Video stores, dying out, adapting, or persevering?
An article in today’s New York Times has presented an interesting question and a few contrary positions on the future of video rental. Kiosk is there to take it frame by frame, play devil’s advocate, and, of course, opinionate. That’s what blogs are for.
Ever since Blockbuster and Movie Gallery opened their first video stores 20 years ago, predictions of their imminent demise have been as common as late fees.
The Barron’s columnist Alan Abelson deemed video stores a terrible business opportunity back in 1986. Five years later, the chief executive of the Pilgrim Group referred to Blockbuster as a “casket case,” adding that the video store would go the way of the dinosaur in three years.
And they were wrong of course. The doomsaying here was in part due to new viewing options like HBO and then Pay Per View movies. These viewing choices did catch on, but did not obsolete physical stores for a few reasons. First, as the NYT article goes on to profess, people like going to pick out their videos. Second, because Pay Per View and premium channels also came with a premium price. Third, neither PPV or HBO were all that convenient, since you still had to wait for a specific time and follow the programmers schedules.
The “drumbeat of doom for the traditional video rental store” has been renewed in the last year or two because the video stores face new challenges. Netflix and VOD services like Comcast’s on demand threaten to obsolete traditional stores much in the same way that PPV did. However, VOD (and Netflix, which will probably be debuting a VOD service with TiVo in the near future) is much more convenient than premium channels and PPV. Also, Comcast’s on demand service comes standard built in to all of their digital boxes, it does not cost extra.
In the future, all TV and movies will be viewable on demand, standard, conveniently, and easily. This is a much more serious threat than PPV was. Furthermore, a lot of people enjoy filling up their Netflix queue and get the same sort of satisfaction that many renters get from going to the store and browsing the physical selection.
“The idea that video stores are magically going to go away for some reason is misguided,” said Tom Adams, president of Adams Media Research, a research and consulting firm for the entertainment industry. “It is still the most popular way to watch movies.”
The number of DVD’s (and a dwindling number of VHS tapes) rented by the movie-loving public still dwarfs any other form of movie watching. According to Adams Media Research, there were nearly 3.2 billion rental transactions last year. By contrast, box-office admissions were less than half of that number, DVD sales totaled about 1.1 billion and there were fewer than 350,000 purchases of movies through video on demand or pay per view.
It may still be the most popular way to watch movies, but that doesn’t mean that it’s still the most profitable way to rent movies. Blockbuster and Movie Gallery, the two biggest movie rental chains, both posted losses last quarter, blockbuster $57 million and Movie Gallery about $12 million. Both chains promise increased revenue in the future, but of course they would say that wouldn’t they? Never in the past have the big movie rental chains seen this kind of revenue bleeding, so the question is, how much longer can these companies remain in business while operating at a loss? Market share is one thing, and of course they control the bulk of it, but market share is not profit, and business is about profit. There’s nothing “magic” about that.
But one obstacle lies in the path of movies on demand, and that is the Hollywood studios. Unwilling to sacrifice the cash cow of home video sales, the studios have shown no desire to close the “window” - or the time lag of about 45 days - between releasing movies on DVD and making them available to the cable operators. Currently, the studios get about 60 percent of the list price of new DVD’s, bringing in about $17 each. For each movie ordered by remote control, the studios get about $2.
And without the newest movies - the ones most popular with video renters - video on demand will be hard pressed to make a significant dent.
UPDATE: 1/9/06 FOX HAS CLOSED THE WINDOW BETWEEN VOD AND DVD. THANK YOU. NOW, BACK TO MY THOUGHTFUL AND WITTY RESPONSE.
This is a valid point that sees its roots in the fundamentals of economics. Movies are indeed becoming a commodity, and he who controls the means of production controls the society. The studios are still calling all the shots here, and the video rental business, though lately not so profitable for the renters, is still extremely profitable for the studios.
Expect some changes in how business is done in this realm in the near future. It could go one of two ways: First, studios could leak a bit more of their profits to the rental chains to keep them afloat, thus preserving their highest channel of revenue. This would be mutually beneficial to both parties. The other thing that could happen, is the studios could maneuver themselves away from the dying chains and onto VOD, Netflix, and big box stores like Wal-Mart, making these streams more profitable by negotiating the distribution rights. This second option seems pretty unlikely at present, seeing as the major studios are all staring like deer in the headlights at the demise of traditional media, but in the future it will become necessary to their survival. If chains like Blockbuster are to survive, they must either reduce costs and find their niches, or continue to adapt into a new animal all together. Yet, the more new business initiatives they undertake (see the failure of their Blockbuster Online stratagem) the more revenue they will continue to bleed. This is exactly what they don’t want to do, so Blockbuster may be in a Catch 22 on this issue.
Movie Gallery is taking the alternate route; instead of adapting they are reinforcing their traditional business model. This is interesting in a couple of ways. The most interesting factor here is that unlike Blockbuster, they did not shell out over $100 million dollars on new business initiatives and a marketing campaign to support them, but like Blockbuster they still posted a loss. They leveled their finger even more steadily at Hollywood to take the blame, but of course this is absurd. The truth is that Movie Gallery it also staring into the headlights of new media, and they’re going to find themselves extinct as well unless they downsize and find a niche. This is an interesting reversal with the current VOD and online services like Netflix, but is necessary to prolong the company’s life.
Stay tuned to this blog for more on this as it develops. We’ll see which position is right, and whether the big chains will adapt, persevere, or die out.
If you can’t read the NYT article, click here for the syndicated version at The Mercury News.
January 14th, 2007 at 7:09 am
Allot has happened since this article was written, we as a firm KT Technology see http://www.kioskterminals.eu designed and developed a “on demand kiosk” for a European customer who has eyes set to deploy them in Europe for 2007. He has all the rigths from movie studios in the States and a joint partnership with a similar based venture in the States who have initiated trails in the States in latter half of 2006 with very promising results.
Although I agree this will not fully compensate for other movie sales or rentals not to improve. Take the example of the explosion that is occuring in DVD rental kiosk machines with such names as Redbox and Flick Station having deployed sevral hundreds into locations throughout the States but a considerable arguement from retailers are the hefty price, and extremely large footfall these machines take in finances and space. It will be an interesting next few years for the entertainment industry to see how consumers will react.