The Long Tail: Are niches more profitable than hits?
The Long Tail: Are niches more profitable than hits?: "What you see here is that the economics of new releases these days are simply awful. The studios charge $17-$19 for the DVDs and the 'big box' retailers (Wal-mart, Best Buy) sell them for $15-$17 for the first week or two, for an average loss of $2 per DVD (this is before overheads; the actual loss is larger).
After the first month or so, the wholesale price of the DVDs goes down faster than the retail price, and they gradually move into profitability. Yet 70% of DVD sales are of titles within their first two months of release, before they're profitable. Why do stores sell new releases so cheaply? Because for the big-box retailers, at least, they're a loss leader, designed to draw people to other titles in DVD section and elsewhere in the store, where the margins are better.
DVD distributors encourage this by allowing unsold new releases to be returned, lowering the risk for retailers (but increasing it for the studios, as Dreamworks and Pixar have just learned to their cost).
The problem is that while this makes sense of the big-box retailers who have other things to sell, it has the effect of setting the price for everyone else, including the specialty DVD retailers like Blockbuster. The big-box retailers have thus driven down the margins for new releases across the industry, making the economics of the Head even tougher. No wonder Blockbuster's stock is down 50% this year.
But if you could shift demand further into the Tail, creating a market that wasn't so dependent on new releases, you could improve the profit picture immensely. People move in herds, so this doesn't happen overnight, but it's not impossible. This is why recommendations and other filters are so important to Long Tail markets. By encouraging people to venture from the hits world (high acquisition costs) to the niche world (low acquisition costs), smart retailers have the potential to improve the economics of retail dramatically."
After the first month or so, the wholesale price of the DVDs goes down faster than the retail price, and they gradually move into profitability. Yet 70% of DVD sales are of titles within their first two months of release, before they're profitable. Why do stores sell new releases so cheaply? Because for the big-box retailers, at least, they're a loss leader, designed to draw people to other titles in DVD section and elsewhere in the store, where the margins are better.
DVD distributors encourage this by allowing unsold new releases to be returned, lowering the risk for retailers (but increasing it for the studios, as Dreamworks and Pixar have just learned to their cost).
The problem is that while this makes sense of the big-box retailers who have other things to sell, it has the effect of setting the price for everyone else, including the specialty DVD retailers like Blockbuster. The big-box retailers have thus driven down the margins for new releases across the industry, making the economics of the Head even tougher. No wonder Blockbuster's stock is down 50% this year.
But if you could shift demand further into the Tail, creating a market that wasn't so dependent on new releases, you could improve the profit picture immensely. People move in herds, so this doesn't happen overnight, but it's not impossible. This is why recommendations and other filters are so important to Long Tail markets. By encouraging people to venture from the hits world (high acquisition costs) to the niche world (low acquisition costs), smart retailers have the potential to improve the economics of retail dramatically."
posted by Peter @ 5:19 PM
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