James Keyes is the former CEO of Blockbuster and 7-Eleven, and the author of Education Is Freedom: The Future Is in Your Hands.
In this podcast, Motley Fool host Deidre Woollard caught up with Keyes to discuss:
- What it is like to be a CEO at a company facing bankruptcy.
- 7-Eleven and the American Dream.
- Blockbuster's early streaming play.
- How AI is changing education.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Feb. 17, 2024.
James Keyes: There is far more learning in the Blockbuster story, if people would dig in and understand it a little bit better. Because really what happened, was not Blockbuster's failure to keep up with technology. In fact, people don't even know this. But Blockbuster partnered with Enron in the early 2000s, 2004 or something to try to come up with the first streaming video capability.
Ricky Mulvey: I'm Ricky Mulvey and that's James Keyes, who is the former CEO of Blockbuster and 7-Eleven, also got a book out called Education is Freedom. The Future is in Your hands. My colleague, Deidre Woollard, caught up with Keyes to talk about what he learned from 7-Eleven franchisees, how micro rewards could transform education, and the less discussed parts of the blockbuster story.
Deidre Woollard: Well Jim, you have had this really varied career. It's led you through top organizations, very important positions. How has education been a through line for you?
James Keyes: It was by far the most important enabler for me. And interestingly, I grew up first generation to attend college. None of my family, brothers, sisters, father, mother, so I had no idea. I was a very typical young person who doesn't really know how or believe that it's possible, and it made all of the difference in the world. That was fortunate enough to go through a four year school college with Holy Cross Massachusetts was able to attend business school at Columbia Graduate School of Business. And it provided a platform really for opportunity and I think that's the big difference. So a lot of question about college today, but what it gave me is breath that gave me so many different doors that I could go through. In fact, gone through many of those doors. [laughs]
Deidre Woollard: Yeah and one of them led you to 7-11. Your career there is interesting because you had to deal with so much change so quickly. So you have this phrase that I love in the book, Change Equals Opportunity. I think that's interesting because most of us, when we're hit with change, we go, oh no. As an individual, as an investor, we have this attitude that change isn't going to be good, it's going to be disruptive, it's going to be negative. So how did you embrace change when everything was shifting 7-Eleven.
James Keyes: Exactly. Well, it's funny. I woke up one day and said, change equals opportunity effect. It was in the course of writing the book. I said that acronym CEO is really the job of every CEO.[laughs] So it was a wonderful fit. And it also made me realize that growing up I faced a lot of adversity. You know, we all do families or a mess, broken homes and poverty challenges as a kid. And I realized that those things that I had to deal with actually made me stronger and made me more able to deal with change. So when I got to 7-Eleven here, I thought my career was on a fast trajectory. I was with this fabulous company, they were doing great. New York Stock Exchange company. Then they did an LBO. In 1987, the market crashed and they had four billion dollar debt at 17 percent. But interestingly, well, some people would look at that and say, well, this is devastating. I have a young guy, I started my career in the company's bankrupt. They saying it's going to go away. Instead of having my head down. I said, well, what if I got to lose this? I'm going to work harder. We'll come out the other side of this. And it turned out that not only did the company come out better for having to have to restructure with a whole new business plan, et cetera. But I came out better as an individual and an employee of the company with far greater opportunity than I had going into that crisis. So it was really a great lesson for me. Change doesn't mean bad. A lot of times we think it, it's really a response to change rather than the change itself that makes all the difference in the world.
Deidre Woollard: Yeah, I think that's so true. I think that's something we all have to learn over time. And I'm interested because at 7-Eleven you learned about this idea of Kaizen from your Japanese business partners. And you've got this story about how this led to a better slope. We all have affection for the slope. Tell us a little bit about this.
James Keyes: Well, I was armed with a graduate degree in business and I had all of these skills and I thought I knew basically how to turn around a company from, you know, classic business training. But then I got to Japan and I was astounded at the success of my Japanese partners with 7-Eleven. They had completely transformed the business. We were in the United States having trouble selling a quality hot dog and they were selling fresh sushi delivered three times a day at the store, restaurant quality sushi. I was shocked at that and I started to really try to understand, learn from them what they had done. What were their business principles that helped them be so successful? And it came down to something that I was shocked to learn originated all the way back with Edward Deming, post World War two. An American that was over there trying to help with reconstruction of the country following World War 2. He presented a simple principle called Plan C, or I referred to it as the scientific method. In other words, have a hypothesis. I think this is going to happen. You put an action in place and then you step back and measure it. And then you modify the action to based on the results, based on the data. This is so ridiculously simple. But they took that principle to the nth degree, incorporated in all the virtually all of their business decisions, and created, as a result, a far better business model that came right down to individual products. They would take every individual product, have a hypothesis for how to make it better, put an action in place, put it in front of the customer, measure the results, and then come back and reinvent it. The whole Kaizen concept of continuous improvement they were actually putting in place. So I learned a lot from them about that and I've tried to incorporate it into every business that I've had since.
Deidre Woollard: Interesting. I wish we got sushi here at the 7-Eleven. It would be awesome. [laughs]
James Keyes: Some day.[laughs]
Deidre Woollard: Some day. I hope so. Well, and another thing with 7-Eleven that you talked about in the book, which is the diversity of 7-Eleven franchisees. It's been the butt of joke sometimes, but you also talk about how it's the source, really, of the brand strength. So you really got into learning about those franchisees and what owning a 7-Eleven franchise meant to them. So what lessons did you learn from those franchisees?
James Keyes: I did. It was fascinating. It actually occurred post 911 when we started having some problems, a 7-Eleven because people saw us as majority minority and they saw people behind the counter, and they started taking out their aggression right after 911 with our stores. I tried to understand and began to talk with franchisees about why did you decide on 7-Eleven? I discovered that what they were practicing is the American Dream. They would come here with 500 bucks in a suitcase. And then they would work in a store, save up enough money to buy a franchise, and then turn that into opportunity, bring relatives and put them to work. I began to realize that this is really the strength of 7-Eleven. We ended up with 135 different countries represented. And it taught me a lesson about diversity. In the book, I don't use the word diversity because it's been such a polarizing word lately. It's getting attacked from all directions and really what it comes down to, and my learning from my 7-Eleven franchisees is, it's really cultural literacy. It's understanding other cultures, and recognizing that I have more to learn from them. And if I collect the learnings from all of these different cultures that I have exposure to, I'm going to be a patchwork quilt of their strengths and it's going to make me a better person overall. I've repurposed the idea of diversity into what I call cultural literacy in the book and encourage everybody to pursue that. It was really the lesson that I learned from my own 7-Eleven franchisees.
Deidre Woollard: I love that. Well, let's move on, talk a little bit about Blockbuster, because you had this very successful 21 year career at 7-Eleven You come into Blockbuster as CEO at this critical time. What do you think people get wrong about the stories that we tell now about Blockbuster and what really happened?
James Keyes: Well, unfortunately, like everything else, people are looking for the simple answer. So the simple answer is, well, Netflix must have beat Blockbuster and Blockbuster didn't keep up with technology. There is far more learning in the Blockbuster story, if people would dig in and understand it a little bit better. Because really what happened was not Blockbuster's failure to keep up with technology. In fact, people don't even know this. But Blockbuster partnered with Enron in the early 2000, 2004 or something to try to come up with the first streaming video capability. That was way too early. There's a rumor that Netflix tried to offer themselves to Blockbuster that was in the year 2000. That was before streaming was even a thing or even an anyone's radar screen. Really what ultimately happened was Blockbuster spun out of Viacom as an IPO. Viacom used to own the company. They spun them out in the year 2004 with a billion dollars of debt on the balance sheet. No problem. Blockbuster was a cash flow machine, could handle that debt, and they were going on down the road. When I arrived in 2007, first thing I did was to buy a streaming video company called Movie Link. So we were well positioned. We had new releases. Movie Link had 3,000 digitized movies, the largest assortment of anybody in the industry at the time. We renamed that product, Blockbuster on demand. Very well positioned to compete. We doubled Ebita Earnings for interest, tax, depreciation, et cetera. We tripled net in our earnings release for the third quarter of 2008. So you might say, well, what happened? [laughs]
James Keyes: Perfectly well positioned. Well, if you remember what happened in September of 2008, Lehman Brothers collapsed. The banking industry basically was on edge, and virtually all lending was shut down. Well, a third of our debt was due in the year 2009. That is the story of Blockbuster, that we were unable to refinance that debt at a reasonable interest rate. We were forced ultimately, into a restructuring of the company, and we sold the company to a strategic partner, Dish Networks.
Deidre Woollard: That's fascinating about being ahead of the game with streaming, because I think that happens so often. We see it over and over with products that come out before the audience is ready, and I'm wondering what's going to happen with things like Apple's Vision Pro, is this the right time for it? Is it too early? We don't know.
James Keyes: Exactly, and that's the unique thing about technology, and about embracing change, you have to see it coming, you do have to embrace it, but the timing is critical. Really it wasn't that we were too early as much as it was, because we were well positioned, we knew we were early, kids were still basically streaming on their Xbox, TVs weren't smart yet. For a frame of reference, the iPad didn't launch until 2009, so this was very early in the game. But it was really the cash flow, and the lesson here for all businesses is that you remember the old expression, cash is king, well, particularly in a time of crisis, and there's a lesson right now. Because if I go back in my history all the way back to 1987, when I joined 7-Eleven, they ran into the financial market collapse of 1987, and had to restructure the company. Then again, I experienced it in 2008, when interest rates went from 5 or 6% all the way up to 12, for challenge companies or more. Here we are in that same environment today, where companies may have borrowed at 2 or 3%, a few years ago and now all of a sudden they're having to pay 7 or 8%. The lesson is there from the past if you're careful about cash management, you can weather the storm, but that debt can be a killer and cause a company to have to step back and restructure.
Deidre Woollard: Absolutely. You were the CEO of 2 big companies, and certainly with Blockbuster, not an easy time. You talk in the book about being tried in the media in relation to the things that the Blockbuster was doing. Some of that was clearly out of your control, but as a CEO, when you're facing that heat, what are some of the challenges of tuning out everyone saying what are you doing and staying focused on what you need to do?
James Keyes: I had an interesting experience. I had started getting calls from my buddies in New York because I didn't take the New York Post living in Dallas, Texas, but the New York Post printed a half page color picture of me with a Pinocchio nose because. It was not a pretty site. The reason they did it is that they had been challenging me about this balance sheet, and we were going to be able to refinance our debt. But Blockbuster had such a cash flow advantage that I really didn't anticipate filing for Chapter 11 for restructuring. Well, we put out a 10K and we gave the warning that that could happen, and certainly when Moody's gave us an increase in our debt rating, but declared us a potential default risk, the New York Post went crazy with it and said, blockbusted was the headline, I believe. I know it was brutal. But the learning from that really, and from all of the false information about Blockbuster, and people assuming that Netflix crushed the company, etc. You realize it's not personal, it's business, and it's such an important learning because confidence is critically important for a leader in any environment that they can't take these things personally. It's going to happen and you're going to get attacked from all sides at times. But if you know you're doing the right thing, and if you have the confidence to continue leading and doing the right thing, then you can recognize this isn't personal, it's just business, and sometimes there are motives that people have behind these attacks that they're making, and you recognize that and you move on.
Deidre Woollard: Well, I want to get your take on AI because I've been talking to people about it for a while, and one of the things that I've heard from younger people is that traditional education isn't necessarily working for them anymore. Partly because they're like, why do I have to stuff my brain with all of this stuff if the computer can do it faster and better? How are you thinking about AI and how it relates to traditional education?
James Keyes: I am super excited about AI. As you can tell I'm excited about technology in general. When Star Link lights up entire continents like Africa, and enables technology to provide learning in places that we could never even get books to historically. The opportunity is amazing and you look at AI and again, there's a lot of fear and probably natural, but we should be cautious about these new technologies. But think about the good that AI can do. We have taught in school the same way for 100 years, blackboards books. Teacher standing in front of the class, standardized test, bell curve, and a lot of people that doesn't fit, and with AI, we have the opportunity to tailor, literally, curate that lesson to the way somebody learns. Some of us learn better with videos, we can curate that training to have them watch videos, and others respond better to the written word, others to a teacher, or a professor. We can find the best algebra professor in the world and pipe them into the classroom, so the teacher then becomes almost a concierge to let someone who really knows how to teach, teach. Then we measure the performance of the students in the best way they learn based on their results. We can keep modifying and keep improving, so think about, this is not artificial intelligence, this is maximizing human intelligence, it's doing the same thing. It's not machine learning, it's human learning, and improving human learning over and over again by using the technology to enable it.
Deidre Woollard: But one of the things I worry about with technology though is, we've seen since the pandemic students have done worse because of remote learning, so what do you think about how we still bring in that human connection so that people are still taking in the information?
James Keyes: Again, I'm not worried about it because I did a lot of work on digital learning during the pandemic, and I was excited about it because we moved forward as much as 20 years in providing access to digital learning, just by lighting up cities with Wi-Fi capabilities, and hot spots, and giving kids laptops, etc. What we are is in the early stages, it's almost like the early stages of digital streaming. It was a horrible experience, and everybody said, this is never going to work. Not true. Technology will over time integrate the platforms, make them better, here's some examples, linked in learning. It's a wonderful thing, but it basically takes textbooks, and turns them into video digital. Well, with the next generation, you'll be able to, instead of showing a biology class, you'll be able to take somebody into an operating room, and watch a live operation going on. That's a whole different level of learning. The best example I can give you is, all the kids that hated digital learning would put away their homework and then play video games for 8 hours. Why? It was engaging and the graphics were eye popping. Another really important difference, they had incentives, so why not provide incentives? In fact, I'm working on a thing, it's like micro finance, but micro scholarships. Instead of giving kids scholarships at the end, we should be working on incentifying them up front. I have encouraged friends and friends children to use Khan Academy to learn math, but Khan Academy is a little dull. But if every time you pass the test, you get 20 cents for it by American Airlines, because they want people to learn math and science, then you might have the incentive and have more fun doing it and staying in, and engaged in those programs. Again, it's early, the technology is going to bring these things that improve engagement, so I am super confident that we're going to find education is transformed in the same way that we've transformed retail with Amazon, or automobiles with Tesla. We're going to find when education works its magic on teaching and learning phenomenal what can occur.
Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey, thanks for listening. We'll be back tomorrow.
