It has been said that the markets are discounting mechanisms and that the money is made and lost on the outlier events that no one is truly expecting. Those events can come by way of new disruptive technologies or even mundane businesses that transform a product or service. Blockbuster Entertainment was such an innovation, as it standardized what had been a fragmented mom & pop industry. Upon the market's acceptance of the VHS format, video rental stores sprang up throughout the United States and around the world. Then came Blockbuster which standardized the business of video rental, and with buying power was able to secure the hottest new releases well before the rest of the industry. This had the effect of crushing the smaller players and consolidation of the industry ensued. In its drive for dominance, Blockbuster decided on a strategy that would ultimately doom the company. To become the leader in the industry, the company took on high levels of debt and property leases to build out its store base. It may seem ironic that such a behemoth in the industry would become a victim of the competitive nature of its own marketplace. But the buildout of the internet and the digital economy would help to displace Blockbuster as the premier provider of video entertainment. As the technology format changed from the bulky VHS tape to the sleek DVD disk, Blockbuster was left behind as startups like Netflix made rentals easy by internet order and US postal delivery for a flat fee. Eventually, Netflix would move its primary business of DVD rentals by mail to a fully digital internet-delivered on-demand format thus embracing the new delivery technology and format.

So, this brings us to the news of Tuesday, Amazon announced that it will be starting an online pharmacy as part of its line of internet-based business. As one might expect this would be of concern to investors and traders in the large chain pharmacy space. Walgreen’s and CVS were both down considerably on the news. The question is this, will this additional competition from Amazon crush these firms? The chains already offer prescription fulfillment by mail and have survived increased competition from grocery retailers. They have substantive footprints, with pharmacists and in-store private personal consultation available. The debt load of the firms is a concern but appears manageable given the current economic downturn. Time will tell.

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