Monday, September 19, 2005 - The Progress & Freedom Foundation Blog

Blockbuster and Video Rental Industry, Part 3: The Beginning of the End?

In previous posts earlier this year, I warned that efforts by the Federal Trade Commission (FTC) to block the proposed acquisition of video rental firm Hollywood Video by Blockbuster Inc. would likely lead to the demise of both companies in the long run. Well, excuse me while I toot my own horn for a moment, but it appears that I was likely right, and sooner than I expected.

Joe Flint and Kate Kelly report in today's Wall Street Journal ("New Signs of Strain for Blockbuster" p. B5) that "Blockbuster Inc. is facing new pressures as signs increase that a sharp decline in the video-rental market is putting a strain on the company's finances." The company's stock prices fell by 9.7% on Friday, hitting a 52-week low of $4.60 per share. This came on news that Movie Gallery Inc., the industry's #2 firm, was reporting that sales at many of its stores were expected to drop by 8-10% this quarter.

What's happening is clear: technological and market evolution are finally catching up with this old business and is about to wipe it from the face of the Earth. With all the new sources of competition out there--Netflix and cheap DVDs at WalMart, online movie download services, cable and satellite movie channels plus video-on-demand, telco entry into the video business, all sorts of handheld mobile media gadgets like the PlayStation Portable, and so on--its no wonder that Blockbuster and others in this sector are struggling.

In fact, Blockbuster Chairman and CEO John Antioco admitted to the Journal that the "rental industry is in the tank" and the firm's SEC filing last year said that it anticipates a "faster than expected decline" in the store-based video rental market. So even Blockbuster sees the writing on the wall.

This is what makes the FTC's efforts to stop the Blockbuster-Hollywood Video merger so troubling. Clearly, this is a sector in the midst of rapid decline; perhaps even the beginning of a death spiral. This has been forecast by some industry analysts and techno-pundits for years, but now it is really happening thanks to all the new competition and innovation in the media sector. Without this merger, both these firms are likely dead. Of course, they might have been dead even if they had been allowed to merge. But now we'll never know.

Hopefully this case study will serve as a cautionary tale for future antitrust analysis of high-technology and media markets. The lesson is simple: Don't sell the market short and don't limit your analysis of "the market" to just a narrow niche of some old market that long ago died. Things change very rapidly on the high-tech / media front. Regrettably, however, this case proves that antitrust thinking takes much longer to catch up to marketplace realities.

posted by Adam Thierer @ 2:11 PM | Antitrust & Competition Policy , Mass Media