Today’s Wall Street Journal has an article about Target and WalMart asking for lower DVD prices, McBride, S. & Marr, M., “Target, a Big DVD Seller, Warns Studios Over Download Pricing,” Wall St. Journal (Oct. 9, 2006). It simply confirms the terminal obsolescence of big-box retailers, at least when it comes to consumer entertainment software such as DVDs and CDs. Any moron could figure out the reason why iTunes and its on-line competitors should get a lower wholesale price. There are no “finished goods,” by which I mean physical things or objects that are sold to consumers. This eliminates manufacturing cost; obsolescence of components (the paper inserts that are collated into the finished goods); product returns; warehousing; and the cost to pick, pack and ship to the retailer. It also simplifies credit and collections issues. Antitrust law certainly permits a manufacturer to offer a lower price to a customer if its costs to service that customer are lower (a so-called “functional discount”).
A second issue is that Target and WalMart uncritically assume that every digital sale displaces a finished goods sale. There is no economic evidence to support this hypothesis. These sales might be purely incremental, to consumers who otherwise wouldn’t have purchased the DVD. The reason for the relative decline in the popularity of DVDs as an entertainment medium has little to do with consumers’ evolving preference towards digital transactions. Rather, it’s because the catalog market is increasingly saturated, and new DVDs (i.e., those of newly-released movies) are so crappy.
The bigger problem is that these two influential chains are stuck with an antiquated template in today’s 21st-century digital world. In reaffirming their dependence on finished goods, they reveal themselves to be part of the problem, rather than part of the solution. The major entertainment companies in turn are so dependent upon customers like Target and WalMart that they have no incentive to innovate, and in fact vigorously oppose, migration to an all-digital, direct-to-consumer, downloading marketplace.
How ironic that this coincides with the demise of Tower Records – the same Tower Records that once promised to have “every record in stock, in all stores, all of the time,” Morris, C., “Tower Records to Be Liquidated,” Hollywood Reporter (Oct. 7, 2006). It used to be a small-scale disaster when some influential artist couldn’t find a copy of his/her record in the Tower Records on Sunset Boulevard in Los Angeles. Now, nobody could care less. And, they have a mountain of CDs and DVDs that nobody apparently wants to buy (at least at a price higher than the fire-sale prices for which they now will be sold). These are the same CDs and DVDs that Target and WalMart want to price-fix vis-à-vis their digital counterparts.
UPDATE: In another instance of ironic cross-reporting, today’s Los Angeles Times ran competing articles about Tower Records and the iPod: the former blaming the latter, the latter commenting on the demise of the former. Nice! See: Swed., M., “For Audio Lovers, Yet Another Blow,” Los Angeles Times (Oct. 22, 2006); and Levy, S., “The iPod Revolution,” Los Angeles Times (Oct. 22, 2006).