As DVD's Die, How Will The Film Business Fare?

Here is a pretty good article that discusses the shifting trends in the in-home distribution of films.  Obviously, the trend is away from DVD's and moving towards direct delivery.  In fact, the shrinkage in the DVD numbers is pretty dramatic.  The DVD is going the way of the CD.

Blu-ray is making up some of those losses, but Blu-ray will eventually follow the same path.  Right now Blu-ray discs are popular because there is no real alternative for super-HD resolution.  But when a Blu-ray quality file can be easily and quickly downloaded right to your big screen TV, there will simply be no reason to mess around with a disc.

Discs are dead.  However, the download and video-on-demand markets are expanding pretty quickly.  None of this is news, but what does it really mean?

For disc manufacturers, it means they should already have shifted their focus to other businesses.

For distributors, the ability to warehouse and handle large amounts of physical product will not be useful much longer.  The distribution of content is still a very good business, but moving digital files is very different than moving discs. The good news for distributors is that the profit margins should increase dramatically as all of the costs of moving physical inventory evaporate.

Producers still need to produce great content.  Consumers will always want good stories that are told well.  However, production is both cheaper and trickier.  As more people use iPads, smartphones and similar devices to watch films, the productions will need to translate from very large screens with huge speakers (like IMAX) to the small screens of a smartphone with headphones.  That's challenging.

The real issue for those of us on the business side is whether the revenue from new sources such as download, streaming and mobile will replace the dwindling DVD market.  I believe the answer is "Yes" if you look at the profits.  The revenue might go down, but so will the costs of delivery.  That means that even if volume is lower,  the profits will be higher and hopefully make up the difference.

Direct delivery of content is a more efficient system than any physical media.  The benefit of those efficiencies should be apportioned in some manner among all of the stakeholders, from consumers up the chain to producers.  I think natural market forces will cause that to occur, and at the end of the day, the film business will be healthier than ever.  Higher profits means it's a better business model.

Blockbuster's Dilemma

This week Blockbuster announced it will likely be closing almost 1,000 of its stores in the near future. Of course, this is no surprise. It has been clear to everyone who watches this industry that the retail video store is dying a not-so-slow death. And the success of the Redbox kiosk business is speeding that process.

So, Blockbuster is now going to spend up to $60 million in shutting down over 20% of its stores in order to save about $30 million a year in operating costs. That means it will take about 2 years for this move to even begin to save money. In the meantime, they are going to spend a bunch of money installing about 10,000 kiosks in an effort to challenge Redbox.

So, two years from now, Blockbuster's best case scenario is that it is perhaps effectively competing with Redbox in the kiosk business, but probably still not making a profit. And they will have announced another round of store closings by then, which will probably cost them more money.

And the real problem is that, in two years, both Redbox and Blockbuster will be that much closer to total obsolescence, because everyone knows that the actual end game is digital distribution. Even Blu-Ray is recognizing that its disc business has a limited lifespan, and is already pushing connectivity with its BD-Live initiative.

So, it would seem that Blockbuster is looking at a few more years of trying to stop the bleeding, while Netflix, Vudu and others get further ahead in the digital delivery business. If Blockbuster wants to ever be a winner again, it needs to also put some significant resources into that arena now. And that means even bigger short term losses.

But the problem is that Blockbuster has a bunch of contracts to distribute DVD's. It can't just stop that business. Not only would that leave it with no revenue and no business model, but it would kill its relationships with studios and distributors. And the Blu-Ray disc business appears to have a few years of life in it as Blu-Ray players come down in price and Christmas is approaching and the economy is slowly improving. Blockbuster can't afford to miss that opportunity, as limited as it might be.

In other words, Blockbuster is actually doing the only thing that it can do under the circumstances. It needs to take a circuitous route to its new long-term strategy, otherwise it will have no future at all. Very tough situation. The only way this could have been avoided would have been much better planning starting at least 5 or 10 years ago.

In the early days of MP3 and Napster, it was immediately clear that discs of all sorts had a limited lifespan. Blockbuster could have started making a new plan way back then. But they were still making tons of money and they wanted to think that they were somehow immune to the inevitable. Obviously, that was a big mistake, and a big lesson to be learned by all.

Your cheese is going to move, so you might as well be the one to move it. (If you don't get that reference, you really need to read more. Check out the Spencer Johnson book here.)

The DVD Is Not Dead...Yet

An article in yesterday's NY Times does an excellent job of covering the point I was making last week. That is, the entire DVD business has a limited lifetime and Sony's Blu-Ray victory is somewhat hollow. The disc business is not a long-term business and it is already showing signs of fading.

The article discusses what the various studios are doing in an attempt to bolster the DVD and Blu-Ray business and keep it from going the way of the CD. They are trying everything from better packaging to actually providing a downloadable file on an accompanying disc so consumers can put the content right on their computers, iPods and wireless devices.

However, that last strategy relies on the fact that loading from a disc is still a lot faster than loading from the Internet. At least one executive claims that this advantage will remain for the foreseeable future. If that's true, then how come everyone is already foreseeing the day when all content will be piped directly to the consumer with no need for a disc or packaging or a brick-and-mortar retailer. Maybe no one can pinpoint the day that the speed and capacity of most consumers' Internet access will cause that technology shift to occur, but everyone can foresee the occurrence. And I maintain it is sooner rather than later.

I think we again are seeing entertainment companies struggling against inevitable technology shifts rather than embracing them and developing new and better business models. These guys have to give Who Moved My Cheese? another read. Change is inevitable and needs to be not only accepted, but pursued. Smart business people get out in front and give consumers what they want before they start switching to other vendors. The problem with the major entertainment companies is that they are still used to controlling the business and dictating to consumers. They need to get smart and embrace the commercial democracy that is created by technological revolutions.

And Blu-Ray sales will certainly pick up. As prices come down on 1080p displays and Blu-Ray players, consumers will seek and enjoy the higher quality. But that doesn't buy that much more time. Eventually, superior HD content will also be delivered over the pipeline. It is right around the corner -- maybe it's a 3 year corner, maybe a 5 year corner or maybe even a 10 year corner, but it's coming. Let's not put so much effort into denying consumers what they really want by delaying technological shifts as long as possible. Let's get out in front of consumers and figure out how to make more money by using technology to provide more quality and convenience at a price that consumers are willing to pay.

Update: Here is an article from Macworld, published last night, that makes the point even more directly, and backs it up with some emerging research.