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Blockbuster's Failed Bid for Circuit City, And The Future of Video Distribution

7/02/2008 1:09 AM

Blockbuster has put its vision for a Big Gulp-size business blending video content with video devices on ice.

The video-rental chain said Tuesday it would abandon its bid for Circuit City. Blockbuster CEO Jim Keyes cited "market conditions and the completion of our initial due diligence process" in spiking the plans.

Blockbuster investors verily cheered, pushing the stock up 7% in extended trading.

Still, Keyes added, "We continue to believe in the strategic merits of a consumer retail proposition that would bring media content and electronic devices together under one brand. We will pursue this strategy through our Blockbuster stores as a way to diversify the business and better serve the entertainment retail segment."

Seriously? Are there any real advantages of selling TVs alongside rentals of TV shows?

Bundling at retail is in Keyes’ blood: It was a key strategy when he ran 7-Eleven.

But I remain doubtful that this is the way of the future for content distribution, as I noted when the deal was first floated (see: Blockbuster + Circuit City = Huh?!).

Tying hardware to media — selling the razors and the razorblades – has worked well in exactly one case: Apple in the music business. So far, that’s been about it. 

And Apple is the exception, with its ridiculously powerful consumer brand and zombie-like following. It’s also worth noting that Apple has a relatively small bricks-and-mortar footprint, with all of its media sales transacted via the Internet.

That’s not to say that the iTunes-iPod stovepipe model couldn’t be replicated by someone else.

Sony, for example, has excited several business journalists with its plan to sell Hancock, the forthcoming Will Smith starrer about a cranky superhero, prior to DVD release directly over the Internet to consumers who’ve bought a Bravia TV and a $300 plug-in module.

"The very future of how we consume media rests on the movie star shoulders of Will Smith," writes NYT’s Tim Arango hyperbolically, before admitting in the next breath, "That is Hollywood hyperbole — but it contains a speck of truth."

The key word being "speck." Nouveau video distribution models won’t immediately puncture traditional businesses. What would it prove if Sony were to sell, say, 1,000 downloads of Hancock? I’m not sure.

The main reason new forms of video distribution won’t erode existing models in the same way the music industry had the rug pulled out from under it is this: TV is already sold as an electronic service.

Music in the era of Napster wasn’t available instantly any other way, so there was a clear consumer advantage to the new (legal and illegal) channels. Movies and TV programming, by contrast, are always a remote-click away. There’s also a natural portability to music that does not exist in the same way with video.

One more point on Sony’s Hancock direct-to-consumer trial.

Start with the premise that incumbent broadband providers — MSOs and telcos – will provide the last-mile conduit for Internet distribution models. (We may toss out the window Blockbuster’s hazy idea that a bigger retail presence is the way of the future here.)

Next, assume all digital content eventually will be delivered on an Internet-based network. 

Now, if you’re Sony Pictures Entertainment, you can either deliver your product through your existing distribution partners (Comcast, etc.) or try to go it alone. Maybe both.

But the fundamental question is: Which will prove more efficient and profitable? Over the naked Internet, the assumption has been that Sony doesn’t have to pay a middleman.

Or does it? 

Remember who owns the pipes into the home. It’s an issue fraught with political problems, with "Internet neutrality" cast as a First Amendment issue by some.

Can media companies and media aggregators, including Google, continue to mine the net neutrality issue and guarantee near-zero distribution costs? I don’t think so. Bandwidth providers will migrate to a usage-based pricing structure, inhibiting the allure of fat HD video downloads.

A simpler model: Blu-ray DVDs from Blockbuster or Netflix in the mail. 

Postage, Mr. Keyes, may be as cheap as bandwidth in that case.

 

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