Announced at last weeks E3 video gaming conference…. Netflix will be providing streaming movies to the XBox 360. This new feature will be part of a fall software update. The Xbox 360 is not only a video gaming device, it also provides users with downloadable TV Shows, arcade games and movies. It also acts as a Media Center Extender – something that I use it for often and have written about in the past.

When I saw this partnership, which is a brilliant idea by both Microsoft and Netflix, it made me think about Blockbuster Video. Do you remember them?

Years ago, they were such a dominant force in the entertainment industry, I remember going to Blockbuster almost every week for movies and videos games. I also remember their late fees. I can probably say I’ve paid over $200 in late fees over my lifetime.

But when the internet came about, the suits at Blockbuster made a critical error, for which they will never recover. They ignored the internet and kept focusing on business as usual. Instead of using their vast wealth to create something online, they choose to build more stores.

Then, an online DVD mail rental business, Netflix, came out. Solving a minor need for consumers by mailing the DVD directly to their homes, bypassing the need to go to a store. As Netflix began to get traction in the marketplace, mostly powered by the geeks, as usual, Blockbuster finally woke up and realized their business might be in trouble. To combat this new threat to their monopoly, they decided to be just like Netflix. Blockbuster figured they’ll try to undercut Netflix and drive them out of business. That almost worked.

While this was going on, I do remember thinking about switching sides and going back to Blockbuster. The one thing they had over Netflix was the ability to drop off their movies at any store. A quicker turn around time was a nice feature. But I also remember those late fees I paid in the past. I hated them for that and felt I needed to support the small online business against the big greedy ugly business. Remember, the customer never forgets.

While Blockbuster was trying to beat Netflix and run them out of business, Netflix decided to start thinking about other offerings they could provide their customers. Netflix soon gave its members the ability to watch movies on demand, on their PC’s, as part of their subscription. An expensive proposition to create for Netflix but one that makes total sense. As home connections to the internet are getting faster, the market is moving towards downloadable content instead of DVDs. Netflix creates a new business model and Blockbuster is still stuck on their old one.

Within the last year, Blockbuster has backed away from trying to undercut Netflix. They actually charge more now for DVD mail rentals; move that a lot of insiders took as a Netflix win and a very bad defeat for Blockbuster.

Then comes the Microsoft/Netflix announcement and the only thing I could think of is… this should have been Blockbuster. It could have been Blockbuster. Why wasn’t it Blockbuster. To answer the why question we need learn from Blockbusters mistakes.

As a business owner you must always do right by your customers. In this day and age, information and opinion travel at the speed of light. I can tell you that with little effort I convinced some people to not switch to Blockbuster. They hated their late fee system from the past as well and felt no need to support them. Netflix is viewed as new and up and coming. Blockbuster is view as old and outdated.

The next lesson applies to any business. Continue to try new things and innovate – don’t be just like your competition. Successful companies are always the ones that innovate, refine their process and move into other areas of business. Look at all the coffee shops that were trying to be like Starbucks. They are screwed now. Starbucks is closing over 600 stores.  Guess what will happen to those copycats. They will soon be closing too. Always strive to create something new and not copy something that has been done.

Netflix solved a simple problem in the market place – convenience. With that action and their business approach, innovation, they single handily took down a company that once was considered unbeatable.

If you are not innovating, solving a problem or trying something new, if you are not doing the right thing for your customers, even if it might mean lower profits, then you are only living on borrowed time – which is exactly where Blockbuster stands today.