Memo to Hollywood: You can't go backwards on consumer functionality

Back when the VCR first appeared, along with the video-rental market it spawned, it offered consumers something they had never had before in their home entertainment experience: do-it-yourself programmability. Renting a movie from the video store bought you not just two hours of entertainment. It bought you any two hours of entertainment–on your own schedule, continuous or not, experienced once or repeatedly–anywhere you had a VCR, which fairly quickly became anywhere you had a TV. In exchange for that flexibility, consumers were willing to suffer the inconvenience of a return trip to the video store.

The studios flattered themselves by insisting their content was “king,” and that their movies provided most of the value for renters. But the evidence says otherwise. For a decade and a half, consumers routinely put up with having to rent something other than their first choice of title because the basic value proposition of renting–any two hours of entertainment–was greater than the value of any particular title.

When DVDs came along, they offered everything that VHS offered consumers while enabling new usage cases and capabilities. The cost characteristics of pressed discs made movies ownable (rather than just rentable), eliminating the need for a return trip to the video store, while the small form factor made them easily portable. The introduction of DVD drives in PCs and laptops greatly expanded viewing options. Even the fact that DVDs could easily (if illegally) be copied, much as it pained the studios, added to the functionality of the format for (some) consumers by making the content portable without the disc. The net result was a quantum leap in consumer spending on home video, even though movies themselves, as measured by box-office grosses, were no more valuable than before.

Imagine, however, if DVDs had not added more and new functionality to the home video experience but less. Imagine if DVDs could only be played at certain times, for instance, or on certain TVs, or that players had to be connected to the Internet to work. If switching to DVDs had meant consumers could do less with the movies they bought and rented than they could with VHS, even given DVD’s superior picture and sound, how many people do you think would have made the switch? Some, surely, but I’d bet you could still by a VCR at Best Buy today if that had been the case, and I’d bet total consumer spending on home video would still be where it was in 1998, not 2008.

The value that was added to the home video market since the introduction of the DVD, as reflected in the increase in consumer spending, was a result of the increased functionality and superior quality of the format versus VHS, not to any qualitative improvement in movies. It would be folly, therefore, to expect that whatever comes after DVD (and I don’t mean Blu-ray) could offer consumers less than DVD does in terms of functionality and quality and still achieve comparable levels of consumer adoption and spending, let alone increased levels.

Anyone who doesn’t believe that need only take a look at the doleful report released this week by ScreenDigest on the movie download market. According to the researchers, paid movie downloads and VOD amounted to a mere $291 million last year, well below ScreenDigest’s previous forecast of $360 million in revenue for 2009. The analysts blame the shortfall, correctly in my view, on the limited functionality provided by most download services.

“Digital downloading is characterised by its restrictions – it’s all about what viewers can’t do, rather than what they can do,” ScreenDigest research director Arash Amel told the Financial Times.

It should be clear from the history of the home entertainment market that consumer expectations with respect to convenience, functionality, portability and interoperability are accretive and cumulative. They move in one direction only.

Whether the studios like it or not, to consumers, “home video” today means, “what I can do with a DVD.” That’s the irreducible benchmark against which any new delivery modality will be measured. If it doesn’t measure up to the functionality of DVD, it’s not going to be acceptable. The studios cannot go backwards and expect the consumer to follow.