History of video rental wars contains lessons for online gaming industry

Video-Rental-Wars-LessonsAs we speak, once mighty video rental chain Blockbuster is mulling filing for Chapter 11 bankruptcy protection. Meanwhile, its online equivalent, Netflix, has seen its share price increase twelve-fold in the past five years. So what did Blockbuster do wrong, what did Netflix do right, and are there any lessons the Monday morning quarterbacks of the online gaming industry can learn from this contest?

The main thing Netflix did right was to build a business model based around doing one thing, then proceeding to do that one thing very well. Blockbuster, on the other hand, with a fortune invested in their thousands of retail outlets (each of which had to be staffed/heated/lighted/cleaned/taxed/etc.) were tardy in going online, but even with a long time to develop an online strategy, the company found it difficult operating two distinctly different types of businesses under the same roof.

Such is the dilemma facing the publicly traded ‘brick and mortar’ casino giants as they ponder getting into the online gaming business. During the boom years, these companies engaged in a seemingly endless construction spree of ever more grandiose venues (“No, mine’s bigger!”), with the result that most of these companies are now saddled with billions of dollars of debt, and the interest on this debt consumes ever greater chunks of their shrinking annual profits.

Casino resort hotels have patented all sorts of tricks to get their guests to gamble, such as forcing them to traipse across the casino floor just to get to their room or find a toilet in which to vomit. These sorts of traps won’t work online, where a world of alternatives is no further away than the address bar of one’s browser. If they want to make a go of any future online gaming venture, land-based casino dogs are going to have to learn new tricks.

But in doing so, these public companies may have to make decisions that might interfere with next quarter’s profitability, and that may piss off investors to the point that they decide to pull their money out, driving the stock lower and triggering all sorts of price-point mechanisms that further inflate the interest rate on the company’s debt.

Private online gaming companies – some of which have over a decade’s worth of experience on which to draw – don’t have to worry about these problems. Having been forced to live within their financial means, they remain light and agile, better equipped to deal with unforseen challenges (which, in this business, can appear with as little warning and as much fury as the Asian Tsunami).

But, I hear you saying, Netflix is a publicly traded company, so doesn’t that negate everything you just said? Yes, Netflix is a public company, but it is not a global company, nor is it subject to the whims of various governments looking for a convenient scapegoat to blame for all of society’s ills. The myriad restrictions imposed by governments on gaming companies limits both their flexibility and their ability to raise capital, at least, compared to companies operating in less stigmatized industries. So going public provides you with fewer benefits and more negatives. Simply put, and I’ll go to my grave saying this, in our industry, the publicly traded model doesn’t make sense… a well run private company will always win. The top two companies in the world — Full Tilt and PokerStars — are private, and I think Bodog will be number 3 by 2014. This will mean the top three companies in the industry are private… nuff said.