Friday, March 10, 2006

The Tortoise & The Hare

I received this comment yesterday:

"Bill, wondering if you could comment (or even do an article) on the current brick-and-mortar video store situation. Each time I go to my local Blockbuster, it seems the new titles are mostly D2DVD and fewer studio pics. Maybe as high as 80/20. Older content is mostly studio pics.This is great news for D2DVD, but as you know, Blockbuster, Movie Galler, et al, are having tough times and losing a lot of ground to NetFlix. "

This is going to be an overly simplistic explanation of this phenomenon with a lot of variables not covered. I'm just warning you.

BB is not only losing ground to Netflix, but also to Circuit City, Best Buy and the grand archnemesis Wal Mart. What studios have found is that DVD is primarily a sales business model and not a rental model in the same way that video tapes were. People buy DVDs for the most part and that has affected how these stores do business.

When I worked at York we used to get most of our income from the revenue sharing portion of the business. That dried up almost overnight. Blockbuster and others are doing everything they can to shore up their income. For example: BB offers new and used DVDs for sale not just rental. They also offered a subscription model similar to Netflix as well as videogame rentals and purchases.

"Just guessing here, but my guess is that D2DVD is more suited for the Blockbuster sales model than the NetFlix model. D2DVD covers, like the old pulps, are designed to grab your attention from the shelf as you pass them. With the NetFlix model, I think that would cater more to recognizable titles (e.g., studio)."

Not a bad guess, but truly a D2DVD doesn't get as many TPC (Turns Per Copy) as a big studio title - what it does do however is stay on the shelf longer. The studio pics are the Hare, and D2DVD is the Tortoise. And while we know who eventually won that race, in the business world slow means "restrictions on cash flow." A Blockbuster or Movie Gallery needs both types of product. Studios have realized this and have reinforced their big theatrical movies with DVD Premiere sequels - Timecop 2, Carlito's Way: Rise to Power, Sniper 2 & 3 - they add something to the brand.

Studio DVD Premieres are great for all the retail stores that I mentioned above. This is especially true for the animated sequels (Lilo & Stitch 2 anyone?) . Lots of floorspace that can be allocated in a retail store for promotional standees and the like isn't available at the local rental store. For the indie DVD Premieres, whether or not the DVD stays in the store is entirely dependent on sales profile. Since the indies don't have any promo material that means it comes down to title and artwork and good placement on the shelf.

And because these retail spaces are ordering in grand quantities they get a big discount on the cost of the DVD. That's why you see all the large "Bargain Bins" at WalMart. They've purchased the DVD for $3.99 each (as opposed to a rental place that can only order enough to get a $6.99 rate) and can blow them out the door at a "2 for $9.99" bargain. The rental store has to race to make sure that they can get enough TPC to cover the costs of the title. Again, another reason why the D2DVD titles are like tortoises - rental stores want to make sure that rentals have covered costs - then they can sell those DVDs on top of that.

My thought is that eventually, these stores are going to be phased out - along with a lot of racking jobs and trucking jobs, plastics manufacturing, etc... as the future unfolds. There is going to be a lot more competition as more internet/broadcast/communications pipe is laid. We won't need stores. We won't need Netflix.

We'll need content.


RogerRmjet said...

Bill, thanks so much for commenting on my question. One point I forgot to make before is that while Wal-Mart does order far more movies than rental stores, I think the real challenge to D2DVD is that they order fewer titles. Wal-Mart, Best Buy, et al don't have the shelf space that Blockbuster has, so the only D2DVD titles I ever see there are studio sequels and the like, such as Bambi II. They steer closer to recognizable brands, such as Disney and Universal, as opposed to pulp movies. Even though Wal-Mart has the bargain bins, most of that is filled with old studio content.

I think that the demise of Blockbuster et al will have a huge, hurting impact on the independent D2DVD market. However, I also think that this product is perfectly geared to new delivery mechanisms, such as iTunes, and that may be the saving grace. Depending on how quickly these new mechanisms come into place, there may be some tough years in between.

Thanks again for your feedback. I really appreciate it.

Bill Cunningham said...

If you look at the Video Business link to the left - you'll see many of the same topics discussed there:

Blockbuster cutbacks.
WalMart dropping HD DVD orders.

I tell everyone that gets into this business that no matter what you do on a film set or in an office -- YOU NEED TO UNDERSTAND THE BUSINESS BEHIND THE DECISION MAKING.

VB is a great resource toward understanding where the industry is going (and where its been).

MaryAn Batchellor said...

Brilliant analogy and crystal explanation. Thank you.

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