Print
Email
ShareKANSAS CITY, Mo. - This is a business tussle consumers should love.
A shifting and increasingly competitive landscape in the DVD rental business has sent players big and small scrambling to maintain their customers or pick up new ones with tantalizing subscription offers, lower prices and convenient return policies.
But as the sometimes-confusing movie rental deals keep coming, an industry shakeout seems inevitable. Indeed, there’s already blood in the streets.
Industry giant Blockbuster is locked in fierce combat with Netflix for online DVD dominance. Movie Gallery plans to unveil its own Internet service, and Redbox is rolling out hundreds of video rental machines in McDonald’s and supermarkets across the United States.
Then there’s Apple Inc., which reportedly is looking at entering the online DVD rental business to supplement movies it sells for download. In March, the company launched AppleTV, which allows people to wirelessly transfer entertainment content from their computers to their TVs. Some say video on demand will eventually ease the current array of video promotions and come-ons. But how long before video on demand becomes widely and affordably available?
“Everyone has been saying that is the future, but they’ve been saying that for at least nine years,” said Susanne Ault of the trade publication Video Business. “I don’t think anyone has a clear vision of what the future is really going to look like or when true VOD is going to happen.”
Given the uncertain timing of technological breakthroughs, DVD rental companies are taking a “let’s try something, anything” mentality,” Ault said.
At the Digital Hollywood conference in May, industry leaders predicted widespread video on demand is at best 10 years away. Industry leaders, including those from Movielink, CinemaNow and BitTorrent, say the biggest hurdles remain a lack of accessible movie content and technology bugs.
What’s at stake? A business that last year generated $35 billion in the rental and sales of DVDs, from the popular titles to the obscure. Those numbers are expected to grow to $38 billion by 2009.
Of that total, about $26 billion came from the sale of DVDs - an important revenue stream for retailers such as Wal-Mart, Target and Best Buy - with the remaining $9 billion or so generated by rentals.
Tiffany Franco is a movie and documentary fan. She said the wider array of choices had allowed her to increase the number of movies she watched to at least three a week.
Franco is a Netflix customer. Before she joined that service, she watched about three or four movies a month, mostly rented from Blockbuster outlets. Now the recent appearance of Redbox machines in her neighborhood has added a compelling choice.
“I do the three-at-a-time with Netflix,” Franco said. “They have lots of good stuff, including documentaries - good luck trying to find that at Blockbuster. I’ll probably use Redbox, too, because it’s a buck. It’s cheap, it’s convenient, and I don’t have to go into the store and deal with people.”
Another company, Chicago-based Redbox is touting the 4,000-plus rental machines it has rolled out throughout the country.
A relatively new player in the market, Redbox puts its big, red, brightly lit boxes in high-traffic locations at grocery stores and McDonald’s restaurants. For $1, a customer can get an overnight rental of one of 70 recent releases.
As the various movie rental businesses vie for their pieces of the pie, consumers for the time being are the clear-cut winners.
They are enjoying more choices in renting and buying DVDs at historically low prices, as evidenced by moves in recent weeks by Blockbuster and Netflix to cut their online and in-store rental prices.
“Consumers who are heavy acquirers of content are the ones who tend to use multiple ways to access that content, and that’s good for the industry, because those are the ones who are putting down lots of cash,” said Russ Crupnick, vice president of market research firm NPD.
“At the same time,” Crupnick said, “the multiple channels (of distribution) appeal to the more casual user who will now have an array of options, which gives them ease of use.”
In mid-June, Dallas-based Blockbuster dropped the price on its various rental plans, generally undercutting Netflix by $1.
That move came on the heels of its launch last November of Total Access, a service that combines elements of online and store rentals in which subscribers can return movies to its 8,000 stores instead of through the mail and pick up additional titles there.
The company also said it would change the pricing on some of its other plans later this year but didn’t provide details.
Blockbuster’s $1 price advantage didn’t last long, however. Just before the end of June, Netflix lowered the monthly fee for one of its most popular subscription plans by $1. Netflix is now charging $13.99 a month to rent up to two DVDs at a time. It also rolled out a monthly plan offering five movies for $5, which customers receive one at a time.
Then there are other players such as Movie Gallery, which recently told Wall Street analysts it was going to launch some type of an online service this year. But the company said it defaulted on the terms of a credit agreement because of a bigger-than-expected decline in its rental business. It hired turnaround specialists to help reorganize the company.
The movie rental industry was turned upside down in 1999 when Netflix launched its online service.
Reed Hastings, founder of the company, based in Los Gatos, Calif., got the idea for the online, mail-delivered model when he was facing the wrath of his wife over more than $40 in late fees for “Apollo 13.”
For a monthly fee, customers get a predetermined number of rentals at any given time.
Today the company has almost 7 million customers and is aiming for 20 million by 2012, though growth reportedly is slowing. The company also has been rumored to be an acquisition target, with Amazon.com surfacing as a possible buyer.
Though late to the online video party, Blockbuster has been trying to make up ground. The company, which had relied on thousands of stores nationwide for putting movies into customers’ hands, launched its online response about three years ago.
But with the Total Access program, Blockbuster has quickly made gains with online customers.
The rapid success of Blockbuster’s online business has forced the closing of some stores. More closures could be coming. Blockbuster recently said it planned to close 282 outlets around the country this year to improve operating margins and expand its market share online.
While Netflix’s financial performance for the most recently reported quarter improved from a year ago, Blockbuster’s eroded. For the quarter that ended March 31, Netflix earned $9.9 million on sales of $305.3 million, compared with income of $4.4 million on revenues of $224.1 million the prior year.
Blockbuster, meanwhile, saw its performance worsen, losing $49 million on sales of $1.47 billion, a tenfold increase in losses from the same period in 2006, when it posted a net loss of $4.7 million on sales of $1.4 billion And on July 2 the company named a new chief executive, James Keyes, to replace John Antioco, who resigned following a pay dispute.
Despite the challenging financial picture, Blockbuster spokesman Randy Hargrove said: “We believe our new programs are bringing the stores more into play. We’re growing in-store and online, and we have had tremendous success with Total Access.”
Steve Bernstein, chief executive officer of Kansas City advertising firm Bernstein-Rein, at one time led Serendipity, a company run by his family that owns dozens of Blockbuster stores in the Southwest.
Bernstein notes that Netflix has about 7 million subscribers and that Blockbuster spent $70 million getting up to 3 million customers. It plans to spend $100 million to reach the 4 million mark.
“I don’t know how that works,” Bernstein said. “Meanwhile, look at the future - things like (Apple’s) iTV, things that start connecting the delivery systems is where we’re going.”
While the rental companies slug it out in the trenches, Hollywood studios such as Warner Bros. continue to test video on demand.
The video-on-demand lure for studios is in the economics. Studios typically keep 15 to 20 percent of revenue from video store rentals, compared with 60 percent to 70 percent of those from video on demand. The trick, industry watchers say, is to not step on the revenue toes of important retail customers.
This week Warner simultaneously released “The Astronaut Farmer” on download and DVD.
“Warner has already done some tests in a couple of cities and is reporting very positive results,” said Crupnick, the NPD analyst. “When DVD revenues were growing at 20 percent to 30 percent and with pretty high margins, the studios didn’t want to kill the golden goose.
“Some retailers are selling $4 billion, $5 billion worth of DVDs, and you don’t want to upset them by saying, `We’re moving to VOD,’” Crupnick said. “But as DVD revenues start to slow, and they have flattened out, all these other options will come to the fore.”
Netflix spokesman Steve Swasy said his company has innovations of its own. Since last fall, the company has been testing a service that streams movies to customers’ computers.
Streaming video differs from VOD in that it’s not downloaded to a computer. Rather, it “streams,” playing only once on a computer, while downloads are generally accessible more than once.
Swasy said the company intended to be the leader in how movies and other digital entertainment were delivered, whether that was through the mail, computer or wide-screen TV.
“The company’s name is `Netflix,’ not `DVD by Mail,’” Swasy said. “DVD is the popular medium now, but that likely won’t always be true.
“Ten years ago, people didn’t know what a DVD was. Now, second to the microwave oven, it’s the fastest-growing consumer product. So that tells us the future is limitless. Our vision is to deliver movies on whatever screen you want to watch them on.”
