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Online Price Wars Won't Destroy Brick-and-Mortars

28 Oct, 2004 By: Thomas K. Arnold

The online rental price wars between Netflix and Blockbuster — reportedly triggered by Netflix's fears that Amazon plans to enter the lucrative subscription rental business — remind me of an earlier, simpler time.

Years ago, when mom-and-pop rental stores still ruled and Blockbuster was seen as a distant threat, there were similar bursts of undercutting between rival stores and grocers.

The store wars usually ended in a disaster for all involved. Joe's Video charged $2 for an overnight rental; Don's Movie Emporium opened across the street with 99-cent rentals. Joe's business dropped sharply, so he lowered his price to 99 cents as well. Both stores took a financial hit and began cutting back on their buys until one or the other went out of business — or their new-release inventories were so depleted that a third guy came along and cleaned up, regardless of how much he charged.

Grocers also tried cheapo rentals to gain a foothold in the market in the late 1980s and again in the middle 1990s, each time with disastrous results. They priced themselves right out of the business, particularly the second time around, when revenue-sharing entered the picture and the complicated formulas made the whole rental business too much trouble for them to continue.

At this point, I don't see much danger for either Netflix or Blockbuster. The online rental business is so profitable that shaving a couple of bucks off your monthly fee won't push you into the red. But the hazard lights should still go on, because as the online subscription rental market becomes more competitive, further price drops are likely. And no one has come out and said where the break-even point is, and what effect more players and more consumers will have on that figure.

Netflix chief Reed Hastings believes an online rental price war could prove catastrophic — not to Netflix and its subscription-touting competitors, but to regular video stores. The cheaper online subscriptions get, the more people will be driven to rent online. And as chains like Blockbuster lower their subscription price, it's only natural for them to lower in-store rentals. Already, we've started seeing Blockbuster and Hollywood Video testing 99-cent rentals in some stores and markets.

Let's hope history does not repeat itself — except in one crucial area: price wars don't go on forever. Video retailers tempted to play the price-war game should instead ride it out, because despite all the gloom and doom, I think there will always be room for traditional rental.

There's still a lot to be said for the shopping experience, and I know many people who truly enjoy browsing for videos at the local rental store. They don't like the idea of forking over about $20 a month for something they may or may not use. They like going into a video store, browsing through everything that's available, and getting to watch it during an evening for $2 or $3, with no strings attached.

Yes, traditional rental is under assault, first by the burgeoning sellthrough market and now by rental subscriptions. And, yes, the traditional rental market will likely get smaller. But as I've said time and time again, it won't go away completely.

Old habits, after all, die hard.

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