Friday’s post laid out some grim evidence about the state of entertainment retail. It seems that Nipper, the loyal old dog that got so famous for listening to His Late Master’s Voice through the gramophone, has gotten fat. If it’s not the economy or other lame excuses, then what’s going on?
Sales of discs are NOT being replaced by digital
As physical sales began declining, many in the business began to assume (and hope) that the declines would be offset by digital sales. However, the transition to digital from physical is nothing short of a catastrophe. Total revenue from the sales and rental of content (physical and digital) has been declining over the last several years, and nothing seems to be working to reverse this trend. The industry is in free fall.
We got here because content owners chose to hang on to the old model and get fat and lazy rather than nurture the development of an inevitable new digital model. That attentive and amazed terrier somehow turned into a territorial pit bull that didn’t want to switch to a more lean and nutritious bowl of food in the name of health. Here’s what happened.
Content owners began emphasizing how to protect their content as it changed from digital on a disc to digital in the computer. The music business stood by in paralyzed disbelief as fans turned to crime and stole entire music collections. In the movie world, studio execs focused on preventing illegal file sharing and created complicated content protection that had the unintended consequence of making it nearly impossible for customers to enjoy content across a variety of devices.
What was great about the DVD – the convenience of using it in any DVD player – was completely undone in the digital world. What a pain it would be if you had to buy three different DVDs to play in your computer, on your phone, or on your TV! With the difficulty of watching movies across devices, consumers have checked out and don’t really care about digital. The irony of all this content protection is that it hasn’t done a thing to stop illegal file share. Not to mention the content owners have allowed a near Apple-monopoly.
The next big issue concerns the economics that motivate retailers to sell products to its consumers. In the DVD world, studios pay to manufacture a DVD – the plastic disc, the case, the paper on which the artwork is printed – and then ship off the package to the retailer. The retailer pays a wholesale price to the studio and then in turn sells the DVD to its customer with hopefully a bit of extra margin to make some money. Easy, right? In the digital world, something happened that I really don’t understand.
Digital files have manufacturing and distribution costs associated with them. But for some reason, content owners began pushing these costs onto retailers. As a result, retail margins to sell digital goods took a hit. When retailer margins take a hit for no good reason, retailers lose interest in selling a product. Consequently, retailers haven’t readily adopted digital. There is simply no motivation to help a customer transition to digital.
So, here we are. The industry suffers as DVDs and Blu-rays sales continue to decline and customers opt for a cheap and easy subscription or rental offer (think Netflix, Amazon, Vudu). The last standing retailers don’t know what to do with the dying entertainment category. As smaller retailers go out of business, the big ones are looking at other more profitable things to sell their customers and fill the space in their stores.
The prognosis for the now fat and lazy Nipper is not looking good. He needs to get up, move around, and start thinking of doing something different. Otherwise, he’ll become another obesity statistic.