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Help The Internet Stole My Business Model Hmv Blockbuster And The Lessons For Media Businesses

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Patrick Smith, TheMediaBriefing Experts' Blog, Digital Media, Finance and Deals


In 2002 advertising agency exec Phillip Beeching was pitching to retain the lucrative HMV account his firm had held for years. He'd worked with HMV during its boom years of rapid expansion in the 80s and 90s, with stores opening around the world.

He told the MD and assembled directors: "The three greatest threats to HMV are, online retailers, downloadable music and supermarkets discounting loss leader product."

Beeching writes on Guardian.co.uk (emphasis is mine): "Suddenly I realised the MD had stopped the meeting and was visibly angry. 'I have never heard such rubbish', he said. 'I accept that supermarkets are a thorn in our side but not for the serious music, games or film buyer and as for the other two, I don't ever see them being a real threat, downloadable music is just a fad and people will always want the atmosphere and experience of a music store rather than online shopping'."

That was 10 years ago. I wonder what other businesses are dismissing disruption as nonsense in the same way now. HMV’s administration and Blockbuster’s fall into the bargain bin of life have similarities to the professional content industries that cannot be ignored.

Not just digital to blame

The failure to strengthen and innovate beyond those businesses' core revenue models are the real reasons Britain’s biggest specialist entertainment retailers are biting the dust. To say this is the fault of digital media is partly true, but it's not enough. There are fine balances in big business.

Perhaps most worryingly for businesses facing similar disruption, HMV – notably under the leadership of former CEO Simon Fox (now at Trinity Mirror) did almost everything in the How To Cope With Disruption Handbook (yes, such a thing exists - and apologies to Simon Waldman for borrowing the headline). And none of it worked.

– Find suitable adjacencies? Sure – HMV entered a joint venture with Live Nation, co-running 13 music venues which pulled in about £6 million in 2011. Live music at that point was thought of as a “saviour” of the music biz as CD sales tanked  - but it didn’t pan out that way and HMV sold its share in the JV for a knock-down price as the lending banks circled, like hungry sharks in pinstripe suits.

Transforming the core business: Just as not all newspapers and magazines today can afford to turn off the printing presses, HMV couldn’t have abandoned its core business of physical sales. So CDs and DVDs remained, but were bolstered by higher priced electrical gadgets, headphones, video games, speakers and a mish-mash of related stuff.

-- Innovate at the edges: in 2009 HMV bought 50 percent of online downloads service 7 Digital for £7.7 million, putting a successful, independent UK online music retailer in its grasp. But the move was a peripheral one - it never generated momentum enough to stop Apple's iTunes becoming the dominant music download platform, bolstered by its own iOS device ecosystem. Where was HMV's ecosysem?

-- Real-world problems: But the downfall of Jessops, Comet, HMV, Blockbuster - that's well over 10,000 jobs gone almost overnight - has been hit not just by the £68 billion we Brits spend online every year but the growth of out-of-town shopping, the decline of the high street and the merciless rise of Tesco, which will now be eyeing up a renewed push into DVDs and music sales.

A parallel here is for newspaper publishers to think the enemy to their business model is "the internet" stealing their content - when in fact they should be more troubled by the changing demographics of a society that simply pays less for news than it once did.

Analysts' despair

 

 

That's former Screen Digest Arash Amel showing his despair over HMV's demise.

Dan Cryan, also an analyst at what's now called IHS Screen Digest, explained to me the challenge for a physical-based business in innovating its way out of a digital deficit. 

He tells TheMediaBriefing: "They took a 50 percent stake in 7 Digital which was a very well run independent music store. But at the same time there weren’t the things in place to make it something complete.

“It is possible to take market share off Apple – Amazon has done it in Germany and the USA. Despite the fact HMV had a stake in a well-run digital store, it couldn’t do this. It had HMVdigital.com and HMV.com at the same time – this is not the way to ensure the smooth transition of your customer base. But as with all these things it’s about nuances."

Cryan is adamant "there was tremendous will to change," but the market forces of consumers buying CDs and DVDs from Amazon and shifting listening from CD players. The focus on the product may have taken focus away from the user, something a certain American tech giant understands intimately.

“One of the things Apple is good at is getting people is telling people what to do with apple products. When you are in that ecosystem, it seems like a good idea to buy more things from them.

“One of the things that becomes interesting with HMV, when you look at the rise of the tablet market, is what if you were to do that digitally at HMV? People would go into a store and say ‘is this the right gadget for me’ and ‘what else do I need for it?’ Instead for a long time they had lines and lines of cheap MP3 players."

 

Businesses in debt have little room for manoeuvre

A final and significant issue here is debt, something many media firms have lots of. On 13 December HMV warned the stock market in its interim results 2012/13 statement it was in “constructive discussions with the Group’s banks” about trading conditions and, presumably, what they were doing about it.

Exactly four weeks later Deloitte had been called in and the game was up. Big media businesses such as Johnston Press, Yell Group/Hibu and Incisive Media have all faced serious existential risks from large debt piles in times of recession and in each case it’s been a distraction from the real task at hand: innovation.

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