A Retail Perspective on the Format War by Jeff Kleist

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A Retail Perspective on the Format War

Editorial by Jeff Kleist of The Digital Bits

As the high-definition format war rages on, one thing I keep hearing over and over in various interviews and discussion forums is the phrase "let the consumer decide." But that's actually more of a marketing term than an actual practice or truth when it comes to the retail industry. As a former video buyer for a chain of audio/video media stores that catered to enthusiasts, I hope I can provide a unique perspective on this notion that hasn't had a lot of discussion thus far.

When I used to sit down with my order book to try and make buying decisions, I would often use Video Store News (now Home Media Magazine) and Variety to consider factors like the box office take of a film. I also looked at enthusiast magazines and websites to find those "video specials" to take a chance on - titles like Equilibrium or the upcoming Sunshine - that have great response from fans, but had a small and fast box office run. Of course, you always had a decent idea that blockbuster titles like Transformers or the latest Matrix film would sell based on prior big movies, but the real skill was in anticipating the small titles that boom.

A major factor in how many of those titles I could purchase for our chain, and how many I could stock, was the physical space I had available to put them in. Sure, I could order 15 copies of Sunshine, but can I move them inside of a couple weeks? Because I need space for the 60-70 copies of Saw IV I'm going to get in. Achieving that balance point between the evergreen catalog titles (steady sellers), the slow moving catalog titles (you need to have them, but they don't sell every week), the new releases and the eclectic stuff (that takes forever to sell, but it's worth the smile on the person's face when they find it in your store), is the goal of every buyer. But hitting that balance point means that you're not going to have a lot of shelf space to play with, and if you guess wrong, then you're up a creek without a paddle for a week or more, with either the back room overflowing with product, or empty shelves and annoyed customers.

All this brings me to my point: The big box retailers like Best Buy or Wal-Mart are the primary conduits through which video titles move to the general public. Like it or not, home video HAS to be a mainstream product for the studios to make money. Wal-Mart alone moves about 30-40% of all home video product (though Best Buy and Amazon are moving more high-definition software right now because enthusiasts tend to shop online). Less than 1 in 5 DVDs are sold online.

Recently, Best Buy has reconfigured their high-definition software areas to either a 2 to 1 or 3 to 1 Blu-ray Disc vs. HD-DVD split, depending on the store's sales. Typically, this is now filling around a full aisle on both sides. Given the number of units that high-definition media is currently shifting, it's unlikely they will be willing to expand past this aisle in the near future. So now that the Christmas shopping season is over, they'll have to start making a choice: Which format is going to start losing shelf space?

A decision like that, for a large retailer, is more complicated than just what the split of media sales is. There are other questions to be asked. For example: How well does the format support the rest of their product lines? Which format helps them move more TVs, cables, and furniture? Which generates more profit on average? Any retailer worth his salt right now would rather move 1 Blu-ray player a week with a $150 profit margin (35% is standard markup at retail), than 5 HD-DVD players that they make a reported $30-50 margin on (a number that's reportedly been maintained even with the recent fire sales). Why? Because it costs less to store and ship 1 player as opposed to 5, given those profit margins, and it also requires far less of an investment in terms of your purchasing budget. The large margin also allows for active discounting to bundle the player with TVs and other accessories, and to drive sales across the board. In addition, the large number of manufacturers and products associated with Blu-ray (from the PS3, to laptops and desktops with drives, to set top players and TVs) results in exponentially more ad buys in the circular, and more end cap displays in the stores. Right now many Best Buy stores have 6 standalone displays featuring Blu-ray Disc, and just 2 for HD-DVD (counting LG's combo player as 1 each).

So in the end, this notion of "letting the consumer decide" is something of a fallacy. It's the retailers who actually decide what products consumers get to chose from, and they're going to pick and stock the products that bring them the most money for the least amount of work. If they don't stock something, you can't buy it. What's more, if they aren't stocking a product, the chances are good that mainstream consumers will never notice that it's missing. Fewer consumers still (outside of early adopters who are heavily invested and pay close attention to such things) will have the motivation to go seek it out online.

Right now, in the wake of the Christmas shopping season, all of the signs (from industry insider rumblings to how high-definition hardware and software are being pushed in stores) tell me that the major retailers will call the ball on this format war very soon, and those signs are all pointing in Blu-ray Disc's favor. Consider that despite the $169 HD-DVD player at Sears on Black Friday, Blu-ray Disc players that were over twice as expensive outsold it 2 to 1. How long did it take for the Hollywood studios to completely dump VHS (in favor of DVD) after Best Buy and Wal-Mart did? About a year, and they dumped VCRs without built-in DVD drives about a year after that.

For high-definition media to thrive, anyone with experience in the retail industry knows that one of these formats must live and one must die, and that's going to happen sooner rather than later, no matter what Toshiba or Sony or Microsoft or the Blu-ray Disc Association or the HD-DVD Promotions Group want. If one of these formats isn't ultimately chosen by the studios and manufacturers, then sooner or later the big box stores will decide that neither of them is worth the effort, and that won't be good for anyone - not the studios, not the retailers and especially not the consumer.

Jeff Kleist
jeffkleist@thedigitalbits.com