Tuesday, February 10, 2004

Retailing matrix shifts Two items in today's news attracted our attention. Viacom has announced, no surprise, that it is trying to get rid of its Blockbuster video rental subsidiary. Tower Records, the music retail chain, declared bankruptcy. While these are unrelated stories, they are both founded in major shifts in the media industry. Both of these firms had claims to be major oligopolies in their own areas a few years ago. Suddenly they lost their position, but it's not like there's a major uptick in competition. It's just that bigger and more adept oligopolies have displaced them, and that the slot in the competition matrix that they each dominated have been undone by a shift. Tower, a family-owned business, was losing out to big box stores. Its hard times follow that of Sam Goody's as record stores are being pushed out by discounters and now on-line services. The result will certainly be a narrower variety of musical offerings, as the big box stores concentrate only on the blockbusters. As an article in the New York Times ("Music Retailer Seeks Bankruptcy Protection", 2/10/2004) points out: With the demise of once dominant stores like Tower that specialize in selling every category of music and do it with great depth and range, [One expert] predicted that "most consumers will move to a much narrower band of music - what they hear of the top 25 songs that are programmed in vicious rotation by the FM radio stations or top 20 almost preselected MTV songs. This is part of a big reduction in the industry according to the article. It quotes one analyst as saying"[T]here were some 50 to 70 regional record chains just 15 years ago and that now there were 'maybe 10.'" Blockbuster's case isn't far apart. While there were thousand of video chains in the 1980s, Blockbuster and rival Hollywood Video virtually wiped out the competition in the '90s and were kings of the hill, There was even serious talk of the two companies merging. Viacom bought the firm in 1995, and it was an enormous generator of cash. Last year, thanks to the switch from renting VHS tapes to buying cheap DVDs at superstores, Blockbuster is fading fast. Blockbuster tried to compete by selling DVDs too, but the superstores could offer a better shopping experience and lower overhead (Blockbuster has around 8,900 separate stores.). Last year the company lost over a billion dollars. Other factors starting to impinge on Blockbuster's take are services like Netflix (which combines the Internet and snail mail) and video-on-demand. Viacom has been quietly trying to sell the company to investment groups, but no one wants to pay what Viacom wants for a company that is dropping like a stone. Viacom may have trouble selling the shares off even to less sophisticated buyers who knew the brand name. Who could have predicted the sudden disruption in the market? Certainly not Viacom, which could have sold its full holding several years ago when it sold off 20%. Even the coziest oligopoly can be outflanked when the competition matrix suddenly shifts. Smaller-scale oligopolies are vulnerable to larger oligopolies. It couldn't have been predicted before, but the biggest competitors for both Tower and Blockbuster are Wal-Mart, Best Buy, and Target. These companies have managed to expand into the realm of more specialized operations and kill them with massive discounts. While the big box companies can concentrate on a small number of guaranteed money makers, the more specialized oligopolies have to carry less profitable items to justify their existence. It's truly an irony that that's just the strategy, discounting and concentrating on the blockbusters, that Tower and Blockbuster used to drive out their mom-and-pop competitors. Now they are being outflanking by an even more intense version of the same practice. 8:23:39 PM

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