Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Thursday, December 06, 2007

Hollywood Suicide

"...-- The breakdown: If a DVD is sold to one of the big boxes and Lionsgate collects $18, then Lionsgate’s net profit is $16, Burns said.

"Don’t get me wrong, that's not without catches. We're the ones taking the inventory risk, it's basically everything on assignment there. So if we can't justify a lower price to them, how can we sell it to Apple for $12 for a digital download to own? You can make the case that if the price went up, you could certainly back-out the shipping costs, the inventory risk and duplication of the DVD. I believe that is forthcoming with the major studio. But in that case, I’d much rather be the tail than the dog."

Uhhh. In this edition of media suits destroying value, we bring you Michael Burns, vice chairman of Lionsgate.

You know, last time I checked, shipping costs, inventory risk, and duplication costs were kind of...ummm...nonexistent for goods whose marginal cost is pretty close to zero.

I could go on (and on) about how trying to fight elemental economic forces with nonsensical arguments designed to shore up bargaining power is about as futile as trying to mountain bike up Mount Everest.

Or maybe about how these different costs and risks - inventory, etc - are exactly what markets, networks, and communities can vaporize.

But honestly, at this point, I'd rather watch Hollywood crash and burn.

Not convinced yet?

"...-- Online Renting: He finds the proposition for a $4 dollar online rental more favorable, noting Lionsgate's 20 percent piece of CinemaNow. That’s going to be a bigger business. It's still tiny, but it's gone up 8-fold for us. It's still less than $10 million per quarter in terms of our business. But it's going to get bigger. I still say, although rental downloads will be big, VOD's going to be bigger."

Lolz. See the point yet? The marginal cost is zero, the distribution cost is almost zero, the good in question is essentially durable forever.

But - amazingly - Burns still thinks that renting is going to create more value than buying.

Actually - all else equal, that's economically impossible, given this cost structure.

Such a fundamental and almost total misunderstanding of basic economics is pretty astounding.

Sure, yes, I know - Burns is just jockeying for position with Steve Jobs.

But this also means that it's almost utterly inevitable that any strategy built on these economics will be not just dominated - but instantly in decay.

Does this sound familiar? It should. It's exactly what killed lots of music industry initiatives, and left massive market space for iTunes to disrupt the labels.

Lucky for us LGF is the only publicly traded film player - time to short perhaps.

-- umair // 10:30 AM // 0 comments


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