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Digital delivery: don't ask, don't tell - April 23, 2008

Amazon on Wednesday became the second major online retailer in as many days to not want to talk about the results of its digital delivery efforts. In a conference call with analysts to discuss the retailer's Q1 earnings, Amazon CEO Jeff Bezos followed the script laid down the day before by his Netflix-counterpart Reed Hastings in refusing to answer analysts' questions about the volume or value of digital sales or what it's costing the company to generate those sales, whatever they are. Both CEOs pronounced themselves "happy" with "results so far" and left it at that. Bezos at least apologized for the lack of more detailed information.

Since the results of their digital offerings were not material for either company, there are sound strategic and accounting reasons for them not to break out the numbers. But what does it say about the pace of development in the digital media delivery business that two established, successful and savvy media retailers like Netflix and Amazon have nothing to show for their efforts? Nothing good, is what.

It's not like they're not trying, after all. Amazon last year launched a music download business amid much fanfare in an effort to compete with Apple's iTunes. It also has a movie download service, Unbox, and in January spent $300 million to acquire Audible, a digital audiobook service.

Netflix cut its earnings forecast for 2008, in large part because it continues to spend to acquire digital rights to movies without yet generating offsetting revenue, let alone a reasonable return on that investment.

That's not just a danger sign for retailers; it should be a red flag for content owners as well.

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, of course, 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.

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