Blockbuster And The Infrastructure Of Digital Value
In the collision between physical and digital business, there can only be one.
In September 2000, the co-founders of Netflix offered to sell their company to Blockbuster for $50 million.
The CEO of Blockbuster, struggled to contain his laughter as he dismissed their offer saying, “The dot-com hysteria is completely overblown.”
Netflix is now worth $170 Billion and Blockbuster doesn’t exist.
What the CEO of Blockbuster failed to realize was the movie industry was already being disrupted. The decidedly-physical business of renting movies was about to be supplanted by the growth of digital network infrastructure.
What could a digital network have to do with renting DVDs?
As it turns out, everything.
Netflix’s online movie-by-mail business model would have been impossible prior to the late ’90s, just as their movie streaming service was impossible prior to the 2000’s. Insufficient bandwidth, insufficient hardware, insufficient users. But once the network infrastructure for hosting, storing, processing, and serving digital media was established, disruption was inevitable.
It was network infrastructure that defeated Blockbuster.
This is somewhat of a chicken-and-egg conundrum. Users are needed to justify building the infrastructure, while the infrastructure is needed to attract new users. What ends up happening is that early adopters of a new technology endure a poor user experience until sufficient user growth is achieved, enabling a virtuous cycle to take hold. More users justify more infrastructure, which enables better services and encourages further user adoption. This is the start of a network effect, and how the Internet became the preferred medium for video content.
All of a sudden, physical networks of stores, inventories, and supply chains changed from being protective moats into structural disadvantages. The cost burden of maintaining a company’s physical footprint, coupled with the inconvenience of requiring customers to physically visit stores, meant Blockbuster was structurally uncompetitive. Their business model was doomed.
The past decades have seen the same phenomenon occur across other physical businesses. Smartphones disrupted photography, eBooks disrupted bookstores, e-commerce disrupted shopping malls, and mp3’s disrupted record stores. When a digital alternative can provide the same or similar service, cheaper, faster, and better, it will supplant its physical predecessors due to structural advantages.
All that was needed for these new business models to dominate their respective industries was the deployment of network infrastructure.
No Internet? No Amazon.
THE BITCOIN NETWORK
Since 2009, a new type of infrastructure has been steadily growing, and it’s called the Bitcoin Network.
This network can be quantified in the number of nodes, exchanges, software wallets, hardware wallets, lightning channels, and mining hash power, all of which represent a global network that is growing in security, liquidity, functionality, and user adoption.
Bitcoin over the past 4 years mirrors the Internet of the late 90’s, but rather than an information network, Bitcoin is a value network.
Just as the modems, data centers, and fiber optic cable that supported the Internet were deployed alongside existing information networks, so too is Bitcoin being deployed alongside existing value networks. Banks, payment processors, foreign exchange services, and ATMs have formed the backbone of the legacy financial system through which we all store and exchange value. Paychecks are deposited, bills are paid, wire transfers are transmitted, and money changes hands all within the infrastructure of this legacy system. What Bitcoin offers is an alternative pathway through which value can be stored and moved.
People can now choose to manage their marginal dollar either via the legacy financial network or the Bitcoin network.
FASTER, CHEAPER & BETTER
Netflix streaming wasn’t just faster, cheaper, and more convenient than Blockbuster, it was fundamentally better:
- 100x bigger movie library than any given video store
- Smart recommendations that improve over time
- Multi-device cross-functionality, with multi-user accounts, to watch movies wherever you go
- An ever-improving app that gets better with each version
Similarly, Bitcoin isn’t just faster and cheaper for managing one’s value, it’s better:
- The ability to instantly send money ranging from less than a penny to millions of dollars worth of value, to anyone, anywhere, anytime
- Money transfers without incurring 3% transaction fees, or 15% remittance fees, or wait times of hours, days, or weeks
- Inflation resistance with a money supply schedule that is pre-determined and immutable
- The opportunity to take physical custody of money, in any amount, which cannot be seized, censored, or frozen
It’s not that the legacy financial system does not want to add these features and deliver a superior user experience, it’s that it is structurally incapable of doing so. There simply isn’t a way for a bank to transfer 1/4 of a penny to the other side of the world on a holiday Sunday at 3am, or to store a million dollars as cash for ten years without it diluting purchasing power. The uncompetitiveness is structural.
The coexistence of Netflix and Blockbuster lasted just over a decade, as people steadily came to realize the true value of the new digital alternative. As more people abandoned Blockbuster in favor of Netflix, Blockbuster could do little but dwindle and die. This is the downslope of a network effect, as user abandonment can only be met with worsening services and prices, which further exacerbates user abandonment.
With Bitcoin, the realization that value can now be managed and deployed in superior ways via an alternative network will result in the collision with legacy financial systems, with the market ultimately deciding how it wants to manage its value. As people exit the legacy financial system, whether to avoid inflation, save on fees, or take control of their money, what can legacy systems do?
THE BUSINESS VS. THE NETWORK
The $50 million dollar price that Blockbuster could have paid for Netflix in 2000 is now seen as a bargain. However, in the Netflix-Blockbuster analogy, Bitcoin is not Netflix, it is the Internet itself.
Instead of owning shares of Netflix, owning a bitcoin is like owning a share of the Internet infrastructure upon which videos are streamed. Whether videos are on Netflix, HBO, Disney, or YouTube is irrelevant, as any video streaming means the network itself is becoming more useful and therefore more valuable. The value of the Internet can be measured in terms of the total value it facilitates, or its usefulness to the world.
The hard supply cap of Bitcoin means that 1 bitcoin will always be worth 1/21 millionth of the total possible supply, regardless of whether a million people are in Bitcoin or a billion people. Owning a bitcoin is akin to owning 1/21 millionth of all possible Internet domain names ( google.com, apple.com, netflix.com, etc…), except that bitcoins are fungible, instantly accessible, and permissionlessly tradable. Seeing as bitcoins are also divisible into 100 million subunits, someone can become an owner of the smallest increment of the Bitcoin network for fractions of a penny.
The current spot price of Bitcoin is more of a distraction, obscuring the real transformative force of the Bitcoin infrastructure. Whether the price of Bitcoin doubles in a month or collapses by 80%, is of less relevance than the steady growth of exchanges, nodes, lightning channels, hash power, and companies building on top of Bitcoin. The Dot-Com bubble of the early 2000’s saw Internet company valuations skyrocket and then collapse, but that did not coincide with a similar collapse of modems, routers, data centers, fiber-optic cable, and most importantly Internet users. Even if Netflix were to have collapsed in 2000, undoubtedly a different company would have emerged to stream movies, simply because the infrastructure was on an unstoppable growth trajectory and digital movies are superior.
Bitcoin’s value infrastructure is on a similar trajectory. Regardless of the current spot price, the undeniable growth of the infrastructure is what really matters and is what will facilitate a transformation of how value is stored and exchanged. User adoption is vastly more significant than the spot price.
Despite physical video stores dwindling and dying, we are all now able to enjoy a cheaper, faster, and better video experience thanks to the infrastructure of the Internet. Similarly, legacy financial systems may dwindle and die, but we will all stand to benefit from a cheaper, faster, and better value storage and transfer experience thanks to the Bitcoin network.
Originally published at https://thebitcoinletter.substack.com on April 3, 2022.
