It is interesting to see how the entertainment sector is shaping up in Australia given the changing global market conditions.

In December 2008 EzyDvd was put into administration close on the heels of Destra being put into receivership. Were they victims of the changing business environment globally, or were they victims of overreaching business ambitions in a sector that is now experiencing serious disintermediation from the Internet.

Bear in mind they are substantially different businesses that happen to both be in entertainment.

Destra really started life as MP3.com.au, a web site that was going to change the way that the music business operated in Australia. It didn’t have much of a business model, but it was online at a time that investors were becoming fascinated with the concept and its entrepreneurial founder was a great salesman for the business.

EzyDvd on the other hand, had a traditional business model, but was online. It sold old-fashioned physical goods, and did so very profitably until it ventured into the bricks and mortar sector of business.

What the two businesses had in common was that they were pure play internet businesses when they started and then ventured into traditional businesses in order to expand and build brand visibility.

The problem for both of them seemed to arise from going public and needing to satisfy the need for growth from analysts and shareholders. For Destra that meant securing rights to catalogues and manufacturing discs which could then be sold. For EzyDvd that meant building a physical high street brand.

They were right in the first place – the Internet is the great disintermediation agent. They should have stuck to first principles, in retrospect.

The majors in both DVD publishing and retailing must be looking very carefully at the potential scenarios that are going to unfold next.

The remaining retail contenders in the DVD marketplace – J&B, Woolworths, Sanity will be rubbing their hands in anticipation of increased market share for both their online and retail operations. The publishers won’t be so happy. Presumably they have a substantial exposure in terms of being unsecured creditors for the inventory that they will have fronted to EzyDvd and will be torn between trying to get it back and then having to find a home for all that stock, and hoping to hell that the administrator sells the product.

Then they have to figure out what to do about how to manage a continuance of the credit arrangement with the Administrator. Do they tighten things up -which will almost certainly mean the winding up of the business; or do they keep things as they are which will almost certainly mean that the fundamental problem doesn’t get fixed. It’s a big headache.

And it doesn’t address the primary reason for the pain: Regardless of whether P2P is increasing piracy or not, what it absolutely does do is drive down price.
The real price of downloading a movie from a P2P network using Emule with a 512kbps connection is somewhere in the region of $3.50 in Australia, I believe, so it certainly isn’t free. That is a fallacy that the content companies have failed to successfully put to the market. But it certainly is a lot cheaper than either buying movie tickets or buying a DVD.

The point is that ultimately things to find a lowest common denominator price and in the case of content that is distributed via P2P the marginal cost of content has to be close to what it would cost to replace with a P2P version – regardless of the fact that the P2P version may be illegal. This proposition must be understood by retailers and publishers/studios alike if they are going to survive the impact of disintermediation.

I would give fairly long odds that the industry will choose to act like Canute rather than recognize that the solution is to adapt rather than to fight. Problems of entirely changed environments need solutions in which the existing organisms adapt radically – just as our ancestors have had to adapt over aeons in order to achieve survival.

The amazing thing is that it seems that an individual human being is sufficiently smart as to understand this, whereas corporations that have so many smart people in them seem to resist that which comes naturally in the wild. I wonder why that is?