Score One for the Littler (But Not So Little) Guy

So Walmart is getting out of the online video rental business in favor of a partnership with Netflix. Blockbuster then promptly took the opportunity to start backing off its recent round of price cuts--which certainly undercut Netflix but were also doubtless aimed at keeping its close to Walmart's rates, which were lowest of all.

I don't shed any tears at Walmart exiting this business or at a certain softness in its overall fortunes. There's a lot not to like about the company as a whole (however much I appreciate the low prices when I shop there myself) and it's hard to see that their online video rental business would ever have been more than a very mass market, lowest common denominator, compete-on-price offering that made like difficult for other companies with more interesting and broad-based services. It's nice to see that Netflix is apparently able to stand up to challengers that could have potentially steamrolled it. (Which is not to say that Netflix is exactly raking in huge profits.) I'm a big fan of their service.

This does seem to be a case where the Internet boom mantra of "Spend to capture mindshare" has more or less played out. Netflix now has the brand (along with a competitive service) and its apparently going to be hard to displace. I think there are a few reasons for that in this case:

• Scale matters. Without multiple distribution centers, it takes too long to send and receive movies. For an East Coaster like myself, this was a frustration with the early Netflix which had only a single DC in Los Gatos, CA.
  
• Scale also matters to selection. Perhaps there's an opportunity for a company that deals only in high volume, mainstream fare. But there's a lot of aggregate volume in the less popular titles too--"The Long Tail" popularized by Chris Anderson of Wired.
  
• And, if you're going to have scale, and a broad-based selection, how much more differentiation is possible? Perhaps someone will figure out an alternative way of doing things. (Distribution by broadband will presumably be such an alternative someday; Movielink and its ilk are not not meaningful competitors today.) Perhaps pay-per-movie alternatives to subscription. But the current pricing schemes seem popular and if any such alternative did click with consumers, it would be easy to quickly replicate.
  
  

All of which leads me to think that this business isn't favorable to having a lot of niche companies playing in it. (Porn being, of course, the exception given that it's big business, its boundaries are fairly well defined and mainstream companies--especially public ones--want nothing to do with it.)