by Richard Veryard
Epstein comments on the fact that the big movie studios typically make a loss on the initial theatrical release (the advertising alone costs more than the box office receipts) which they hope to recoup from the overseas release and video sales.
On the old business model, the video sales (mostly to video rental chains) were pegged to the initial box office. So the higher the initial box office, the higher the subsequent (more profitable) sales.
But this kind of cross-subsidy is only possible if the movie studios are powerful enough to maintain a positional strategy. Changing patterns of demand – synchronous overseas release, collapse of the video rental market, increasing domination of DVD retail by mass retailers such as Wal-Mart and Tesco – have undermined this positional strategy.
There are increasing problems with cross-subsidy in many industries, as the once predictable linkages between the loss-making elements and the profitable elements are eroded. This in turn calls into question the integration logic (“North-South”) on which many large firms are (have been) based. To support a relational strategy instead of a positional strategy, such firms must develop a new kind of integration logic (“East-West”).