October 19 in business history: a $25,000 car, 16 per cent of revenue, and 508 points
Three October 19ths inside five years — DeLorean's collapse in 1982, Blockbuster's first store in 1985 and the 1987 crash — each ran on a number that was really a claim about how other people would behave.
Three October 19ths fall inside five years of each other. In each one, a business carried a number that was really a claim about how other people would behave.
In 1982 a sports car was priced at two and a half times the average car. In 1985 a video chain came to earn 16 per cent of its revenue from late fees. In 1987 a hedge was sold on the promise that a buyer would be there at every step down.
The car priced at two and a half times the average
On 19 October 1982 John DeLorean was arrested in Los Angeles, charged with conspiring to distribute 55 pounds of cocaine in a $24 million deal. He was acquitted in August 1984. 1
Hours earlier, the British government had announced that his plant outside Belfast would close for good. The company had been in receivership since February, when ministers refused more aid. 2
The car was a stainless-steel two-seater with gull-wing doors and a 130-horsepower Renault engine. It sold only in the United States, at $25,000. 1 An average car then cost about $10,000, and a Chevrolet Corvette $18,000. 1
That price carried everything else: the plant's payroll, the suppliers' contracts, the loans. Buyers stayed away.
By February 1982 only half of the 7,500 cars shipped to America had sold, even at a discount. 2 By September 1982, 2,218 had been sold, some marked down to $19,000. 3
Britain had put $138 million into the project. At its peak the plant employed 2,600 people in an area with 21.5 per cent unemployment; about 70 were left at the end. 4 A parliamentary committee later called it "one of the gravest cases of the misuse of public resources for many years." 3
Decision mirror: Northvolt, the Swedish battery maker, was built the same way, with capacity sized to customers who had already signed. Volkswagen paid €900 million for about 20 per cent in 2019. 5
BMW agreed a €2 billion order in 2020 and cancelled it in June 2024 because deliveries were late. 5 Northvolt filed for Chapter 11 on 21 November 2024, and for bankruptcy in Sweden on 12 March 2025. 56
On the day it filed, the company reported that cell output had doubled and yield improved by half since September, and that it had delivered its first million cells. 6 The factory was producing. The order book had gone.
The store that earned 16 per cent from a fee
On 19 October 1985 the first Blockbuster video store opened in Dallas, with about 8,000 tapes on the shelves and a computerised checkout. 7 Its founder, David Cook, had sold software to oil and gas companies before this. 7
The money leaned on a fee. In 2000 late fees brought in nearly $800 million, 16 per cent of Blockbuster's revenue. 8
Customers hated the fee enough that Netflix's flat monthly subscription, with no due dates, became a selling point against it. 8
The chain peaked in 2004 at 9,100 stores. On 14 December that year it said it would stop charging late fees from 1 January 2005, with a one-week grace period. 9
It told investors the change would cost $250 million to $300 million of operating income in 2005, against about $50 million to implement, and expected extra store traffic to make up the difference. 9
By 2009 late fees were $134 million, 3 per cent of revenue. 8 Blockbuster filed for Chapter 11 on 23 September 2010, with 3,300 American stores and 25,500 employees. 8 The last company-owned shops closed in 2014, and an independently owned store in Bend, Oregon, has outlasted the chain. 7
Decision mirror: Banks ran the same arithmetic on overdraft and insufficient-funds fees. Lenders with more than $1 billion of assets reported $11.96 billion of that revenue in 2019 and $5.83 billion in 2023, a 51 per cent fall. 10
Bank of America's fell 91 per cent after it cut its overdraft fee to $10 and scrapped the insufficient-funds charge. JPMorgan Chase, Wells Fargo and Regions fell 43 to 46 per cent, and Capital One and Citibank ended the fees outright. 10
The Consumer Financial Protection Bureau checked whether the banks made the money up elsewhere, and found maintenance and ATM fee revenue flat from 2019 to 2023. 10
The hedge that assumed a buyer
On 19 October 1987 the Dow Jones Industrial Average fell 508 points, or 22.6 per cent, in one session, and the Nasdaq fell 11.35 per cent. The Library of Congress puts the loss in the Dow at more than $500 billion. 11
Some of the selling came from people who had bought protection. Portfolio insurance used computer models to set the split between stocks and cash, selling stock index futures as prices fell, the way an option would. 12
Providers preferred futures because trading there was cheaper, and because many were not authorised to trade their clients' shares. 12
The strategy rested on one assumption: that futures would stay tied to the cash market, and that every sale would find a buyer. 12
The Brady Commission found that portfolio insurers made about 40 per cent of non-market-maker sales in futures that day. The ten biggest sellers accounted for half of all non-market-maker volume in futures, and one institution sold thirteen blocks of just under $100 million each, $1.1 billion in all. 12
A week before the crash, the Wall Street Journal had reported fears that the strategy "could snowball into a stunning rout for stocks." 12 Regulators later disagreed about how much of the fall it caused. 12
The market recovered. The Dow passed its August 1987 high within a little over two years. 11
Decision mirror: On 5 August 2024 Japan's Nikkei 225 fell 12.4 per cent, its worst day since 1987. The S&P 500 lost 3 per cent, its worst session in nearly two years, and the Dow fell 1,033 points. 13
A small Bank of Japan rate rise and a weak American jobs report pushed traders out of positions funded in yen, all at once. 13
Three questions for the day
- Which number in your plan is a claim about what customers will pay, and what happens to the plan if that claim is wrong?
- How much of your profit comes from a fee your customers are already trying to avoid?
- If everyone in your market owns the same protection, what is it worth on the day you need it?
References
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- 5Wikipedia, "Northvolt"
en.wikipedia.org
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- 7HISTORY, "First Blockbuster store opens"
history.com
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