For once the latest showdown in Hollywood is not about a hysterical actor demanding a pay rise, a larger trailer and a rewrite of his fumbled love scene. Instead, four giants of entertainment and retail are all converging on what is becoming one of the most hotly contested battles for customer mindshare – the online DVD rental space. And the funny part is - it all began with a simple idea – nobody likes late fees.
Netflix thought it up first. Customers use a website to choose a list of movies they wanted to watch, cross reference this data with other customers to make useful movie recommendations, and then use an advanced logistics system to ship DVDs in reply paid envelopes direct to people’s door – all for a low monthly fee. Like a juggler with three balls in the air at one time, provided you kept returning DVDs, the system would ensure there was always something you wanted to watch en route to you, and you never had to worry about late fees. Late fees were the hidden profit margin for most video rental stores, and contributed to a wellspring of consumer resentment that provided Netflix with the marketing momentum it needed to sign up three million paying customers in just a few years.
Competition was not long in coming, but arguably for different reasons than the ones that put Netflix into business. Walmat, seeking to protect its strategically important DVD retail business launched a copycat service, and Blockbuster – after significant prevarication – re-adjusted its late fee policy and launched online as well. Although late to the party, Blockbuster has now added the extra twist of offering customers two downloadable rental coupons a month for anything from your local Blockbuster store, and later this year will move to convert many of its 4,500 outlets into DVD mailing centres which will dramatically increase response times. Although the Blockbuster strategy may seem appealing to existing bricks and mortar players, it may be difficult to replicate in other countries where stores are heavily franchised. In the US, Blockbuster directly owns the vast majority of its outlet businesses.
All of this is good news for the post office – which in addition to volumes stimulated by eBay – has been less of a victim of the new economy than you might have thought. However, that may not be the case for long. When Netflix first contemplated their business model, they had hoped to use the internet to directly deliver content. Limitations on bandwidth and digital rights management made the low tech workaround of the postal service a necessary bridging step to offering video on demand. But Yahoo and Google now active in the video search space, higher broadband penetration rates, and the availability of secure distribution platforms – it may not be long before online DVD rental, just becomes online rental.
When that change occurs – the company with the most number of subscribers may not necessarily be the one that wins. Netflix’s most valuable asset is not their million strong customer marketing list but rather its detailed understanding of their users' tastes and preferences which allows it to make incisive recommendations of related movie titles. When you consider the huge number of titles already on DVD, and add that to the explosion in content which will become available when the world’s libraries of movie and television content are digitised and placed online – a reliable recommendation engine based on a large sample of customer interactions will be a powerful barrier to entry to new players.
And there’s the rub. Although Netflix came up with the idea of putting rental DVDs into envelopes first, the clever use of collaborative filters to improve the retail experience was cooked up long ago by book and CD giant Amazon.com. No surprises then that the rumour mill is abuzz with the prospect of Amazon entering the DVD rental space in the US, as they already have done so in the UK. Perhaps even more so than Walmart and Blockbuster, Amazon has the potential to develop a business which leverages its expertise in online merchandising, and combine a rental/retail proposition which could underwrite a very aggressive pricing strategy.
Although both Amazon and Netflix have made pioneering attempts in using recommendations technology, the jury is still out on how well they actually work. Amazon in particular has the problem of trying to deal with the fact that its customers are buying product across multiple product lines, in multiple categories, and often for multiple people. The problem of managing online inventory is as relevant to rental players as it is to retailers. Letting customers usefully navigate 40,000 available titles in the Netflix library is no mean feat. Arguably in the long term, when all entertainment content sits on a server somewhere between LA and Mumbai - the difference between rental and retail products will collapse, and customers will just pay for various types of access licenses.
Of course, it is easy to forget about the long term when all the current players in the game are scrambling to destroy each others' profits with discounting and spiralling customer acquisition costs. But while there is certainly more blood on the bottom line than many are comfortable with, there is also much less than warrants the cant emmanating from some Wall Street pundits.
When you consider the big picture - the consumer appetite for quality entertainment products is seemingly as limitless as the production queue of feature films, TV series and games which are waiting for distribution in as many formats as possible. So, whether the endgame is Netflix being swallowed by Yahoo, or ultimately merging with Blockbuster to create a fully integrated online/offline offering – there is no doubt that subscription rentals are in, and late fees are well and truly out.
