Chapter 59 - The Making of a Blockbuster: How Wayne Huizenga Built a Sports and Entertainment Empire from Trash, Grit and Videotape
Today’s Chapter is based on the book “The Making of a Blockbuster: How Wayne Huizenga Built a Sports and Entertainment Empire from Trash, Grit and Videotape” by Gail DeGeorge.
Here’s what I have learned:
Leading Partners
“Four Seasons is the sum of its people—many, many good people.”
— Isadore Sharp
Right from a young age, Wayne Huizenga, the founder of Blockbuster, knew he wanted to get into business for himself rather than working for someone else. This entrepreneur spirit can be seen both in Wayne’s father and grandfather. As a matter of fact, his grandfather once said that working for somebody else would never amount to anything. A saying that Huizenga took to heart.
Despite his young age, Huizenga was never afraid to talk with strangers to question them about their businesses and how they worked. A curiosity that would definitely help him in building the knowledge required for him to run businesses in wide range of industries during his career. In fact, before he started Blockbuster, Huizenga started Waste Management Inc. , a corporation that provides a comprehensive waste and environmental services.
This entrepreneur spirit was so important to Huizenga that ownership became a central tenet of Waste Management. All employees, from managers to low-level employees, were encouraged by Huizenga to become shareholders of the company through stock purchase plans or stock options. As a matter of fact, Huizenga wanted his employees to work for the benefit of shareholders, and to do so, they had to be shareholders themselves.
On this front, Huizenga led by example. When he was at Blockbuster, Huizenga took just $1 a year as salary for the first three years as the chairman and preferred being paid in options. In the long run, it ended up a great investment for Huizenga as he turned $17.5 million into $600 million in just seven years as CEO of Blockbuster.
Considering his employees had shares in the company, Huizenga always treated his employees as partners more than anything. Huizenga, by seeing his employees as equals, had the special ability of motivating and leading employees by recognizing their importance in the business whether they were a truck driver or a manager. He often mentioned to his employees that “this is a “we” company.”
This ability certainly helped him both at Waste Management Inc. and later on at Blockbuster. On this note, Dick Molenhouse once mentioned that Huizenga always took the time to talk to employees within his company: "Wayne always took time. If you called Wayne, he would somehow find time to talk with you. He doesn't care if you're a truck driver, a helper on a garbage truck, or a laborer in a landfill or the paper picker, Wayne will take the time to talk with you.”
While managing his Blockbuster, he had two famous sayings among his employees that illustrate how he treated them as equals:
“You don’t delegate responsibility, you only share success.”
“Don’t tell me all the good things because the good things always take care of themselves. I want to know about the problems and I don’t want to be surprised.”
In my opinion, these two sayings explain how Huizenga worked in a decentralization management method and never took sole credit for the success that happened among his company. It was to be celebrated among all employees. When he was at Waste Management Inc., each stores were independent and he treated store managers as independent owners who had the full discretion in deciding how to manage their orders.
Huizenga’s management system reminds me of the way Warren Buffett manages Berkshire Hathaway. In fact, Buffett runs an extreme decentralised operation among its subsidiaries. As Charlie Munger once said, “delegation just short of abdication.” Subsidiaries are solely responsible for their business performance. Operating managers are only required to submit financial statement information on a monthly basis and to send extra free cash flow generated to be handled by headquarters.
Furthermore, Berkshire had a similar saying in his 1995 Berkshire Hathaway Shareholders letter:
“At Berkshire, we believe in Charlie's dictum - "Just tell me the bad news; the good news will take care of itself" - and that is the behavior we expect of our managers when they are reporting to us. Consequently, I also owe you - Berkshire's owners - a report on three operations that, though they continued to earn decent (or better) returns on invested capital, experienced a decline in earnings last year. Each encountered a different type of problem.”
— Warren Buffett
This concept of treating employees as partners remind me of Paul Orfalea’s management style at Kinko’s. He started calling his employees as coworkers to remind himself that he didn’t want to “use” people, but to work with “empowered entrepreneurs”. To instill this sense of entrepreneurship among Kinko’s workers, the company, similar to Huizenga at Blockbuster, gave a share of the profits of the store to everyone — partners, managers, and even workers behind the counter.
Orfalea mentions that initially, Kinko’s “gave each manager 25 percent of his or her store's profits. Later, we expanded the system of profit sharing when we started giving each manager 15 percent of the store's profits and earmarking the remaining 10 percent to be split among that store's coworkers.”
“At Kinko's, we were building a family together at the same time we were building a business.”
— Paul Orfalea
Being Opportunistic
“Opportunities come to the prepared mind.”
— Charlie Munger
Huizenga, as seen previously, is humble about his success in business. He often mentions being lucky by being, “in the right place at the right time”. However, as we have previously learned from Napoleon, nothing happens by coincidence. It is often always the result of one’s planning and wisdom. To Napoleon, being lucky is the ability to exploit accidents.
Napoleon once said, “A consecutive series of great actions never is the result of chance and luck; it always is the product of planning and genius. Great men are rarely known to fail in their most perilous enterprises. . . . Is it because they are lucky that they become great? No, but being great, they have been able to master luck.”
As a matter of fact, Napoleon believes that the difference between success in war is one's ability to calculate all the possibilities and to act accordingly. This is the reason why Napoleon rarely had definite ideas as it is impossible to control all circumstances surrounding him. The only thing he could do was to obey to them.
“Military science consists in first calculating all the possibilities accurately and then in making an almost mathematically exact allowance for accident. It is on this point that one must make no mistake; a decimal more or less may alter everything. Now, this apportioning of knowledge and accident can take place only in the head of a genius, for without it there can be no creation-and surely the greatest improvisation of the human mind is that which gives existence to the nonexistent. Accident thus always remains a mystery to mediocre minds and becomes reality for superior men.”
— Napoleon
Similarly, Huizenga was definitely able to be opportunistic due to his hard work and preparation. For example, when starting his waste management business, while other competing garbage companies were strictly focused on their own operations, Huizenga learned how to leverage money and to use income from one operation to buy another one. By doing so, he was able to expand his business from one truck in 1962 to more than 40 trucks in 1968.
Furthermore, he was extremely hardworking in order to gain significant information advantage to acquire new customers. In fact, he was always the first to arrive and the last one to leave the office. Every day, he would make phone calls and drive around the neighbourhoods in order to know every store there was and where every new business would open up.
Huizenga once said, "I've always been in the right place at the right time. I really don't think that we do anything different. I don't think we're unique, we're certainly not smarter than the next guy. So the only thing that I can think of that we might do a little differently than some people is we work harder and when we focus in on something we are consumed by it. It becomes a passion."
But more importantly, Huizenga knew that the most important thing, especially while running a small operation, was to retain customers. As a matter of fact, Huizenga believes in doing anything in order to do right by the customer no matter the cost. As he would often repeat that one unhappy customer would tell ten people and you would end up with eleven unhappy customers.
"The most important thing to him was to keep that customer happy because that's your whole base."
— Wayne Huizenga
On another note, Huizenga was always in the lookout for new business opportunities, new ways to make more money. Once his waste management company was established, he noticed that the real money was in renting containers to bars, restaurants, stores, etc. That’s how he first started in the renting business. This philosophy of “renting things” stayed with Huizenga forever. In fact, Huizenga once said that everything he wanted to do in life was to rent things.
Perhaps due to Huizenga’s curiosity and entrepreneur spirit, he built himself a pattern system that allowed him to identify great business opportunities and to build success companies beyond his field of expertise. As a matter of fact, when he first started Blockbuster, he knew nothing about videos or entertainment, but he did know about customer services and running a rental company and that was enough for him to be confident in investing $17 million. He was able, by leveraging his previous experience running a garbage renting company, to build Blockbuster into the largest video rental business in the word.
Here’s how an outsider explains Huizenga’s pattern for success:
"He likes to take industries that are fragmented with no clear leader, take market share from moms and pops, in an industry that is growing and has economies of scale in having a large company and he likes service companies with repeat business."
— Randall E. Haase
This reminds me of the power of convergence in evolutionary biology. Charles Darwin was one of the first to recognise the power of convergence when he said, “Animals, belonging to two most distinct lines of descent, may readily become adapted to similar conditions, and thus assume a close external resemblance.” Similarly, in terms of business, while two businesses may not be in the same industry, the same business model may be used in order to succeed. This is what happened with Huizenga with Waste Management Inc. and Blockbuster.
In his book “What I Have Learned About Investing From Darwin” by Pulak Prasad, he explains that rather than to invest in individual businesses, he prefers to invest in convergent patterns based on the power of convergence in evolutionary biology. As Prasad explains, “As we saw, “replaying the tape of life” often yields the same result. We operate on the principle that the business world is no different.” And I believe Huizenga’s story is a perfect example of this.
“There is a big difference between asserting “I love this business” and “I love this business construct.” We are fans of the latter, not the former. We don’t care about a business; we are deeply attached to a business template.”
— Pulak Prasad
Find your Edge
"The most important thing to me is figuring out how big a moat there is around the business."
— Warren Buffett
As we have learned previously from Warren Buffett, it is necessary for a company to have significant competitive advantages in order to retain high return on invested capital for a long period of time. As he once said, “A good business is like a strong castle with a deep moat around it. I want sharks in the moat to keep away those who would encroach on the castle.”
As we have learned previously, there are various methods in order to obtain a competitive advantage in an industry with various competitors. In the case of Kinko’s, Paul Orfalea knew that there were no barriers to entry for other competitors to come in and compete with Kinko’s. As such, if he wanted to beat his competitors, he would have to create an incredible corporate culture and make it a competitive advantage. Orfalea believed he could achieve this by setting the right incentives in place. In fact, Orfalea mentions that it is a lot easier to manage the work environment than the people in a store. He once said that “when people are properly motivated, they will essentially manage themselves.”
Similarly, we have learned from Isadore Sharp that a competitive advantage may also be achieved by scaling down into a specific niche. Sharp built Four Seasons and was able to create of the largest hotel chain in history despite competing with various existing giants in the industry such as Holiday Inn and Marriott by specializing; he focused on midsize hotels of exceptional quality to offer a differentiated product compared to the rest of the industry.
He explains that “Holiday Inn had created an empire on U.S. highways, first through standardized rooms, then by becoming “the host with the most,” the first to offer free cribs, dog kennels, soft drinks, and ice machines. Marriott had found a profitable niche in suburban complexes, between the new roadside motels and the older downtown hotels. I believed we could do as well, maybe better. All we had to do was stand out from the clutter, be distinctive.”
“But my mind was made up. “We will no longer be all things to all people,” I said. “We will specialize. We will offer only midsize hotels of exceptional quality, hotels that wherever located will be recognized as the best.” I resolved to sell any hotel that didn’t meet our new standards.” — Isadore Sharp
As for Wayne Huizenga, similar to Paul Orfalea at Kinko’s, he realized that by being in the video rental business industry, Blockbuster’s concept could be easily copied since there was nothing proprietary. As such, Huizenga believed that in order to dominate the market, he had to roll out the concept quickly and achieve a level of scale that would make Blockbuster difficult to dislodge due to economies of scale.
On this subject, Huizenga once said, "We better hurry up and develop this thing before somebody else figures out that what everybody is saying isn't right. And so, you know, we had to move quick.” As such, Huizenga did what he did best: he went on a acquisition spree in order to have fast growth. He understood that the key to Blockbuster’s success would be growth—at nearly any cost in order to “build enough mass in markets to support advertising and create a loyal base of Blockbuster card-carrying customers.”
But more importantly, Huizenga decided that instead of growing through licensed stores, he preferred acquired stores. Here’s the reason behind this:
"Franchise companies come and go every day. If you really want to do something, you have to build some mass. And the only way you are going to build mass is if you own these stores."
— Wayne Huizenga
Having a large distribution system is certainly a great competitive advantage and Blockbuster is a perfect example of it. As Peter Thiel once said, “Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product-even if it easily fits into already established habits and anybody who tries it likes it immediately-you must still support it with a strong distribution plan.”
However, in order for Blockbuster to grow, it was primordial for Huizenga to have the management talent in place to handle the fast growth. As he once said, "If you're going to grow fast then you need to put people out into the field. So we were hiring people way ahead of the curve." As such, Huizenga always paid up in order to get good people into Blockbuster as he often mentioned that people was the best investment the company can make. Of course, as mentioned above, the incentives structure in place helped in this matter as well.
Furthermore, in order to differentiate Blockbuster from other video rental stores and chains, Huizenga believed he had to build Blockbuster to become a brand. While other companies were putting their marketing effort in promoting new titles, Huizenga was using marketing in a way to market Blockbuster’s image, similarly to how McDonald’s would do it. As a matter of fact, Huizenga often mentioned that he wanted Blockbuster to become the McDonald’s of the industry, a company that was clean and friendly and family-oriented.
This concept of focusing on marketing a brand rather than specific products remind me of what we have learned from Bill Gates. After hiring Rowland Hanson, an ex-VP of Marketing from Neutrogena, he learned the importance of promoting brand name over a particular product. As David Ogilvy, the father of modern advertising, once said, “every advertisement is part of the long-term in the personality of the brand.”
“The brand is the hero, said Hanson, People start to associate certain images with the brand, and that becomes much more important than any single product. What the consumer goods companies realized years ago was that products come and go. Y**ou are going to have a product and it’s going to rise and fall. But if you can create a halo around a brand name and create equity in a brand, when you introduce new products under that brand halo it becomes much easier to create synergy, momentum…We decided that we need to make Microsoft the hero. Gates understood the logic of Hanson right away.”
— James Wallace & Jim Erickson in the book “Hard Drive: Bill Gates and the Making of the Microsoft Empire”
Beyond the Book
Watch "Berkshire Hathaway's Unusual Decentralization (1998 Q7 pm)" on YouTube
Read "Berkshire Hathaway's 1995 Shareholders Letter"
Read "Moats - Competitive Advantage" by Investment Masters Class
Buy "What I Learned About Investing from Darwin" by Pulak Prasad