The Video Rental Market Is Changing

According to Reuters, 2008 was a record year at the box office for the movie industry:

Global box offices earned a record $28.1 billion in 2008, up five percent amid the gloomy economy.

So why is Blockbuster Inc., the world’s largest video rental chain staring at bankruptcy when movies have never been more popular?

Blockbuster enjoyed great success for years. Like Walmart, they invaded one town after another. They killed off most of the local video stores, yet now the company is struggling to turn a profit. The video rental market is changing and leaving Blockbuster behind.

No More Late Fees

Netflix changed the industry when it gave consumers the option of renting a DVD for an unlimited amount of time without having to pay any late fees. A lot of Blockbuster customers defected to Netlfix and haven’t looked back.

In 2005, Blockbuster stopped charging its customers a late fee on video rentals, sort of. They were sued for deceiving their customers with a lousy marketing campaign that promised the end of late fees. They continued to charge customers a late fee under the guise of a “restocking fee” until the lawsuits ended in several settlements.

Over the years, Blockbuster made a lot of money on exorbitant late fees. Customers were often charged late fees that were more than the cost of the video they rented. Now that the late fee revenue is gone, their profitability has taken a huge dip.

New Releases

Blockbuster retail stores focus on new video releases. Older videos take up valuable shelf space and most customers are only interested in the latest titles. Netflix and Zip.ca also have the latest titles but if you want your movies immediately then you’re out of luck.

I have never had very much luck obtaining new releases from Zip.ca when I want them. Instead, I’ve always relied on Blockbuster’s retail stores for the new disc of the week and Zip.ca for more obscure and less mainstream movies.

Blockbuster retail stores have an edge over Netflix and Zip.ca when it comes to new releases but I think that piracy poses a greater threat. A lot of people are happy to download a movie illegally and simply watch it for free.

Piracy

Their have been plenty of arguments about piracy and just how much impact of an impact it really has on the industry. David Chartier at Ars Technica says:

Despite the MPAA’s continuing battle against film pirates and even a French group’s warning that piracy could kill the industry, domestic box offices are doing better than ever.

Piracy may not be hurting the domestic box office but what about DVD sales and video rentals? A staggering amount of Internet traffic consists of BitTorrents.

Adapt Or Die

Who would have thought that a website renting movies by mail would dethrone the mighty Blockbuster? When Netflix came on the scene and started to take a share of the market, Blockbuster copied the Netlfix model (poorly) with Blockbuster Online. In addition to running its costly retail stores it was doing a lousy job of trying to compete online.

To make matters worse, Blockbuster tried to buy Circuit City while Netflix was streaming videos and staying ahead of the curve. Last week Blockbuster announced a deal with TiVo to stream its digital library directly to your television.

While movie ticket sales are up, DVD sales are way down this year according to the New York Times:

But according to studios, sales for some new-release DVDs are down a jaw-dropping 40 percent, hammered by the recession, a saturated market (on sale now: the complete ninth season of “Murder, She Wrote”) and a shift to Internet downloads.

Surprisingly the video rental market is healthy despite the death knell for Blockbuster. Variety reported that the rental market will grow over the next year and continue to support the movie studios:

The rental biz - and all of the various platforms that generate such income - will keep studio homevid divisions afloat and even growing, analysts say.

Not suprisingly the two most innovative companies in the rental business are doing quite well:

Renting has become more convenient, with companies like Netflix and Redbox attracting customers through their DVD-by-mail or kiosk services that rent discs for $1 a day. Both saw subscriptions and usage surge over the past year. Netflix, which launched during the previous recession, signed up its 10 millionth subscriber in February.

Video-on-demand and download services are continuing to grow — Apple’s iTunes, Amazon’s Video On Demand, Hulu and others. I think that once these services mature, the Blockbuster retail stores will become distant memories. Soon, we’ll wonder why we ever used to drive to the video store to rent our movies.

Posted in Movies at 10:04 PM