Economics Index and Qualifications
By Richard Bruce BA, MA, and PhC in Economics
Former Instructor St. John's University, New York City

Now Several New Technologies Beat You Simultaneously
The Blockbuster Case

In the good old days, a new technology would come along and drive you into extinction. Sailing ships lost to steam ships, the horse and buggy lost to the car. But technology grows at ever accelerating rate so now several new technologies wipe you out simultaneously. In the good old days a shark attacked, now it is many sharks in a feeding frenzy.

The rapid demise of Blockbuster and the other video rental stores illustrates the point. A combination of video vending machines, most famously Redbox, video by mail, Netflix, video streaming, Netflix, Amazon, Hulu, and others, and the public libraries drove Blockbuster into bankruptcy and left the video rental stores a tiny remnant of their former glory.

Imagine if the sailing ships had to face the steam ships moving freight, the jet airplane moving people, and long distance telephone for communication all at once. This is the type of thing that Blockbuster and the video stores faced.

The usual explanation for the fall of Blockbuster and video rental is to focus on Netflix, video by mail, and video streaming by many companies. The video vending machines are mentioned less often and the public library not at all.

The Public Library

Public libraries can be deadly competitors. They are free. The late fees are less, twenty cents per day per item in my public library. The check out period is longer, a week for videos. If no one puts the video on hold, you can renew it twice for free. Usually, I can find about ninety percent of the movies I want.

The weakness of the library is that the videos frequently have scratches that will mess up a couple of minutes of the movie. Nevertheless, the public library is a tough competitor as it is supported by the tax payer.

One might think that the library's lending of videos has little to do with changing technology, but it does. The Internet cut into the public library's traditional sources of circulation and usage. The periodical section that used to be heavily used is now largely untouched. No doubt adult nonfiction has taken a big hit. So public libraries have searched for new sources of circulation and patronage to justify their budgets.

Movies and television shows are probably the biggest new source of circulation. My local library started circulating music CDs. Other public libraries were already doing this before the Internet, but ours added the new service after the Internet became popular. Public libraries always offered collections of newspaper and magazine comics, but in the Internet era, they began offering graphic novels. These are often collections of superhero comics that originally came out in twenty-page pamphlets.

All of this has been quite successful for public libraries. While academic libraries saw massive decreases in their circulation, the public libraries saw their circulation increase. But these increases in circulation come from media of limited educational value.

Video Vending Machines-Redbox

Redbox is mentioned more often than the public libraries in the demise of Blockbuster, though I suspect the public libraries may be more important. Nevertheless Redbox no doubt was a factor. They were cheaper, only a dollar if you got the video back on time. They had a one day check out period, but I am not sure of the details, I never used the service.

The Redbox machines had new movies and a collection of older movies. The collection of older movies was constantly changing, so over time, the user could see a lot of movies, even though at any one time the collection of older movies might be quite limited. Blockbuster and the other video stores could have done this too. They could have offered a rotating collection of older videos that they shifted from store to store. This would have given them a chance to offer over time more videos while having fewer old videos at any one time. Additionally, they could have used less retail store space.

This strikes me as an important missed opportunity, but in an era rapid change where you are facing many new highly effective competitors, it would probably have just delayed the inevitable.

Video Streaming

Blockbuster went bankrupt in 2010, but it had been in serious decline before that. For the most part, video streaming became very important after Blockbuster and the video rental industry were already in steep decline. Therefore, I suspect that video streaming discouraged attempts to save Blockbuster and more generally the video rental business. Video by mail, video vending machines, and the public library cut Blockbusters rental revenue and the video streaming made it obvious that there was little or no hope of recovery.

Video streaming, on the other hand, has played a role in our drama because it has and probably will continue to undermine video by mail, video vending machines, and even the public library. The process continues as the sharks in the feeding frenzy are themselves consumed by the other sharks.

Video by Mail

Netflix, video by mail is often seen to be the chief culprit, perhaps because it makes such a good story that Netflix wanted to partner with Blockbuster and did not. It is popular to blame this mistake for the demise of Blockbuster, ignoring the brute fact that the rest of the video rental industry also disappeared.

A Lesson for Our Time

The demise of Blockbuster and video rental illustrate key issues for our economy. While the measured progress of our economy is slow, we are in fact experiencing rapid technological change. This discourages heavy investment and encourages business to plan over a relatively short time horizon. Furthermore, many if not most of our large companies may be in a shaky situation in the long run.

The Auto Industry Another Example

Consider for example the challenges facing the auto industry. Cars last longer, two to three times as many miles as they did in the sixties, which reduces the need for new cars.

We are substituting cheap communication for transportation. Long shopping trips are replaced by orders to Amazon. Trips to see family are replaced by long and frequent phone calls. Why not? They are free. Furthermore, grandma can actually see the grandkids. So we are driving fewer miles.

Computers help us to arrange carpools or rides through Uber and Lyft which can further reduce the demand for cars.

Foreign competition competes with far cheaper labor, and many cases they use their cheap labor to launch new car companies that will ultimately provide competition for the older companies.

Cars are changing, including their source of power. The car company needs to invest in these and they might invest in the wrong one. There are electric cars, hybrids, plug in hybrids, power cells, natural gas, and other exotic power sources. All of this may require big investments in what is likely to be the wrong system.

Furthermore, driverless cars are adding another element of uncertainty into the auto makers business plans. In the future we may tell a web site where we want to go and it will send us a vehicle to pick us up, which perhaps will deliver us to another vehicle, and so on until we reach our destination. Each of these vehicles may closely match our needs for that particular trip, but be radically different from the vehicles the industry presently produces.

All of this uncertainty can discourage heavy investment, particularly if it will take many years to pay it off.

Safety and Investment

Heavy investment sucks up a lot of savings. But the enormous uncertainty of our rapidly evolving technology and economy favors light investment. This reduces the demand for investable funds.

One result of this is that the interest rates on very safe investments are low, almost zero. Unless you count inflation in which case they are negative. If the nominal interest rate is almost zero and inflation is two percent a year then the real interest is approximately negative two.

At the same time, many of our companies are making big profits. It looks like they are making a good return on capital, but I suspect that it is a return of capital. These companies may be very profitable for a short period of time and then they may crash. So the money that the capitalists are pulling out is simply a return of the capital they put in, not a semi-permanent stream of income.

The safe investments, short term government bonds, are returning nothing, or if we count inflation, less than nothing. If the people who are making those safe investments are rational that suggests that the investments that are showing a good profit are not safe.

I suspect that in our rapidly changing economy propelled by a rapidly changing technology that is exactly what is happening.

Rich are Not Doing as Well as We Think

Income inequality is a favorite topic these days. What the above suggests is that the rich may not be doing as well as we think they are. They even may not be doing as well as they think they are. If the stocks they own will soon be losing their value then the high profits they enjoy now might turn out to be a return of capital rather than a return on capital.

Not that I am worried about the rich, they will do fine. Furthermore, with the world being awash in excess savings, which are causing wide spread unemployment in the developed world, the rich are doing us no favors by holding their wealth. So if they are not making much on their money or are even losing money this is not a disaster for society as a whole. The disaster if the high unemployment that is caused by all those funds that they are sitting on.

Here is another web page on rapid technological progress and investment.

Here is an index to my other pages on economics, and a short review of my qualifications in this field.

Here is an index to other pages on essays on media.

Tell me what you think. Here is my contact information..

Last updated September 25, 2019

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