• by Mike Bloxham , Op-Ed Contributor, December 4, 2008

Something like 10 years ago, I remember sitting in a pub in London with a couple of friends discussing the promise of the then newly burgeoning Internet and postulating on what it might really mean for all those bricks and mortar businesses that were casually being written off by the dotcom wunderkinds as dinosaurs well on the path to extinction. Being genetically jaded and hard-wired to be skeptical of many of the fashionably all-encompassing statements of the day (and never having been described as fashionable), my friends and I sat in the corner of the pub nurturing our pints of ale pontificating on what scenarios might ultimately play out and become real.

It is in the nature of all such discussions that a healthy degree of what is said turns out in retrospect to be utter rubbish -- however wise and insightful it may sound at the time. One thing we agreed upon, though -- and which has stood the test of time -- is that being a business like Tower Records or Blockbuster Video was really going to suck if this Internet thing lived up to its promise and enabled us all to get as much digitized content over the Web as we were prepared to pay for.

After all, the incumbents were laden down with legacy systems, expensive real estate or leases, an employee base structured for personal interactions at point of purchase, nationwide distribution and logistics and all the rest. What chance would such businesses stand against aggressive and well-organized newcomers? In such a brave new world, they wouldn't even be playing on a level field. Perhaps the one (not insignificant) thing they might have going for them -- assuming they kept it relevant -- would be their brand and the relationship consumers already had with it.

Fast-forward to the present day, and what do we see? Certainly the record business has gone through turbulent times as the retail model has been redefined with, of all things, a consumer electronics/IT brand bringing order to the growing chaos and downward spiral of economic doom. Music downloads are now hard-wired into the DNA of vast numbers of the population, and CDs are increasingly the preserve of the older demographic (many of whom also download their music). When was the last time you visited a music store?

As for video, the field is much more open -- and for that matter, more interesting.

As the world of video-on-demand has taken its various shapes -- from Cable VOD through DVRs and DVDs to online video (to say nothing of the arrival on the scene of Netflix) -- the competitive landscape for the likes of Blockbuster has become infinitely more complicated. The cozy old days of retail video rental when it was all about location, price and having sufficient of the right range of stock available must seem a long-distant memory for those looking to maintain the value of this business.

Which is why last week's announcement by Blockbuster of its new movie download service was both inevitable but also intriguing. With so many avenues open to customers to gain access to the movies they might previously have gone to Blockbuster for, the company had to move in this direction -- Netflix is doing it, the cable companies have effectively been doing it for a long time, and even Apple is getting in on the act (or trying to) with its Apple iTV offering.

What seems particularly interesting about Blockbuster's proposition, however, is that -- unlike Apple's -- the emphasis is not on the box or the technology, it's on the movies and on convenience. It may seem blindingly obvious, but this simple acknowledgment that people are more interested in movies than the means of their delivery is not a message that appears to have gotten through to Apple (savvy though they undoubtedly are when it comes to consumer marketing).

Blockbuster's proposition is basically "rent 25 movies for $99 and you get the box they play on for free -- after which, the movies are $1.99" -- which doesn't seem like a bad price when downloads of a single song are 99 cents. The box will link to your Internet connection at home (wired or wireless) and delivers DVD quality. That to me is classic sales promotion and a simplified version of the cable and satellite proposition that has worked so well (and which does of course represent possibly the greatest competitive threat). Nobody cares about the box; in fact, the greatest stumbling block to the strategy (no pun intended) is the extent to which people may resist the notion of "yet another box" in the household.

Longer term, the challenge for Blockbuster -- and for that matter, Netflix and any other purveyor of any kind of VOD experience -- is going to be differentiation. Availability of content is likely to be wholly commoditized (unless particular players are prepared to pay through the nose for 24 hour exclusive windows within their category, which is probably unlikely); quality of image and delivery will be commoditized at a necessarily high standard; and location becomes irrelevant.

The differentiator, then, is likely to be service add-ons like recommendation engines a la Amazon and Netflix, and marketing and promotions. It all comes down to understanding your consumer and creatively building and leveraging relationships based on their interests.

But whither advertising in all of this? While at present, any one of the VOD variables accounts for only a small slide of the total viewing pie -- and therefore has minimal impact on advertising exposures -- how long will it be before the cumulative effect of all the options available to us for controlling our viewing experience starts to take an undeniable toll on the collective reach of TV advertising?

Household penetration of DVRs is already well on its way to 30% and although growth may be slowed by the current recession, it won't be stopped. And as anyone with even the most delicate grasp of reality knows, the proportion of ads recorded that are actually watched in real time (as they are designed to be watched) is alarmingly low. Add to this DVDs, cable and satellite VOD, online video where there is less advertising in total -- and now the efforts of Netflix and Blockbuster to enter the home unsupported by ads -- and it's hard to deny the prospect of a future where the time we spend watching programs and movies that feature real-time ad breaks (or any ads at all) is considerably diminished, with the commensurate effect on available ad inventory.

Ads won't be going away, but like a once dominant species, they'll be constrained to an ever-smaller domain, be more highly prized and jealously guarded. Maybe we'll even see less clutter and heavy-handed rotation.