Wednesday, July 19, 2017

One more quibble with Goldfarb – – why Netflix and not Redbox?

I'm starting to feel really bad about this. Brent Goldfarb recently wrote one of the best and most important analyses of the Tesla business model and of the larger question of the disruption fetish, but so far, all we've managed to do is complain about relatively minor issues in his piece. That said, this one has bothered me for a long time. Furthermore, I believe the point that follows, though it somewhat contradicts Goldfarb's account, actually strengthens is argument.

Here's the passage in question:
A disruption theorist would explain Kodak’s downfall by arguing that Kodak ignored the threat posed by digital photography because it was too focused on the seemingly steady and solid profits produced by selling film. Likewise, Blockbuster ignored Netflix’s DVD-by-mail model and later streaming, leading to its bankruptcy.

Ignoring these innovations may have seemed sensible at first: Low-resolution digital photography did not appeal to Kodak’s customers, and Netflix started out by offering odd and old movies, i.e., not blockbusters. Why would Blockbuster bother to compete with that?

Why talk about Netflix and not Redbox? It is not at all clear to me that the DVDs by mail model is any more innovative or "disruptive" than the DVD by kiosk model. Nor is it immediately obvious that Netflix played a bigger role in Blockbuster's demise. Redbox targeted virtually the same market as the rental giant and it did so very successfully.

Redbox Automated Retail, LLC is an American company specializing in DVD, Blu-ray, and video game rentals via automated retail kiosks. Redbox kiosks feature the company's signature red color and are located at convenience stores, fast food restaurants, grocery stores, mass retailers, and pharmacies.

The company surpassed Blockbuster in 2007 in number of U.S. locations, passed 100 million rentals in February 2008, and passed 1 billion rentals in September 2010. Competitors include Netflix and Blockbuster. In Q2 2011, kiosks accounted for 36 percent of the disc rental market, with 38 percent of that attributable to rent-by-mail services and 25 percent to traditional stores, according to the NPD Group. As of Q2 2011, 68 percent of the U.S. population lived within a five-minute drive of a Redbox kiosk. The numbers for Q2 2013 shows that the Redbox rentals had surpassed 50 percent of the total disc rentals in the country.

At the risk of oversimplifying, you could argue that competition from these two companies killed the Blockbuster chain, but for some reason, only one of the two makes it into the narratives. Why is the still highly visible kiosk service so often forgotten? Some might suggest that it has to do with the decline of the DVD, but while that might affect the valuation of the company going forward, it is not at all relevant to the period in question.

The reasons that you hear more about Netflix than about Redbox, are the same reasons you hear so much about Netflix. First, the company has considerable Silicon Valley sheen, the kind that guarantees excessive hype. Second, and far more important, Netflix spends a god-awful amount of money making sure that people talk about it. The marketing and PR budget for the company has been astounding and astoundingly successful. Think about all of the news stories you seen about the company, including the stunningly embarrassing "look what's coming to Netflix this month" which regularly runs in otherwise respectable news publications.

Goldfarb argued that bullshit hype and the disruption fetish distort markets and divert money and talent into bad projects. The fact that even he is influenced by this hype only goes to support his larger thesis.

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