This article was written by Benjamin Cahill

In 1965, companies in the S&P 500 index remained in the index for an average of 33 years. By 1990, that figure had dropped to 20 years. At the current churn rate, about half of today’s S&P 500 companies will be replaced in the next 10 years.1

There are many reasons why businesses back down or fail. One of the most obvious reasons is the inability of companies to adapt to the changing environments in which they operate.

As famous biologist Charles Darwin said;

“It is not the most intellectual of the species that survives; it is not the strongest who survive; but the species that survives is the one that is best able to adapt and adapt to the changing environment in which it finds itself.

While this quote was originally in relation to cash, there should be no doubt of its relevance and application to the evolution of business. Below are two informative examples of companies that ultimately failed to react to their changing environment, along with the hidden benefit of index investing.


Kodak was founded 130 years ago in 1892 and was at one time the most valuable motion picture company in the world. Its value peaked in 1997, estimated at US$30 billion (US$54 billion adjusted for inflation). Mid to late 20e century, they effectively held a monopoly on camera and film sales, with over 75% of the global market share.2 But in January 2012, Kodak filed for bankruptcy. So where did it all go wrong?

Figure 1: (L) Vintage Kodak Ad 1952 (R) Vintage Kodak Ad 1950. (Source: Envisioning the American Dream)

Kodak’s business revolved around repeat sales of film for their cameras. Known as the Razor-and-Blades business model, they would sell the camera itself with a low margin and sell the consumable, the film, with a high margin. All was well until the start of the digital revolution, marked by the invention of portable digital cameras in 1975.

But that shouldn’t have been a problem for Kodak! Steve Sasson, then an electrical engineer at Kodak, was the inventor of the first portable digital camera, which the company soon patented. At the time, the economies of scale were not beneficial for going digital because the cameras cost thousands of dollars and the quality was still questionable.

The main problem was that for the next 20 years, Kodak’s invention sat on the shelf as management struggled to change its thinking and strategy to adapt to the digital age. Kodak was making so much money from the film that its technology took to the dust, as management feared it would cannibalize its film business by going digital.

Within five years of the expiration of their original patent, sales of roll film and analog cameras had peaked. Meanwhile, sales of digital cameras had increased by more than 500%.3

Figure 2: Film reels and camera sales. (Source: Dortmund University of Applied Sciences and Arts3)

Digital photos are cheaper to produce and of higher quality than film. Kodak did not realize that its business model and virtual monopoly in photography was threatened by rapidly changing technology.

Once synonymous with a moment worth capturing, a Kodak moment now commonly represents a company’s failure to predict.


Many can reminisce about the days of going to the local Blockbuster, arguing with family and friends about which movie to pick before heading home, laying on the couch and shutting everyone up as the movie begins. Unfortunately, it is unlikely that we will have this experience again.

The 1990s were the era of VHS. Adjusted for inflation, the films regularly sold for US$100 or even US$150 each.

Late fees aside, Blockbuster was the perfect solution to the problem, allowing customers to rent movies at a fraction of the cost. The business model made sense. Blockbuster eventually became a global powerhouse, employing 84,300 people in 9,094 stores at its peak.4

On the eve of the 21st century, the digital shift was in full swing. The ongoing technological change began to favor DVD rentals and then streaming services as a new medium for home video entertainment.

In 1997, Netflix was founded and its main business revolved around online DVD rental and then streaming. Blockbuster was lucky enough to buy Netflix in 2000 for US$50 million (US$84 million adjusted for inflation), but reportedly made the rising company laugh out of his office.5

Blockbuster instead followed suit, launching its own Netflix-like service in 2004. In 2006, Netflix had 6.3 million subscribers compared to Blockbuster’s 2 million.6 Netflix had a 7 year head start, but Blockbuster had a globally recognizable brand. It was anyone’s game.

But that’s where the blunder happened.

In 2006, famed investor-activist Carl Icahn organized a proxy vote to remove then-CEO John Antioco, who was focused on this digital shift. The vote passed and James Keyes, who had experience running the bricks-and-mortar business 7-Eleven, took over as CEO. Icahn and Keyes thought reinvesting in retail stores was the best move for the heavily indebted Blockbuster, and subsequently stopped the digital shift in its tracks. Deciding to stick with an outdated business model proved fatal for Blockbuster.

“I was frankly confused by this fascination that everyone has with Netflix…Netflix doesn’t really have or do anything that we ourselves can’t or aren’t already doing,” Keyes said in 2008. .

Two years later, Blockbuster’s stock price had fallen more than 80%, and soon after, it filed for bankruptcy. As of March 2022, Netflix was worth US$200 billion and had over 220 million active

Figure 3: Netflix vs. Blockbuster revenue. (Source: HBS “Blockbuster: It’s Failure and Lessons for Digital Transformers”)

What’s the lesson?

Many businesses fail because they don’t scale, but there’s also a hidden lesson about index investing. The idea of ​​only owning the top 100, 200 or 500 companies in a given market has bigger implications than it seems. For example, only about 10% of companies that were in the S&P 500 in 1955 remain in the index, with the remaining 90% going bankrupt, merging, or dropping out of the top 500.8

But if you had invested US$100 in the S&P 500 index in 1955, it would be worth more than US$80,000* today in nominal terms.9 How it works? As companies come and go, broad market indices adhere to Charles Darwin’s quote and evolve systematically with changes in market dynamics, the introduction of new ideas and companies at the forefront of change. .

*Note: You cannot invest directly in an index and the investment performance shown does not take into account the fees and costs of managing the fund. Past performance is not an indicator of future performance.

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The information generally comes from the following sources:
1. Snively, C., & Raffaelli, R. (2018). The reinvention of Kodak. HBS CASE COLLECTION
2. Sloan, M. (2020, June 1). Netflix versus Blockbuster. Retrieved from Drift: (SEE THE LINK)

1. Perry, MJ (2021, June 6). Creative destruction. Excerpt from the AEI: (SEE THE LINK)

2. Snively, C., & Raffaelli, R. (2018). The reinvention of Kodak. HBS CASE COLLECTION.
3. Chistiakova, I., Chui, T., Favarin, A., Papamichali, M. and Pataut, P. (2017). The “Kodak moment” is dead. Long live Kodak! Dortmund University of Applied Sciences and Arts.

4.Google Arts and Culture. (2022, June 30). Blockbuster LLC. Excerpt from Google Arts and Culture: (SEE THE LINK)

5. Graser, M. (2013, November 12). Epic Failure: How Blockbuster Could Have Owned Netflix. Variety Extract: (SEE THE LINK)

6. Sloan, M. (2020, June 1). Netflix versus Blockbuster. Retrieved from Drift: (SEE THE LINK)

7. Statistics. (2022, April 1). Paying Netflix subscribers worldwide. Excerpt from Statista: (SEE THE LINK)

8. Perry, MJ (2021, June 6). Creative destruction. Excerpt from the AEI: (SEE THE LINK)

9. Webster, I. (2022, June 30). Stock returns since 1955. Taken from (SEE THE LINK)