1st Quarter 2018

Posted on April 26, 2018 · Posted in Newsletters

There is nothing permanent except change. – Heraclitus of Ephesus c. 535 – c. 475 BC

The exact translation is subject to debate, but there is little to argue that this early philosopher emphasized change as a constant presence and a fundamental essence of our existence.  There is also little doubt that this constant state of change can unleash disruptive forces on our lives and on the economy as described by Joseph Schumpeter in his 1942 book Capitalism, Socialism and Democracy.

Change and the Movies

What can Schumpeter’s “Creative Destruction” look like over time.  To demonstrate these forces, we are going to look at movies and more specifically, how we consume them.  You only have to go back to the 1970’s and you would see that almost every town had a movie theatre.  By the late 1970’s, the multiscreen theatres began to appear driving the mom and pops out of business and shuttering the real estate that housed them.  The 1980’s saw the arrival of VHF and a new business was born; the local movie rental store.  Seeing an opportunity, people like Stuart Skorman of Empire Video and Wayne Huizenga of Blockbuster created large chains which forced most of the locally owned stores to fold.

Discs and Streams

The next decade saw tapes morph into discs and a consolidation into super regional and national video businesses.  In a November 1, 1997 article in Wired, Skorman laid out his vision of the future.  He stated that in the next five to ten years, technology will allow film fans to download movies instantly and directly into their TV or PC screens.  He also stated that his new business Reel.com would be one of the first video-on-demand outlets at the starting gate.  He was right, but neither Reel.com nor Blockbuster would survive to profit from this new business model.

At its peak, Blockbuster had more than 9,000 stores, but a new business model had emerged and a new competitor, Netflix.  With a better strategy of sending discs through the mail, the new model required no retail real estate.  Blockbuster struggled to compete with this low-cost model.  Then, with the advent of faster broadband, Netflix, along with the other remaining players, began to migrate towards streaming rather than mailing discs, fulfilling Skorman’s vision.

Original Content

It now appears that it is very difficult to make any money, through subscription service or rental, even as the dominant movie business.  After less than 15 years, Netflix, having struggled to earn a positive rate of return delivering movies to consumers, either streaming or discs through the mail, is now emphasizing original content.

What does the future hold for the movie business?  It’s hard to say.  Whatever it is, the forces of creative destruction will probably continue.  Technology has made new businesses possible that were only visions a decade or two ago.  These advances have made life difficult for every business model thus far.