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Blockbuster's Death Was Long Foretold

Blockbuster's bankruptcy filing has caused at least one business writer to scratch his head in wonderment. In truth, the company has been a dead man walking for years. Two decades ago, analysts speculated that the stock was vulnerable to the rise of on-demand viewing from what was then called the Information Superhighway.

Digital delivery of movies has taken much longer to become a significant factor in the entertainment economics than almost anyone imagined. Now that it is here, however, we shouldn't pretend to be so surprised. And we should be prepared for the center of creative effort to move from Hollywood to pay television.

The Wall Street Journal's Shira Ovide points out that the decline of the DVD business has large implications for the movie industry as a whole. And the shock effects of shifting to digital delivery will offer important lessons for other media. Here Ovide gives us some numbers on just what the DVD means for Hollywood economics:

In 2009, sales and rentals of physical DVDs accounted for 44% of all studio feature-film revenue, according to Screen Digest. The percentage from DVDs was 56% in 2004, the peak of the DVD retail market. In 1981, before chain stores like Blockbuster took off, video tapes were 14% of the overall film market.
Blockbuster was instrumental in changing the Hollywood equation. Before DVDs and tapes, foreign distribution rights were the big ticket for the studios. As stars began to demand a cut of the gross, studios were saved by the new revenue streams from DVD sales. Star power was valuable to open a movie but not for sustained popularity.

The obituaries for Blockbuster will point to Netflix's (NFLX) ascendency but, in truth, the company had been a basket case long before Netflix was even born. The first crack up at Blockbuster occurred on Viacom's (VIA) watch as the new managers who had acquired the firm from Wayne Huizenga made terrible choices when buying videos to stock their stores. The inventory mis-match was exacerbated by a drive into increasing revenues from add-ons like candy and popcorn. It turned out most people already had the house stocked with snacks for movie night.

Even though Blockbuster remained a staple of suburban life for another decade, the company never reclaimed its go-getter status. After Viacom spun it off, and management hatched a bricks-and-clicks plan to outflank Netflix, it still couldn't re-energize itself. Maybe that's because the legacy costs of managing a huge network of physical stores would always weigh the company down.

Netflix, on the other hand, was a business waiting for digital distribution to come into its own. Only now, as it insinuates itself inside the house through game consoles, DVRs and various Apple devices, do we see the economics of digital distribution come into play. But as Ovide's numbers point out, there will be knock on effects.

Cable and Pay television are beginning to rival the networks and movies as a source of content for the rental market. In the case of pay services like HBO, the only thing stopping them from creating a direct pipeline to the consumer through an app is their symbiotic relationship with the cable companies. But even without retailing their shows directly, pay television becomes a much better incubator of content than the movie studios.

Digital distribution collapses the distinctions between formats. It makes it easier to release movie theaters one week and across iTunes or Netflix a few weeks later if conditions warrant. Studio product requires ever-bigger and louder marketing campaigns to make an impact and create the kind of echo that will drive rental sales.

Pay channels like HBO can build buzz -- and a following for their content -- over time and through clever management of a franchise. So the collapse of Blockbuster may also be a harbinger of the death of the blockbuster movie as well.

Image of Blockbuster video drop by Genista via Flickr

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