. . . Wednesday December 22, 2004

Keep the Kid

There is an old Woody Allen stand-up routine during which he recounts a negotiation between the FBI and the the kidnappers who took him hostage when he was a kid. It goes like this:

The FBI surround the house. “Throw the kid out.”, they say. “Give us your guns, and come out with your hands up.”

The kidnappers say, “We’ll throw the kid out, but let us keep our guns, and get to our car.”

The FBI says, “Throw the kid out, we’ll let you get to your car, but give us your guns.”

The kidnappers say, “We’ll throw the kid out, but let us keep our guns – we don’t have to get to our car.”

The FBI says: “Keep the kid…”

Those companies competing for your business in the online DVD rental market may start to sound a lot like those FBI agents when it comes to negotiating a price. The latest salvo in the DVD rental price wars has been fired by Blockbuster. In addition to getting rid of all late fees for in-store rentals (which is the equivalent of a movie theater throwing in popcorn and drinks with the purchase of a ticket), Blockbuster has now lowered their monthly rent by mail fee to $14.99. That’s three bucks lower than Netflix.

This price war has been fast and furious. Are we really that far off from one of the competitors announcing that we can just go ahead and keep the movies and fees?

Several years ago, a few months after Netflix had launched, I had lunch with one of the founders. Even at the early stage, he knew he had a hit. He explained to me that the one question he needed answered was whether or not people would be willing to rent movies by mail. Once he knew that they would, he was confident that the company could grow.

He was right, of course. But the irony is that now there are several major competitors all trying to attract customers to a model that will ultimately disappear. I can already TiVo movies in HD off of my Satellite. The quality is better and I don’t even have to make the (what now seems long) trip to my mailbox. How long is it really going to be before downloadable movies make DVD mail rentals look like a brief preview before the main feature begins?

So the relatively short term price wars make perfect sense. The idea to get as many customers as possible over the next few years so that they’ll look to you when it comes time to start downloading.

The only problem is that there a lot bigger companies with a lot deeper pockets who already have the customers and who are just waiting for the technology to roll out so they can crush the DVD model.

Today’s competitors may absorb a lot of losses over the next few years only to find that they are left in the dust.

Something tells me we won’t be hearing Comcast or Murdoch yell out: “Keep the customer…”

Concentration is important!