went bankrupt ten years later. Netflix rose to become the dominant force in the streaming market. Blockbuster's bankruptcy is often explained as the result of "the meteoric rise of a startup called Netflix." However, that explanation is insufficient. In some ways, Blockbuster was brought down by its own actions. This was not simply a case of management failure, but an example of how internal power dynamics within an organization can stifle innovation.

From its entry into the market, Netflix leveraged physically smaller and more durable DVD technology. It adopted a "subscription" business model. Consumers could rent up to three DVDs at a time, with no return deadlines. There was no need to visit a rental store; DVDs were delivered by mail. At the time, this was a groundbreaking approach. Some Blockbuster stores earned more than 30% of their revenue from late fees alone.

Blockbuster's management did not completely reject change. They saw potential in Netflix's model and developed a similar one. The difference was that, instead of using mail, consumers had to pick up and return DVDs at the rental store. This model was well received by customers but was soon discontinued.

As previously mentioned, Blockbuster's business model relied heavily on rental franchises and late fee revenue. To fully adopt the Netflix model, rental stores would have had to give up these profits. Store owners strongly resisted. While Blockbuster's executives were aware of the need for change, the resistance within the existing structure was simply too strong to overcome.

This case demonstrates that adopting new technology is not just a technical decision, but a complex process of reorganizing internal power structures. In Blockbuster's case, efforts to protect the interests of the existing power structure (store owners) ultimately led to the downfall of the entire company.

British Army vs. German Army: Attitudes Toward the Tank

A tank standing alone among the cavalry unit. DALL-E3

To benefit from new technology, it is not enough to simply adopt it. Bold decisions and strategies that can overturn existing organizational structures are required.

At the end of World War I, Britain introduced a new weapon to the battlefield: the tank. The tank was an innovative weapon capable of changing the dynamics of a battlefield still dominated by horses.

However, after the war, the British Army simply integrated tanks into the existing cavalry units. Even as the clouds of World War II were gathering and Germany was beginning to rearm, Britain's response was surprisingly old-fashioned.

At the time, British Army Field Marshal Archibald Montgomery-Massingberd ordered that the supply of feed for horses be increased tenfold. He also provided two horses to each cavalry officer and one horse to each tank officer. This was an attempt to forcibly fit new technology into existing organizational structures and strategies.

By contrast, Germany, whose military organization had collapsed after defeat in World War I, took a different approach. They viewed tanks in a completely new way, starting from a blank slate. They understood that "new technology requires new organizations and new strategies." Germany developed a new strategy called "Blitzkrieg" and even invited the British Army to observe demonstrations.

Britain tried to maintain the existing power structure (the cavalry) while forcibly fitting new technology into it. As a result, they faced significant difficulties in the early stages of World War II against Germany's Blitzkrieg. For the German military, which had no need to maintain the old organizational structure, this was actually a stroke of luck.

BlackBerry vs. iPhone: Strengths Can Become Weaknesses

iPhone (left) and BlackBerry

[BlackBerry photo: The BlackBerry keyboard was highly accurate for typing and optimized for writing texts and emails. It was especially favored by office workers, senior executives, and politicians.]

The competition between BlackBerry and Apple's mobile phones is also worth revisiting.

In the late 2000s, BlackBerry was the undisputed leader in the mobile phone market. Its physical keyboard was its key competitive advantage. It was optimized for emails and text messages, with long battery life and durability.

The iPhone, launched in 2007, was quite different. It featured a built-in battery, a touchscreen with no keyboard, and an intuitive interface. At first glance, it seemed like a clumsy device that lacked any real strengths. At the time, the mobile phone and IT industries predicted that Apple would fail.

However, the power of the iPhone did not lie in its features. The iPhone introduced a new structure that integrated software and hardware. Its intuitive user experience was an innovation that lowered the barrier to technology. Anyone could access the App Store and release apps tailored to their needs. This benefited both developers and consumers.

Of course, it took a long time for the iPhone to dominate the market. In 2007, BlackBerry achieved its highest sales ever. Ironically, this made it harder for the company to recognize the need for change. Among the companies that witnessed the "iPhone shock" and recognized the need for change, only one?Google?responded.

While ridicule toward the iPhone continued, both the iPhone and Android-based smartphones gradually began to take over the market. By the time BlackBerry realized that "something was wrong" and tried to respond, it was already too late. With its existing corporate structure and product philosophy, BlackBerry could not adapt quickly to the rapidly changing smartphone market.

The Challenge for Companies Introducing AI: The Courage to Face Internal Resistance

People having a meeting in an office. Photo by Getty Images Bank

The cases examined so far show that the adoption of new technology is not simply a technical decision, but a complex process that involves changes in the internal power structure of organizations. These are examples where resistance to maintaining existing power structures and vested interests ultimately led to organizational failure to adapt.

This is an inevitable challenge for organizations and companies seeking to introduce artificial intelligence (AI). While the products, services, and company names may differ, fundamentally, everyone faces the same kind of resistance.

It is important to recognize that new technologies like AI may not simply make existing tasks more efficient, but can require fundamental changes to the organization itself. Just as the German military, starting from a blank slate, was able to develop new strategies with tanks, sometimes it is necessary to completely restructure existing organizational frameworks.

In addition, it is important to anticipate and identify stakeholders who may lose existing power or interests due to the introduction of AI, and to find ways to address their concerns or involve them in the change process.

Successful technology adoption and AI innovation depend not just on bringing in the latest technology, but on the ability to effectively manage the organizational and cultural changes it brings. The cases of Blockbuster, the British Army's use of tanks, and BlackBerry all illustrate this point.