Thursday, August 18, 2005

Losing Money on Volume

A few weeks ago I suggested that
at least relative to the Harry Potter books of the world, there's a bit less discounting competition on the Long Tail which should at least partially offset higher costs associated with lower volumes. With purely digital goods, the Long Tail comes even closer to pure gravy.

It turns out that for the blockbuster hits, discounting can hit profitability hard. That's because a "big box" reseller like Best Buy uses hot new DVD releases as loss leaders to bring customers into the store. It may, in fact, sell new DVDs below cost for a time. This practice presumably works out for Best Buy (otherwise one supposes they wouldn't do it) because enough people who come into Best Buy to buy the latest Star Wars DVD also buy another non-sale DVD, a CD, or an ink cartridge. However, in the process, Best Buy pretty much destroys (or at least greatly reduces) the profitability of new blockbuster hits for everyone else in the process. Stores, both online and bricks-and-mortar, that drag less other business along in the wake of the bestseller can end up making relatively little money on their highest volume titles as a result. By contrast, smaller titles may have somewhat higher stocking and inventory costs, but tend not to be exposed to loss leader discount pressures from the big retailers.

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