The chart above shows the relative revenues of Netflix – a popular mail order DVD rental and movie streaming firm in the US, similar to LoveFilm over here – versus Blockbuster, the DVD rental giant. Netflix’s convenience put Blockbuster out of business. Why drive to the local video store when you can do it over your computer?
But everybody knows that. The important thing about the graph above is the relative revenues for Netflix and Blockbuster at their peaks. Blockbuster, at its height, was pulling in $6bn of revenue. Netflix is making about a third of that. As Go-Digital says,
When the inefficiencies of having retail locations, moving physical inventory, and maintaining overhead/staff are cut out of the ecosystem, far less revenue is needed to support the system.
Consumers are watching as many – if not more – films than ever for less money and time than ever, for a third of the cost. The money that had been spent on (now unneeded) overheads can go on other things. Be sure to avoid the broken window fallacy – the saved money will go into other productive things that people want. As Blockbuster falls, something else people want will rise. And, at the margin, lower costs mean that there should be more movies made per dollar spent.
I think this pattern might hold elsewhere, too. Since getting a Kindle e-reader in June, I’ve read more books than I did in the entire year up to that point.
Although costs aren’t falling yet – it’s a proprietary Amazon device, and they’re keeping the costs high while subsidising the cost of the device itself – the shift to e-readers means that authors will eventually be able to bypass publishers and significantly increase their profit-per-purchase. Like the rise of Netflix, this will probably mean less money spent on overheads and more spent on actual content.
This is one of the great virtues of technology-driven economic growth. As fewer people have to drive trucks and staff video stores, they’re freed up to do other things, and more money goes directly to the creators of movies, books and other works of art that we treasure.