View From the Trenches: Surviving Change

I am a veteran of the format wars. I started as an innocent civilian,
caught on the side of Beta while the DVD army pushed the front closer
and closer to my home. Later, I joined the motion picture special
forces, dutifully accounting for units of Laser Discs, Beta tapes, and
endless VHS videocassettes. I don’t think a truce was signed as much as
the other formats faded away, though Beta did manage to live on as a
professional favorite until just a few years ago.

As I moved up the ranks, I saw industries die. I saw them resurrect. I
saw panic. I saw salvation. I saw resignation. I saw false hope. I saw
belief. I saw consumer indifference.

The first death — arguably — was the rental store. Back in the olden
days, you’d go to a store and rent a video. You’d find it on the shelf*,
fork over some money, take the video home, watch it immediately, return
it. If you failed in either of the last two steps, you’d be dinged with
a late fee.

This market was ruled by scarcity. Stores paid big bucks for those
units. Retail price was in the neighborhood of $80, higher for some
titles. The videocassettes (and yes, we really called them that) could
circulate a certain number of times before they were worn out. Only the
popular titles were repurchased.

Bookish lesson. But the market was growing, growing,
growing, and smart minds were figuring out how to make it bigger. The
studios messed with their major markets, introducing a whole new revenue
stream. This impacted everyone from theaters to airlines to pay
television channels to television networks to local stations. Yet those
markets adapted and thrived. Imagine the joy in the finance ranks!

Then, around July 1992 (give or take), the rental industry was
destroyed. The studio I worked for released its first major sell-through
title, and the world was never the same. Quick definition: in
publishing, sell-through is the percentage of actual units sold versus
units shipped. In motion pictures, sell-through is defined as direct to
consumer sales (versus rentals). Today, we include “electronic
sell-through (EST)” or “digital sell-through (DST)” in our jargon. I
prefer the latter, the guilds seem fond of the former. I will win this

Sell-through titles were attractively priced for consumers. Under thirty
dollars, under twenty dollars. More titles were available; the dollars
involved made it financially viable to release more titles to video.
Suddenly, it was feasible to own your own home movie library (as opposed
to, oh, home movie library). Sales boomed. Rentals crashed. Businesses
had to rethink their models: no longer could a store get away with
buying one or two copies and forcing consumers to wait. More investment
in inventory was required. Oy!

Just when all was hunky dory, along came DVD. Consumers immediately got
the superiority of the format, the permanence of the format, and they —
amazingly — rebought their home libraries in DVD format. And, of
course, title selection increased even more; studios digitized their
entire lists. Yep, they bit the bullet and made a project of it. Those
legacy rental businesses that figured out how to get into the
sell-through game suffered some new costs (turns out a DVD package is
very different from a videocassette package), but they did okay.

Until the day DVD sales started slipping. I have my theories on this,
but there came a point when consumers weren’t buying like it was going
out of style. Or maybe buying just went out of style. Luckily, the
studios were ready with a plan: they reincarnated the rental market,
only this time it was called revenue sharing.

(This model was the result of a lesson learned from the previous
incarnation of the rental market. I mean, why wouldn’t you want to take a
share of those rental dollars? Seriously…let the store keep it all?)

Alas, rev share, despite consumer love of Netflix, wasn’t enough to fill
the sales gap. Probably because consumers saw the next big thing:
digital downloads. They’d already started the shift with music, and
those darn early adopters were circumventing geographical restrictions
by downloading episodes of, oh, Dr. Who via the torrents. Not that I know anything about that.

But wait! There’s more. Hollywood had a plan. Two plans,
actually. One plan was called Blu-ray. The other plan was called HD-DVD.
One or the other would save DVDs and the business model and maybe even
the world. Hurrah!

Bookish lesson. This is called trying to preserve your
legacy business, even if that legacy is barely two decades old. See
also: turning a blind eye to reality.

Except…Beta, VHS, DVD, next big thing on the horizon. Consumers
weren’t particularly interested in repurchasing their libraries in yet
another new-and-improved format. They were particularly uninterested in
getting in the middle of a format war that would leave angry consumers
on the losing side. In mid-2008, I attended a conference panel where a
publishing executive noted overall sales of players for both formats
were in the 500,000 range (cannot confirm this number, but sales of HD units were pretty meager).

Oh, if you care about wars, Blu-ray won. Enough studios realized
creating a false format war wasn’t good for their business. Consumers
were sitting on the sidelines. They had perfectly good DVD players, and
couldn’t justify purchasing new, higher priced players. In the early
days, HD-DVD and Blu-ray selection wasn’t that awesome even if the
technology was greatly improved, and, of course, there was that next big
thing just around the corner.

So sales kept declining. Netflix kept gaining customers. People loved
the selection and convenience. But Netflix could not do it alone. DVD
sales, while huge by book world standards, were decelerating. For
consumers, it was no longer an all-you-can-eat buffet.

Which leads us to today. Sales are still declining; Blockbuster is considering bankruptcy.
To get a sense of what this decline in sales means, look at the fate of
MGM. Once, a catalog like theirs was fresh meat for sharks. Now we are
witnessing the slow, painful death of a studio. When all you have is the
home entertainment and television markets to sustain you, and those
markets are essentially played out, you don’t have much.

Bookish lesson. Obvious.

What Hollywood has is digital. DVD will remain a solid revenue stream
for a while yet, and people will buy Blu-ray players as their old
machines die. Maybe. But the glory days are over. Digital is growing.
Netflix’s recent deals, such as with Epix
will bring more streaming content to consumers. There is great hope
that another switch in business models will fill the gap left by lower
DVD sales.

(I once had a meeting with a high-level executive at my company, and
after he showed me his cabinet of DVDs [mind. out. of. gutter.], he
said, quite seriously, “You know, video on demand will never happen. It
won’t.” I think this was supposed to be my “plastics” moment. He was
wrong. Very wrong.)

Bookish lesson. Hollywood thought it understood the
psychology of consumers, and bet huge on (ahem) enhanced DVDs saving a
business that had been very, very good to many people. Hollywood bet
wrong. Consumers weren’t interested in something they didn’t really want
and definitely didn’t really need.

Looking back at this, I am somewhat impressed by Hollywood. Their
business followed a predictable path for a few decades. A new market
disrupted the flow. Everyone regrouped and repositioned. More disruption
happened. Those with a survivor mentality thrived. More disruption.
More survival of the fittest. Add in some evolution, some new species
emerging, investment in new media, new ideas. There were deaths. There
will be more.

There were mistakes. There will be more. To my mind, the most
fascinating aspect of all this is how the studios managed their existing
business while investing in new business. No consumer was left behind.
Okay, maybe the laser disc folks were deserted.

Bookish lesson. Change will happen. Fight for the future, not the past.

* — Side note: our local video store was organized, as near as we can
tell, by cats. There was no rhyme nor reason to the shelving process.
Unless you were seeking a martial arts movie. That section was