In business lore, the story of Blockbuster vs Netflix is often told as a classic example of the “Innovators Dilemma." A closer look at the how and why reveals a deeper lesson about operating models and structural incentives, one that seems to be reemerging today.

At its peak, Blockbuster was the home-entertainment giant: thousands of retail stores, billions in revenue, and a ubiquitous presence in American life. By the early 2000s, it operated over 9,000 stores worldwide and employed tens of thousands of people 

Several critical factors contributed to its decline:

  • Late fees as a revenue anchor: At one point, Blockbuster collected approximately $800 million annually in late fees, a significant source of revenue but one that alienated customers

  • Delayed digital response: Blockbuster did launch online/DVD-by-mail rentals in 2004, but it was late to market and struggled to compete with Netflix

  • Slow embrace of streaming: Netflix pivoted to streaming in the mid-2000s, fundamentally redefining media consumption; Blockbuster’s efforts were incremental and constrained by its legacy structure

By 2010, Blockbuster filed for bankruptcy. Netflix, meanwhile, had evolved into a streaming pioneer and leading content platform.

Blockbuster saw the digital shift coming and attempted to respond, but the company’s core structure limited its ability to become a software-centric subscription business:

  • Headcount and real-estate-based operating model

  • Revenue tied to transactional fees and store utilization

  • Decision processes optimized for retail execution

  • Incentives aligned with maximizing the existing store network and staff

Netflix, in contrast, was built from the ground up for a software-first operating model:

  • Centralized, data-driven decision-making

  • Low marginal cost per incremental customer

  • Scalability without proportional increases in physical assets

Netflix’s success was not just about earlier technology adoption; it was about operating model compatibility with the future state of the business. Blockbuster’s structure made that transition inherently difficult.

The BPO vs Agentic AI Parallel

For COOs having conversations with their BPOs about add-on AI capabilities, is it not the same as Blockbuster adding DVDs by mail or a streaming service option?

  • Business Process Outsourcing works. It has delivered scalable execution for claims, underwriting support, policy servicing, and back-office functions for decades. It is contractable, governable, and performs satisfactorily for today’s expectations.

  • But like Blockbuster, BPO’s structure is tied to human labor, utilization metrics, and linear cost models. AI and automation is used to augment humans rather than rearchitect the model.

  • Agentic AI is a new operating model. Work design shifts from people-centric execution to autonomous software agents supported by humans, with scalability built in.  

The question for operations leaders isn’t merely “Can BPO vendors deploy AI?” Many can. The more critical question is whether the structural incentives of human-based delivery align with a future autonomous model. Blockbuster could add online rentals and streaming service, but it couldn’t be Netflix.  Just as BPOs may enhance their operating models with AI, but not structurally enable an agentic operating model.

A Path Forward

Operating models evolve gradually, until they become suddenly incompatible with market expectations. Unlike early 2000s media consumption where last mile high-speed internet was still being implemented, the foundational elements for agentic operations exist in insurance today: digital data, rules frameworks, and workflow systems.

The strategic questions for COOs and Operations Leaders are:

  • Which processes are structurally agentic?

  • How can workload transition with minimal disruption?

  • What governance models are needed for autonomous execution?

Leaders who navigate this well will treat Agentic AI not as a plug-in tool as part of a vast technology ecosystem,  but as a fundamental operating model shift with long-term implications for resilience, cost structure, and competitive differentiation enabled with technology.

Blockbuster didn’t fail because it couldn’t innovate — it failed because its structure constrained its ability to become Netflix.