A recent article in the Wall Street Journal (“Hollywood: The Price is Wrong” ) highlights the growing difficulties that movie studios are facing in making a profit from home movie rentals.  DVD sales have long been one of Hollywood’s most profitable ways of selling movies – it costs less than a dollar to print a DVD, and the marginal cost of producing thousands of DVDs is very small.

Unfortunately, Hollywood’s DVD cash cow is under pressure from lower-cost options like Netflix’s Video on Demand (VOD), Redbox’s low-cost DVD rentals, and other online streaming media that deliver movies directly to people’s computer screens, wherever and whenever they want. Industrywide DVD revenues fell 15% during 2010, with overall home entertainment revenues down by 3.8%. This is a red flag for Hollywood that their recent years of making big profits on DVD sales may be coming to an end.

In response, Time Warner is proposing offering movies on demand directly to viewers’ home TV screens, only 2 months after the movie has appeared in the theaters – but their proposed price point of $20-$25 per movie is much higher than what most people are paying for their monthly Netflix subscriptions. It seems like Hollywood is out of touch with what people really want – and what people are really willing to pay for its products.

Lesson 1: Don’t Wait to Compete. The Competition is Brutal.

No matter the industry, the lesson is the same: prices can only stay high if what you are selling is what your customers demand – and if you have a sustainable competitive advantage that makes customers willing to pay a premium for what you sell. Few companies devote the time and effort to doing market research and discovering exactly what their customers want, so instead they spend time playing “catch up” when their profit margins take a hit from increased competition.

In this case, Hollywood is scrambling to figure out how to maintain their margins on home entertainment revenue. Their competition (Redbox, Netflix, other online video streaming services) are offering cheaper prices, and consumers are taking a back seat and waiting to see who the winner will be.

It’s easy to see why a video-on-demand option would be appealing to consumers, especially as smart phones and tablet computers become increasingly powerful and widespread. After all, why spend $15 on one DVD when you can stream unlimited movies on your iPad, TV, smartphone, and computer via Netflix who offers a low monthly payment (currently $8-$10)? No more bookshelves full of DVDs cluttering up your living room – Now you have freedom to watch what you want, when you want, wherever you want.

Hollywood does not want to compete with low prices, but they should have figured out what their consumers wanted before the competition became so powerful. Hollywood grew complacent with its existing distribution model and its highly profitable pricing structure. Meanwhile, upstarts like Netflix and Redbox were figuring out how to stream videos online and how to put DVD rental kiosks outside grocery stores and on street corners.

The big movie studios could have done this – they could have invested the time and money to figure out what the next “big thing” was going to be and what customers really wanted from their home movie viewing experience. But instead, as so often happens, the incumbent players got complacent, while the scrappy outsiders figured out a new way of doing business. Now, Hollywood is going to have a difficult time holding on to its fat profit margins from DVDs.

How to Compete? Have a Competitive Advantage.

Another lesson from Hollywood’s DVD “mission impossible” is that every business needs to constantly rethink and re-evaluate its competitive advantages. Why are people buying from you? What makes them willing to pay a higher price for what you sell? And how can you keep your competitive advantage from going away in the face of stiff competition?

Learn from Hollywood, and start becoming proactive instead of reactive. Don’t let your profit margins crumble to competition– spend some time and effort now to doing market research, understanding your true competitive advantages, and discovering what it takes to keep your customers happy – and buying from you at a price that makes you happy too.

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*Blog photo from Mobilemag.com

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