Wherehouses and white elephants:
The first of many retail businesses is
about to be Internet-ted to death
By Robert X. Cringely
It was just a small item on an inside page of the Wall
Street Journal. Viacom, the media empire run by Sumner
Redstone, was selling one of its smaller divisions. No big
deal. Everyone knew Viacom had too much debt and too
many business units that just weren't performing, so
shedding an operation here and there made perfect sense.
Yes, selling Blockbuster Music to Wherehouse
Entertainment makes good sense, but not just for the reasons everybody already
knows. Because of galloping technology, Viacom had to sell its CD retailer while
there was still something left to sell. This is the beginning of a trend that will
change an industry.
Blockbuster Music is, or was, a piece of Blockbuster Entertainment, the giant
video rental outfit scooped-up several years ago by Viacom for too much money.
The music division was relatively new, just over 370 stores devoted to selling
primarily compact discs. Now Wherehouse Entertainment, another CD retailing
powerhouse, will take over Blockbuster Music in exchange for $115 million in
cash. That sounds like a lot of money, but it's only a little more than $300,000 per
store, probably less than the value of the leases and fixtures. Why was Viacom so
eager to dump the stores that they'd do so at a loss?
One reason is Amazon.com. Charged with IPO moolah and in no immediate need
to show an operating profit, the Internet bookseller recently started hawking
music, too. There were already some well-established Internet music stores, but
Amazon.com has a certain cachet on Wall Street that sends competitors running
either out of town or to the gym to bulk up. Barnes and Noble decided to bulk up.
Blockbuster Music decided to run. After all, Amazon.com and its ilk can offer
every CD there is with no inventory costs or shipping fees that aren't paid directly
by the retail buyer. This means, even though it takes a couple days to get the
music, customers can always get what they want and get it cheaper by ordering
over the Internet. Retail stores can't compete.
From Viacom's perspective, this is bad enough, but it's not the real reason for
selling. Blockbuster Music, after all, could still claim the impulse buy, that nth copy
of the White Album you need at the last minute as a gift for your cousin Bud. And
in the music industry, there is a lot of impulse buying. Alas, advancing technology
is taking away even that sale. We are at the dawn of the era of online music
delivery, when even impulse buys will be downloaded from the Net. Who needs
stores?
Thanks to Moore's Law, there are two technical trends at work here -- the
bandwidth gap and the processing surge. The gap is narrowing and the surge is
growing. The result is that change is happening in the way intellectual property is
delivered almost too quickly for outfits like Viacom to even react. As your pipe to
the Internet gets fatter, the time needed to download data gets smaller. As the
microprocessor and memory in your PC get more powerful, the more they can
compress those files, making them download even faster. By working in two
dimensions at once, we've managed to use Moore's Law to accelerate itself.
It's a combination of faster push and faster pull, each doubling in performance
every 18 months for an aggregate improvement of about 2.25 times per year.
However fast you can download a file today, a year from today it will be at least
twice as fast. And a year after that it will be five times faster, guaranteed. So
anything that is pure intellectual property, that either doesn't require a physical
manifestation or can be poured into some kind of generic container, will be more
and more likely to arrive at our houses by wire rather than in our shopping bags or
via UPS.
At some point the combination of ever quicker gratification and lower price makes
it less painful to download such files from the Net than drive across town to buy
them. If the cost is lower and the time required is less than what it takes to drive
to the mall and back, people will simply stop buying these kind of goods in stores.
The record companies saw it coming more than a year ago when college students,
who typically have the best Internet access of all, started trading MPEG-3
compressed audio recordings of their favorite bands. Suddenly it was like the
whole music industry being treated like the Grateful Dead with bootleg recordings,
only these recordings are digital and can be copied over and over without a
decrease in quality.
Drawing the curves, it looks like the date at which it will be just as easy to
download a CD worth of music from the Internet as it is to bring it home from the
mall is no more than a year away. This week's deal between Real Networks and
Inktomi to provide a scalable infrastructure for such downloads guarantees that.
This is a trend that won't stop until it has run through every kind of intellectual
property that millions of people want capable of being sucked through a wire. The
businesses that will be affected first are those whose intellectual property makes
the smallest files. That means music, because audio files are typically a tenth the
size of video files, making it still more efficient to drive to Blockbuster Video (not
Music) for that copy of "Passenger 57" than to download it from the Net. The
bitrate of transferring data on videotape by car is still significantly greater than
schlepping it over the Internet. for now.
How long will it be before the time difference between driving to get video on
demand or downloading from the Net is a wash? Three years, according to my
figures. Add another three years for broad availability and to cover the impact of
HDTV, which will make our video files five times larger again. In six years, then,
the Blockbuster and Hollywood Videos of this country will probably be have sold
their storefronts, too, leaving the strip malls of America to Starbucks and
Bennetton. These intellectual property businesses will simply go away, along with
what's left of the retail software business. All that will be left is books -- the oldest
intellectual property vessels of all.
Fortunately for the Viacoms of the world, six years is a business lifetime away. In
this era where businesses concentrate almost exclusively on short term results,
hardly ever looking past the present quarter and the present fiscal year, the
prospect of having a multi-billion-dollar business simply evaporate in six years is
not at all daunting to Viacom and its competitors. They haven't thought that far
ahead and probably won't for sometime. But eventually they will.
By then, Sumner Redstone will be retired and Wayne Huizinga, the guy who sold
Blockbuster Video to Viacom in the first place, will still be happily running his
present business, Republic Industries, which sells cars. There's no way to stuff a
car down a wire. At least, not yet.
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