Post of the Day
March 13, 1998
Subject: Re: The end is near!
Who was in the home video market before Blockbuster? Who was in the book market before Amazon?
The juxtaposition of these two questions shows such a dramatic misapprehension of the situation that only now am I beginning to understand why the bears on Amazon are at such a loss to explain the strength of the Amazon phenomenon. What is not being grasped here is the fact that the success of Blockbuster was not the victory of one company to dominate the market of a new product or service, but the victory of one company to dominate a new distribution channel for a very old one.
Under the paradigm suggested by the above questions, one would think that consumers in the early 80s were lining up six deep at their local video stores so that they would have the pleasure of storing in their homes overnight some plastic boxes that contained little spools of magnetic ribbon. On the contrary, these consumers were instead lining up to rent copies of a product that the public had by then already been enjoying for something like eight decades: movies.
Never mind that Blockbuster was in a commodity business. The products they peddled were the same ones you could get at any other video store, or on television, or at the local theatre. Nevertheless, this distribution channel, as an industry, grew because it had advantages the old channels did not offer: selection and convenience, to name two. The fact that the new distribution channel thrived did not mean the old channels were going to be run out of business; people did not stop watching cable television or going to movies because they could rent their own entertainment. The new industry grew simply because it offered consumers benefits the other channels could not.
Blockbuster's success in dominating the new industry was built on two factors: location and mindshare. Since Blockbuster was positioned to dominate the new channel, it reaped the lion's share of its success.
With Amazon, we are looking at something very similar: an old product, a new distribution channel, and one company poised to dominate that channel. Its distribution channel offers advantages that the old channels do not: location and convenience, to name two. It seems to be poised to win the mindshare game as well.
The existance of this new distribution channel does not threaten the traditional distribution channels for book sales -- those old channels, after all, offer their own conveniences and pleasures, just as a movie theatre is likely to have a better picture and sound quality than the one you can get watching your own video system at home. Moreover, it remains to be seen how well Amazon will execute its plan to dominate this new market as it matures. But the old-line thinking that this company has much to do with the old bricks & mortar distribution system is simply a mistake.
The parallels are (quite serendipitously) explained by Jeff Fischer in tonight's Fool Portfolio recap:
Ten months ago there were an estimated 35 million Web users, and by the year 2000 it's expected that there will be over 150 million (according to a Morgan Stanley Dean Witter report). That firm expects Web retailing to grow aggressively, but to not displace traditional retail sales. It also believes that as fragmented as online retailing is now, eventually only a few leaders will emerge for each sales category. So far, Amazon is the book leader.
In conclusion, let me pose the lead-off questions a different way:
Who was in the movie distribution business before Blockbuster?
Who was in the internet book market before Amazon?