Can Video

-on-Demand Economics Work?">

Now that 2004 has drawn to a close, and plans for 2005—which include expansion of the trading and Game Pass subscription programs—have been set in motion, Blockbuster is busy eyeing the technologies that will become a priority in 2006. As an example of how quickly a new technology can affect, and threaten, Blockbuster's business, consider the words of CFO Larry Zine, who, last February, said of video-on-demand, "We don't think the economics work well right now." Then, during the company's annual call with analysts and investors the following month, Blockbuster announced that it had launched successful trials of video-on-demand in both the U.K. and the U.S., and that it plans to start its own VOD service through Blockbuster Online next year. Meanwhile, Netflix will be rolling out its own service for downloading movies from the Internet later this year.

Blockbuster still has the brand recognition and the marketing muscle to become a big player in video-on-demand, should the markets move in that direction. "VOD is the ultimate impulse decision," says Jennifer Illes, a research assistant at Harvard Business School who has co-authored a series of case studies about Blockbuster's transition. "Coupled with TiVo (or any brand of digital video recorder) it's the ultimate threat. There's been so much speculation about VOD being just around the corner, and it's not totally here yet, but with those two together you have the ability to get any movie you want at any time.

That could be to Blockbuster's advantage, though, if the company can make its mark in the new technology even as its traditional business model fades away—something that even Carl Icahn expects it to do. That could explain why CEO Antioco is so determined to take advantage of each new business opportunity. If VOD is a potential Blockbuster-killer, like Netflix before it, he wants to keep the Blockbuster brand at the forefront of VOD's adoption so that the company can replace any rental revenues lost to the new technology.

Yet others scoff at the idea of VOD taking so much as a nibble from either the rental or sale markets in DVDs. "VOD is a joke," says analyst Pachter. "The studios know it doesn't make economic sense to allow VOD at the same time as rental. Pixar Animation [shares] blew up because they only shipped 20 million copies of The Incredibles. What if they had no DVD sales at all? Literally 50 percent of studio profits come from DVD sales. The studios recognize the need for that gap, the window, between DVD release for rental and sales, and either pay-per-view or VOD."

The technology isn't even ready for prime time, Pachter warns. "You can't have dedicated bandwidth for 40,000 movies on demand all the time, which means you'll never get the same selection you get at the video store." Besides, he says, a number of U.S. households don't even have computers, much less broadband access. "It's not going to be a threat for at least ten years and it's foolish to look beyond that."

Perhaps. But Illes notes that the studios have two opposing views of the new technology. "They're very dependent on Blockbuster because home video rental is a huge chunk of their revenues," she says. "But Blockbuster is the middleman. If they could somehow get rid of them, then VOD could be extremely lucrative for the studios. Whether VOD is an ultimate threat for Blockbuster is dependent on how the studios end up handling their release windows."

And, of course, on how nimbly Blockbuster rolls with the changes.

Janet Rae-Dupree, the technology editor for the Silicon Valley Business Journal, has covered technology and science in Silicon Valley for a number of publications, including BusinessWeek and the San Jose Mercury News.

This article was originally published on 08-10-2005
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