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Shifting Rental Models

25 Jul, 2004 By: Kurt Indvik

During an analyst call last week, Blockbuster CEO John Antioco said he figured the online rental market to have the potential to be about 10 percent of the overall video rental business and figured there might be about 4 million potential customers out there for online rental subscriptions, or about double Netflix's current subscriber base.

At the recent the VSDA show, Jerilyn Kessel, analyst for the research firm Centris, said a recent consumer survey showed that about 9 percent of active DVD renters said they are currently members of a subscription program, either online or in-store. Blockbuster hopes to have about 10 percent of its customers on a subscription by the end of next year.

OK, so both online rental and subscription models are small chunks of the overall home video business at present, but because of the current struggle by many rentailers (including Big Blue) to show growth in rental, Blockbuster's focus on online rentals and subscriptions is causing quite a stir. Antioco hinted at the possibility of other rental pricing structures being changed (are rental rate decreases far behind?) as the big retailer struggles with the right combination of offerings that will maximize revenue from its current customer base and attract new customers. And early next year, the plan will be to marry these online and in-store subscription initiatives.

Because of its investment in these areas, Blockbuster is expecting some loss in profits, and its stock was hammered last week. And partially because of Blockbuster's investment in these areas, Netflix stock was also hit hard, although there was hangover from its announcement the prior week that its profits would also be hurt due to higher-than-expected customer acquisition costs. You gotta love Wall Street. It hits you when you have to spend money to grow your business, and it hits your competitor because you're spending money to grow your business.

Of course it's not that simple, but the fact is that right now no one really knows if subscriptions in a brick-and-mortar traditional rental business can truly be successful. And while Netflix has been a darling of Wall Street up until the past couple of months, the question arises that with the arrival of Blockbuster on the scene and the potential to marry its online and brick-and-mortar store businesses, perhaps Netflix has seen the zenith of its growth potential, at least in this space. (Netflix CEO Reed Hastings has promised the company will move into the digital download space, which would seem to be a natural extension of its business.)

In 2004, home video rentals will be a $10 billion business — healthy indeed, but not showing any signs of growth. The struggle over subscriptions and online rentals is, as we have seen, a struggle over 10 percent to 20 percent of the business that is shifting from one form of rental to another. And while publicly traded chains must always be seeking business models to show signs of growth (or maintenance of market share) or be hit by investors, small businesses can still enjoy profitable years without reinventing themselves — to a point. Are smaller retailers adjusting their rental models in any way to either squeeze for ROI out of their rental business, or keep customers with more attractive rental options? Are subscriptions an option? Beyond previously viewed sales, which has proven to be a wonderful way to offset whatever level of rental decline a retailer is experiencing, what other rental adjustments are being tested?

Video Store Magazine has an online poll this week on the subscription model. Take a moment to complete it and see where you are in the scheme of things. Meanwhile, let me know your thoughts on the subscription business and other rental options. You can reach me at my e-mail link above. I hope to report back on what I hear.

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