On Marginal Costs and Dishonesty

This week’s book learning is from How Will You Measure Your Life? by Clayton Christensen.

When DVR rental giant Blockbuster looked at fledgling internet start-up Netflix in 2001, they dismissed it as a threat. They had billions of dollars of earnings thanks to their DVR renting and lucrative business model that made money off high late fees. The late fees made sense because every check out of a popular movie was how they made money.

Netflix turned it around by charging people per month and mailing DVRs. Netflix made money when people didn’t rent DVRs! But, in 2001, it was making only $150 million in profits in comparison to >1.5 Billion that Blockbuster was making.

The problem was that Blockbuster calculated “marginal increase” of pursuing Netflix. It meant a very small marginal increase on top of Blockbusters existing revenue but what Blockbuster didn’t realize is that this new product would redefine the industry’s future. They went bankrupt in 2011.

It’s not that different in our personal lives. We start on the path of wrong doing by calculating marginal cost or cost of doing something wrong ‘just this once.’ That’s how Nick Leeson started out trying to wipe out a trading loss. The path led him to lose $1.3Bn, bankrupting 230 year old Bearings bank, costing 1200 employees to be laid off, losing his marriage, and being imprisoned for 6 years.


Sketch by EB

No athlete or Enron senior executive started out saying they’d cheat. One small compromise led them down a slippery slope. As Clay wisely puts it, it might seem like one extenuating circumstance but life is just a series of extenuating circumstances…

Clay’s advice is to figure out what your values are and never deviate. You can’t follow 99% of an ideal. It’s 100% or nothing.

It was this insight that made me realize that my laissez faire attitude towards online piracy media content was not in congruence with my values – I’ve been a very happy iTunes customer since!