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The Format Cold War

1 Mar, 2006 By: Holly J. Wagner

Well, I hate to crow about the obvious, but Netflix CEO Reed Hastings yesterday confirmed what I said about a month ago: Online retailers are much better positioned to market high-definition formats in a guerrilla format war.

The reason? They just don't have to spend as much to keep up. Think about the brick-and-mortar chains, just for grins.

If each chain wants to stock every title in every format in every store (which most likely they do not, at least at the outset), that would mean Movie Gallery and Blockbuster would have to buy, for starters, about 95% to 98% of their standard DVD order, plus 9,000 more copies each per title for Movie Gallery and Blockbuster — one Blu-ray and one HD DVD for each store — and that's just in the U.S.

It's a gamble that some copies would ever get rented at all.

Distributing online orders from stores may help Blockbuster shoulder some of the added load, but overall it's a much higher-cost proposition for physical store chains than for a pure online play.

Hastings gave the example that Netflix could start with 98% of its standard DVD order and just 1% each of the new formats because its inventory is always flying all over the country anyway, and it only has to stock, today, 37 distribution points. Even if that jumps to 50 by the end of the year, it's still 1% of the buildings even one of the physical chains would have to stock.

It would be easier on everyone if the studios could agree to bring one high-definition format to market, but in the end their war of egos could end with a whisper, not a bang. While today's entertainment executives quibble about formats and copy protection, tomorrow's visionaries are off figuring out how to store 50 times more data on holographic formats.

For physical rental, the format war could be the beginning of a cold war in which the winner is the one who can survive the additional expenditures. Neither of the physical chains is in a good position to do that.

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