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.