Prediction: Death of the DVD vending machine

Back in 1991, Microsoft founder Bill Gates was asked about film company Kodak. Even before the internet came to public awareness, Gates knew the company's business model was doomed. 'Kodak is toast' he replied. Last week, Kodak finally filed for bankruptcy protection.

Here my prediction: DVD kiosks and vending machines will eventually go the way of Kodak. The thing is, my prediction isn't anywhere near as impressive as Gates'. Anyone who thinks about the DVD vending machine business model will soon realise that there is no long-term future in physical delivery of movie content. Eventually, this content just has to be delivered online.

Strangely, the unlisted Franchise Entertainment Group doesn't realise it. As this Herald article explains, Franchise Entertainment Group has just bought 1,000 DVD vending machines from the USA and is rolling them out. In the short term this business is sitting in a 'sweet spot' because I've seen queues at my local vending machine. Perhaps this delivery mechanism works because it's easier to find something than spending 15 minutes trolling the aisles of your local DVD rental store.

Head in the sand?

But what's most surprising is that Franchise Entertainment Group must know content is moving online. It already has direct experience because it owns the Blockbuster and Video Ezy chains in Australia, which are suffering from the structural shift.

So why is the company investing $15m buying vending machines that will almost certainly need to be scrapped in a few years? (I'd be intrigued to know what the company's depreciation policy is). Perhaps the payback is sufficiently fast that these vending machines are very profitable immediately, but somehow I doubt it.

For value investors, this is the sort of thing we must think about. It's no longer sufficient to invest simply because a business looks cheap on the numbers (if it ever was). Real businesses often invest capital into doomed new ventures—or existing ones—apparently ignorant of the long-term consequences. This was an issue explored in JB Hi-Fi: Steep descent ahead.

In the Herald article, the founder of Franchise Entertainment Group apparently described the purchase of the DVD vending machines as 'future proofing' the company. If that's his vision of the future, then I think he's being very short-sighted indeed.

What do you think? Is there something I'm missing here? Can you think of any other examples of growing segments of industries that have ultimately declined?