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Is Online Rental A Flash in the Pan?

27 Feb, 2003 By: Thomas K. Arnold

Online rental is the big rage these days, with Netflix recently signing its millionth customer and big-scale competition from Wal-Mart and Blockbuster heating up.

But falling DVD prices make me wonder whether the whole online rental concept is a bubble waiting to burst. The fact is, Netflix was launched and achieved its early growth at time when the selection of rental DVDs at typical physical video stores was severely limited, if not nonexistent.

Consumers were hot to try this new technology, but they wanted a huge selection from which to choose — and Netflix emerged as a simple and convenient way to tap into the growing catalog of DVD product without driving all over the place, trying to find out who has what.

The Netflix model still makes sense, to a large degree. The selection is fabulous, unmatched by even the biggest Blockbuster, and the subscription charge is about half what the average basic cable bill is — small potatoes, even to those who don't subscribe to HBO.

But as more and more consumers walk by those $5 DVD dump bins at Wal-Mart, the perceived value of DVD is going down, down, down. Sure, the cheapie DVDs are deep catalog while NetFlix offers all the latest new releases, but the most active renters rent an assortment of product, not just the hot new releases. And if they subtract two or three $5 oldies from their monthly rental menu, it's going to be a little harder to justify that $20-a-month subscription charge.

To be sure, that mindset won't hit everyone. But it could hit a fair amount of people, to the point where the market for online rentals is likely to shrink — or at least, in these DVD boom years, of not growing as fast as it used to.

Factor in the entry of the big physical stores — and a lot of small players, as well— and you're faced with a bleak prospect: A flattening market, and a growing number of mouths eagerly going after a taste of the pie.

Therein lurks the potential for disaster. If the decline in DVD pricing begins to spread beyond deep catalog — and at least one studio, Warner Home Video, has made no secrets of its quest for mass distribution and prices of about $10, even for new releases — then the rental business is going to suffer.

If DVDs routinely sell for $10, chains like Hollywood and even Blockbuster will be in the catbird seat—they'll be the ideal destination for consumers who want to rent some titles and buy others.

The online renters, meanwhile, will have to do something else to make up for lost business, for the migration of renters into the ranks of buyers. The natural choice, of course, would be to offer sales as well as rentals. Many already do.

But given the strength of established online sellers like Amazon.com, that transition could be tough, if not downright impossible.

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