A New Era In Home Entertainment Started Today

With Amazon's entrance into the streaming business, the horses are officially out of the gate in the new race for home entertainment dominance.

My buddy, Jack Wrigley, emailed me today to point out the importance of Amazon's acquisition of LoveFilm which has allowed the Internet retailer to magically turn its Prime subscription shipping service into a film-streaming service. With the flip of a switch, Amazon becomes a force to be reckoned with in digital entertainment. 

In light of that development, I think it is fair to say that this week marks the real beginning of a new era in home entertainment.  Up until now, Netflix has been in a massive proof of concept stage, showing the world that there is money in streaming movies into homes.  Prove the concept they did, becoming a $2+ billion business in the process, with massive growth still ahead.  And then within a 24 hour period, Blockbuster acknowledges that its business cannot be revived and agrees to sell the remnants for less than $300 million, and Amazon makes its bold move into Netflix' streaming space.  Oh yeah...and Redbox is shouting a distant "Me too!" from its post in front of the 7-11 stores.

In saying a quick and fond farewell to Blockbuster, I can only note that its market value less than 10 years ago was over $5 billion.  It lost about 95% of that value sitting on its hands while Netflix took advantage of predictable (inevitable, really) changes in the home video market.  It is perhaps the most blatant case of corporate arrogance I've seen in my adult life.  There are plenty of lessons to be learned from that tale.

Redbox jumped into the home video game for some short term profits, with a model for better price and convenience that was never as good as the Netflix solution.  It was good enough to beat Blockbuster's rusty model, but Redbox ignored the obvious pending impact of digital delivery.  Redbox uses the Internet for payment and inventory control on its machines while it continues to deliver its films in a dying format.  It's somewhat convenient because the discs are available 24 hours a day in places where consumers already go, and you can return the discs whenever you want to any Redbox machine.  If there was no such thing as digital delivery of content, it would be a great business.

Of course, Redbox is a division of Coinstar -- a vending machine company.  Redbox was designed as a strategy for placing more vending machines, not for giving consumers what they really wanted.  It's a perfect example of a supply-driven strategy as opposed to a market-driven strategy.  It only works well so long as you happen to be supplying something the market wants.

Reed Hastings

Netflix was born as a market-driven company.  Its mission was to ease consumers' pain over late fees at Blockbuster.  It also started as a disc-renting company.  Its subscription model and cool envelope design were the initial competitive advantages.  But Reed Hastings is a software guy; he understands the power of digital technology.  More important, when he sees changes coming, he embraces them -- in fact, he jumps ahead and lets the world catch up to him.  That's what successful people do.

So, he focused on creating a superior web interface that his customers could use to line up their disc orders.  Then, with the flip of a switch (and some new contracts), he let them start watching the films right on their computer.  When the inevitable convergence of Internet and television finally arrived, there was Netflix (and its 20 million users) already eating popcorn on the couch.

Jeff Bezos

Jeff Bezos at Amazon is another visionary guy who truly understands the power of technology.  His company also has one of the best user interfaces on the Internet, and a massive number of loyal customers.  Amazon jumped into the digital streaming business in a pretty timely manner, but its pricing model reflected its "unit sale" roots.  With today's move into a subscription model, Amazon is officially acknowledging that consumers don't prefer to rent their entertainment in single unit packages.  Amazon has 10 million Prime members already paying an annual subscription fee.  That's a pretty good start at chasing Netflix for movie streaming dominance.

And while Redbox publicly acknowledges that it needs to be in the subscription streaming business, it is lacking some key elements.  First, it has no cool website as an integral part of its existing model.  There is no installed user base already making online payments, and no superior user interface.  It's a vending machine company.  No one wants to stream videos in front of their local 7-11, and that's where Redbox lives.  Again, this was predictable; if they wanted to be in people's homes, they should have built their model with a home-based component.  They didn't do that.

So, the bell has sounded and the race has officially begun.  In addition to Netflix, Amazon and Redbox (at the back of the pack), there is Hulu and Google/Youtube and Vudu and Apple and others.  Plenty of horses to bet on.  The winners will be determined by their ability to navigate their way onto consumers' televisions, their ability to cut the right deals with studios and other content owners and creators, and good old-fashioned marketing.

And as always, the winners will be the companies that can see around the curve, getting ahead of the trends and letting the rest of the world catch up to them.  There is no way to win by chasing someone else's success in today's entertainment business.  True vision and innovation are the only paths to long-term success in the new digital environment.  Blockbuster learned that lesson the hard way, and there will be more casualties before it's over.

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.)