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Weekly Column

BYOB: Don't be surprised if Apple saves the day for Blockbuster Video

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

Poor Blockbuster Video hasn't made a profit in years, the stock is down about 90 percent from its 2002 high, NetFlix is cleaning its clock, and nobody - I mean NOBODY - thinks the future looks in any way rosy for this pioneering video rental chain. Steve Jobs to the rescue? Maybe.

The problems at Blockbuster are simple. The company has high inventory and real estate costs compared to either NetFlix's super-efficient rent-by-mail operation or to just about any of the many emerging digital distribution plans. Having that Blockbuster shop just down the road used to be a huge advantage for the chain, providing easy proximity to viewers. But NetFlix comes straight to your house and even though Blockbuster now runs its own NetFlix-type service, those stores aren't (yet) going away, so it can never have NetFlix-like efficiency.

Now jump to Apple's current challenge, which is very different but just as real. Where Blockbuster shares are in the toilet, Apple shares are in the stratosphere where the difference between stall speed and cruise speed is so small that almost any turbulence could bring the stock down. Apple has two notable product challenges, which are managing the Intel transition for its computer line and keeping strong its line of iPod music players and the iTunes Music Store against increasing competition from all sides. Apple's technique for managing both is to be aggressive and to as often as possible surprise customers with good news, not bad. That's why Apple's Intel product roll-out is going faster than originally announced - not because it is going smoother than expected but because Apple PLANNED to do it this way and simply look better. So, too, the Intel notebooks are shipping with faster-than-announced processors. Think that was some mistake on Intel's part or good fortune on Apple's? Think again: it was all planned. So, too, the continually refreshed iPod line with steadily lowering prices to draw-in more customers and fight-off more competitors.

Where Blockbuster is dumb and reactive, Apple is smart and aggressive, but all the maneuvers mentioned in the last paragraph can only help to maintain Apple's current position. They won't help the company and its stock price to grow further. That will require a whole new product initiative - one that doesn't in any way weaken the other parts of Apple.

For a year now I have been writing that Apple is aiming to build a video distribution empire to match its existing music distribution empire. We've seen some of this take place, too, with Apple claiming to have distributed more than 12 million music videos, TV episodes, and motion pictures through the iTunes Music Store. Down the line we'll see Video iPods with larger screens, the Video Express wireless access point-cum-H.264 decoder, faster Mac Minis with larger disk drives, and whole new versions of Apple's seminal Front Row home theater application. As soon as Steve Jobs can sort out his legal problem with little Burst.com and finish signing every movie and TV studio to an electronic distribution deal, we'll see lots more announcements from Apple.

But what about Blockbuster?

Apple will do anything that sells more hardware and software, with software in this instance including multimedia content. The company's success is always based on this combination of hardware and software, which makes it different from all its competitors. Microsoft competes on software, Dell competes on hardware, but if you want to go head-to-head with Apple you have to go both ways, and no other company really does. So any emerging Apple initiatives will involve substantial hardware and software components.

Apple values Blockbuster for only two things - its customer list and neighborhood locations. Every other part of Blockbuster is literally useless, as I am sure Steve Jobs has told the Blockbuster folks over and over and over again. He has no use for Blockbuster management, labor, or even all that shelf space. All Steve values about Blockbuster stores are the sign and the checkout counter.

By now he has so berated and brainwashed Blockbuster management that they believe they are not worthy and will accept whatever Steve deigns to sell to them or to let them sell to us. By now Blockbuster sees Apple and Jobs as their company's salvation. They are ready to drink the Flav-r-ade.

I'm not at all saying, by the way, that Steve Jobs is wrong in his assessment. Blockbuster IS in trouble and has shown itself to be generally clueless. They probably do need Steve, or someone like him.

Apple's Blockbuster product strategy is simple. Start with a new iPod that has video- and audio-out capability. This iPod -- which will be just as good at playing songs as any iPod that preceded it - will be more than just a video storage device. It will be a video player. No make that plural - players - a whole family of video-out iPods, some with flash storage and others with little disk drives.

Take your Video-out iPod to Blockbuster, drop it in a kiosk dock then download from the local xServe your choice of 50,000 movies. You can rent the movie or buy it and you can even choose the resolution, which may or may not affect the final price. Take the iPod home, drop it in the dock attached to your TV and watch the movie. H.264 decoding takes place in the iPod in hardware.

For Apple the point here is to sell iPods to people who might not otherwise ever buy one (my Mom, for example), to bring digital downloads to people who don't have broadband or even a computer, and to make it all incredibly easy. You don't even have to return the videos when you are done, since they will automatically time-out.

Apple says it has sold 42 million iPods to date. Just counting on my fingers I'd guess the number of U.S. consumers who have televisions, rent movies, yet lack broadband is probably another 42 million and virtually none of these folks will have yet bought an iPod. It's a whole new market, both for digital content and for iPod ownership.

This strategy does not in any way mean Apple would be giving-up Internet movie distribution. This is just another outlet for the same material but aimed at folks who can't be reached over the Net.

For Blockbuster it comes down to simple salvation. Here's a strategy that actually is made better by having lots of stores. Yet the stores can phase-out VHS and eventually even DVD inventory, cut the labor required to manage that inventory, and take on a new product line to sell along with those microwave popcorn buckets - iPods. Blockbuster stores could be smaller, too. Smaller is cheaper and cheaper is better.

Don't forget the 5800 xSans, 11,600 xServes, and 60,000+ iMacs it would take to outfit all of Blockbuster's U.S. stores.

To be honest, this strategy isn't one I've heard from Apple. I just expect them to do it. Apple has learned a lot from its own stores about the value of a local retail presence. But there aren't enough Apple stores to support an iPod-based video food chain. Hence the need for a host like Blockbuster, which would gladly assume all the financial risk once exposed to Steve Jobs' reality distortion field.

And if Blockbuster wouldn't do the deal, then Hollywood Video would. Since Blockbuster, for all its lack of recent success, probably doesn't have a death wish, the very prospect of its major retail rival running with this deal would force Blockbuster to take it.

So Blockbuster it is.

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