Internet Killed the Video Star

Published November 1, 2005

Excuse me while I toot my own horn for a moment. On occasions in the past I’ve 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. It appears I was right, and sooner than I expected.

As Joe Flint and Kate Kelly reported in the Wall Street Journal (“New Signs of Strain for Blockbuster,” September 19, page B5), “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.” At the time, the company’s stock price hovered at a 52-week low of $4.60 per share. Meanwhile, there came news that Movie Gallery Inc., the industry’s second largest company, was reporting sales at many of its stores were expected to drop by 8 to 10 percent this quarter.

What’s happening is clear: Technological and market evolution are finally catching up with this old business and are about to wipe it from the face of the Earth. With all the new sources of competition out there–Netflix, online movie downloads, cable and satellite movie channels, video-on-demand, IP video from telephone companies, cheap DVDs for sale at Wal-Mart, not to mention all sorts of handheld mobile media gadgets like the PlayStation Portable–it’s 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 Securities and Exchange Commission filing last year said it anticipates a “faster than expected decline” in the store-based video rental market. Even Blockbuster sees the writing on the wall.

That 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 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.

This case study should serve as a cautionary tale for future antitrust analysis of high-technology and media markets. 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, this case proves antitrust thinking takes much longer to catch up to marketplace realities.

Adam Thierer ([email protected]) is senior fellow and director of the Center for Digital Media Freedom at the Progress & Freedom Foundation. This article was adapted from a posting on the PFF blog (