Do the Movie Studios Have a Strategy for the Online World?

I recently paid my annual visit to what is reported to be one of Borders' most successful stores, located in an upscale suburb of a Midwestern US city. When I reached the CD department, I had to do a double-take to confirm what I was witnessing. It seemed to me that the department had been downsized by probably over one-half since February 2009, both in terms of floor space and stock. The feeling that I had entered into a CD ghost town ran through my thoughts.

The recurring theme of the movie industry, and more specifically the DVD business, is that it will do (or try to do) whatever it takes to ensure that it will not suffer the fate of the CD music business. This struggle was well-summarized in an article that appeared in the Strategy & Competition section of the October 19th issue of Business Week. Entitled "Squeezing Every Dime from DVDs", the article discussed the efforts by the content providers to garner greater profits from DVD products. The reality is there for all to see--DVD sales are declining and there is little or no expectation that this trend will be reversed. In the words of Peter Chernin, the former president of News Corp., "[t]he days when you [could] get anyone who wants to see a movie to pay $15 at a Blockbuster, Best Buy or Wall-mart are in significant decline."

Against this backdrop, Hollywood is reported to being taking the following steps to improve its position in the dwindling CD market:

1. Cooperation between studios to combine certain activities, such as distribution and the back-off, in order to cut costs and improve CD margins ("Those talks have since bogged down because hoped-for savings might not materialize quickly enough.")

2. Improve their business terms with the rental company Netflix, whereby the studios want to increase their share of subscription revenues and/or to furnish Netflix with releases only several weeks after they go on retail sale at Wal-Mart et al.

3. Improve their business terms with Redbox, which specializes in $1 DVD rentals at kiosks located in supemarkets, by threatening to withhold titles unless Redbox agrees to certain restrictions, such as limiting the number of titles available at a given kiosk, sharing rental fees and imposing a 45-day wait period from the commencement of retail sales (Not surprisingly, Redbox has filed suit to challenge such restrictions.)

CD as a Dodo Bird

There seems to be a two-pronged approach of sorts going on here, against the backdrop that the studios have internalized that sooner or later there will be a future without DVDs. First, in at least the short-term, squeeze more income out of the existing, if ultimately declining DVD market. Secondly, figure out a way to monetize movies in a non-DVD world.

Experiments abound. For one, Warner is trying to roll out a small number of online rentals in a test market, whereby the in-store sales will take place only four days later. The thought is that the online capability will encourage in-sale purchase of the DVD (though in my humble opinion that reminds me of the failed rationale for making music available on-line.) For another, Fox is offering a three-disk package for the movie X-Men Origins: Wolverine, containing a Blu-ray disk, traditional DVD, and one that can be stored in a computer hard drive. And then there are the online subscription experiments. ranging from Disney, with its proprietary list, to YouTube, with its platform open to all content providers.

I have several thoughts here:

1. For 300 years, content providers have migrated from distribution platform to distribution platform as technology changes. Thus, the effort to increase studio revenues from CDs is an attempt to make the financial best of a bad (and getting worse) situation. Here, the studios are seeking to earn a bit more change while in transition. For the distributors, however, such as Netflix and Redbox, there is the potential double whammy of a declining revenue share and ultimate obsolescence as a distribution platform.

2. The studios (and potential distribution platforms) are far from formulating a successful strategy in the post-DVD world. One advantage of movies over music is the commercial advantage of the movie theatre over the concert and music halls. But the revenues from movie theatres is not enough. Despite a half a decade of talk, the jury is still out whether the movie studios will fare any better commercially than their music colleagues in the online space. In the words of Barton Crockett of Lazard Capital Markets, "They've been practicing for some of these dance steps for a long time. It's time they hit the dance floor."

3. The strategic options available to the movie industry should take into account the wider world of emerging markets. Hardly a day goes by without a business pundit observing that emerging markets will be the focus of economic growth for the foreseeable future. Hollywood, Bollywood, and Nollywood may each have its own core market, and the DVD market is hardly the same for all of them. Indeed, I am not sure the extent of the DVD market for emerging market film industries. But down the line, all will have confront the challenge of online distribution. I, for one, would like to see more discussion of the challenges of online distribution in this broader context.

It's Time to Hit the On-Line Dance Hall