OPINION: Digital delay

This past week was not a good one for online media retailers.

First came word from Netflix that it was trimming its earnings guidance and lowering its projected subscriber growth for the rest of 2008, causing its shares to lose almost a quarter of their value in one day.

That was followed by Amazon’s first-quarter earnings report, which saw an increase in net income due to its acquisition of Audible and a weak dollar overseas, but included a sharp deceleration in U.S. media sales (books, CDs, DVDs).

More troubling, though, than the lowered sites for the retailers’ core businesses, which can be attributed in part to the softening U.S. economy, is the apparently slow pace at which their digital delivery business is developing.

During Netflix’s earnings conference call, CEO Reed Hastings repeatedly declined to disclose any data on how many subscribers are taking advantage of the retailer’s instant streaming capability.

Hastings did report that Netflix has signed deals with four hardware makers to embed its electronic storefront in their devices beginning this fourth quarter. But he stressed that the results of those efforts would not be material “for the foreseeable future.”

Conferring with analysts one day later, Amazon CEO Jeff Bezos similarly declined to break out the results of Amazon’s various digital ventures, including its MP3 music store, its Unbox video-on-demand service and e-book sales for its Kindle devices.

On one level, it’s hard to blame the retailers for their reticence. If the results are not “material” in the accounting sense of the term, there is no need to disclose them, and there are competitive reasons not to.

But it can’t be good news for the digital retailing business that two prominent, successful online retailers like Netflix and Amazon have nothing to show for their efforts so far. If the numbers were anything to crow about, it’s a fair bet they’d be crowing, particularly given the somewhat downbeat data in their other business segments.

One quarter’s results from two retailers, of course, is hardly definitive evidence that the digital retailing business is doomed to fail. But it ought to give pause to content owners as they consider their own future in the digital delivery business.

As British research firm Screen Digest pointed out in an analysis published on the same day Amazon released its results, the studios have been “overly cautious” in making rights available to retailers on terms that will allow them to grow the business more rapidly.

“The studios cannot afford to be complacent about their digital business,” Screen Digest analyst Sarah Johnson wrote. “Online movies are a long way from being a key revenue stream, and the huge potential of the online market will remain largely untapped unless the studios adopt bolder long-term digital strategies enabling store owners to provide consumers with a large library of cheap (or free) content directly to their TV screen.”

Twenty-five years ago, entrepreneurial retailers took it upon themselves to start renting prerecorded videocassettes, creating a new and thriving business in home entertainment. The studios were aghast at first, but the success of the rental model led to enormous outside investment in the business by retailers, ultimately building a business where none existed before, to the great, great benefit of the content owners.

Right now, no one is making much of a case for a comparable level of investment in building a digital media retailing business.