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Would You Like Fries With That DVD?

25 May, 2004 By: Holly J. Wagner

The competition is getting scary out there, and the first casualty is likely to be rental margins.

Just last week, I was ranting about $9.99 sellthrough discs at supermarkets. Now video specialists will have to compete, at least in Denver, with McDonald's. The chain is putting DVD rental kiosks in or just outside of its 105 Denver-area stores, and I have to tell you, I would not want to be the guy with the video store across the street from Mickey D's.

Since McDonald's is in the burger business, the chain — much like Wal-Mart — doesn't have to make money on DVD. It just has to keep people coming in to buy more burgers and salads. Hence the $1-a-day rental fee at those Redbox machines: DVD has already become the carrot dangling from the end of the stick, a mere incentive to buy whatever you really wanted in the first place. Or at least to buy it in a different place.

And that may not even be the worst of it.

Dee Cravens, the EVP and chief marketing officer for DVDPlay, which makes the vending machines McDonald's is using, told me that some other companies testing the machines offer rentals for as little as 69 cents a night. That's going to put a lot of pressure on rental pricing, at least for the latest hits. The ones on which Blockbuster has depended for growth.

Meanwhile, Big Blue has only this year got its software worked out so customers can use their membership cards at different stores. Those folks still have to return the rental to the same store where they got it, while McD's renters will be able to return their discs at any McD's with a rental machine.

Same-store rentals at Blockbuster stores in the United States were off 10 percent in the first quarter of 2004, and movie rental revenue was down 10.7 percent, according to a corporate filing with the Securities and Exchange Commission. And that was before one of the few companies with such pervasive brand recognition and more store locations decided to get into the game.

Even though Blockbuster wants to offer its customers subscription rentals nationwide this year, this increases the pressure out of the gate to make sure customers can rent and return in different places. It will also make a $25 monthly subscription much less attractive than it is to consumers who are paying $3 or $4 a night for a new release. The chain's new initiatives, which are aimed at “replacing declining rental revenue,” will face that much more of a challenge.

No doubt the other chains will feel it as well, on new release pricing at least. Even Movie Gallery, which has been relatively insulated from competing new technologies like broadband and cable video-on-demand, will have the specter of Ronald McDonald looming over its stores.

This could also hit other Denver dealers large and small with problems maximizing pre-viewed revenue: If even 10 percent of a business' customers rent from McDonald's, it will start to take longer to turn any hit title enough times to reach the selloff threshold. If McDVD forces others to rent new releases even cheaper, hitting the selloff point will take that much longer.

Even Netflix may have to evaluate how much of an investment it wants to make in new hit releases, part of its growth strategy, going forward. It will depend on how big of a dent McDonald's makes.

The one thing that most likely is safe from the burger giant is adult product. I doubt McDonald's will want its child-dependent brand associated with porn. Will we see Hollywood and Blockbuster start offering adult (Movie Gallery already does) to compete?

The chains seem to understand that they will have to offer more to keep growing, or just to stave off disaster. But I'm not looking for burgers or cheesecake at my neighborhood Blockbuster any time soon, so they had better hurry.

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