Blockbuster was hit hard by Netflix, which while it was on the internet was still physical delivery when it started killing Blockbuster (broadband penetration and internet-to-TV connections weren't yet common enough for living room streaming to compete strongly with DVD and then BluRay delivery.)
There were efforts to reproduce the Netflix DVD model for porn, but home delivery of porn always had a comfort issue, so they were never as successful against local rental as Netflix was against blockbuster.
Netflix might have been a problem for blockbuster, but I think the real problem was redbox. The vast majority of foot traffic in the blockbuster was for the recent releases, and they did everything in their power to screw new release renters, and god help you if you ever returned something late.
So, the instant gratification, want to watch the new release crowd quickly discovered they could get their fix for $1, and if they forgot to return it, no big deal it was just $1. The tiny little machines meant that they didn't have massive overhead, so not renting movies on mon/tue/wed/thur wasn't a big deal.
So for slightly more than a single new release a month you could have a much larger back catalog with netflix, and for new releases and quick turnaround you could rent a movie for $1 instead of $5-6 or whatever the standard 3 day thing was at blockbuster.
Their problem was that they were fat, dumb and happy screwing their customers and creating ill will. When a couple reasonable alternatives presented themselves boom, the bottom fell out faster than they could react. Although in hind site, I can't really imagine what they could have done. Maybe trim the stores down to a few deep catalog sites with a subscription model like NF while sprinkling little robotic boxes everywhere? Who knows, the end result would have been much lower profits, and if there is one thing history tells us, its that corporation have a really hard time when their margins shrink. Its just to hard to trim the fat.
I worked at a Blockbuster for a few years right about when video was on the way out and DVD was on the way in.
I don't think we screwed customers. A new release was $5 (AUS) for a night, that's hardly extortion. Almost all of our profit was made on new releases in their first week. The rest of the stock in the shop turned an almost insignificant profit and merely existed to buff the selection a bit and keep people in the store.
Late fees were an annoying issue but a necessary evil when you only have X units of stock and if they aren't returned you can't rent them out again. We were pretty lenient on reducing late fees to sensible amounts but some people were terrible at bringing things back and incurred ridiculous fees.
Physical rentals are a pain. On top of the X units issue, you have to keep them in good rentable condition and customers weren't very obliging on that front either. Digital delivery makes so much more sense now that we have the bandwidth to acommodate it. I can see a small market might still exist, but you can't afford to scale it anymore. Blockbuster was always going to die.
