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How Rental Got Its Groove Back

24 Feb, 2009 By: Erik Gruenwedel

Ongoing job losses, failing banks and imploding mortgages have put consumer confidence on life support, but not the public’s desire to be entertained by movies.

Theatrical revenue topped $1 billion in January for the first time, and the latest “Friday the 13th” installment starring indestructible fictional mass murderer Jason Voorhees shredded the recent President’s Day weekend box office record.

All the while DVD rental has quietly kept pace.

Most notably Netflix topped 10 million subscribers, including 600,000 new members since the beginning of the year. Since its launch in 1999, Netflix has posted 30% compound annual subscriber growth and remained profitable.

“It’s an impressive metric, considering the economic environment,” said Edward Woo, research analyst with Wedbush Morgan Securities, which covers Netflix. “I don’t think Netflix will be slowed in the near term, as they have lots of momentum, economic favorable products, and first mover/competitive advantage in digital streaming.”

Family Video, the Springfield, Ill.-based No. 3 DVD rental service with 575 stores, late last year celebrated its 30th anniversary and the burgeoning rental market by giving away more than 1 million free movie rentals.

Blockbuster, the venerable rental service often derided by analysts as a 1980s retread, has reported five consecutive quarters of same-store sales growth. Even Movie Gallery (together with subsidiary Hollywood Video) generated more than $1 billion in revenue after filing for bankruptcy in Oct. 2007.
“It is clear that the video rental industry is a strong beneficiary of the current economic crisis,” said Stacey Widlitz, analyst with Pali Capital.

The analyst said that with rental titles available for $4 ($1 at kiosks), consumers in today’s economy are less likely purchase a DVD for $15 to $20.

“The lower price and increasing convenience of rental are driving growth,” she said.

Indeed, DVD rental kiosks from Redbox, Moviecube and The New Release continue to expand exponentially and are expected to surpass 20,000 units by the end of the year, according to Pali Capital.
Todd Zaganiacz, president of the National Entertainment Buying Group, a coalition of 300 independent video rentailers nationwide, said rental has an opportunity to significantly increase revenue during the downturn.

“Sure, [rental is] not the cash cow of days past, but it’s still a viable alternative for someone who doesn’t have a lot of money to spend on entertainment,” Zaganiacz said.

He said that throughout the buying group some retailers are up a few points, some are down, but the majority is operating even to previous years, which is considered a positive in the current economy. Zaganiacz said previously viewed DVD sellthrough is up slightly despite a decline in sales of new releases.

“If consumers are financially strapped but still want to buy movies, then [previously-viewed content] makes sense,” he said. “Through thick and thin rental is not going away.”

Analysts say that while the rental market (including kiosk and online subscription) ended flat in 2008, the results supplanted sellthrough, which declined 9%. They say ongoing technological innovations and customer service (at the store level) have kept the market alive all these years when may people thought it was dead.

“The category has to be performing for Netflix [and others] to do well,” said Arvind Bhatia, analyst with Dallas-based Sterne Agee. “It’s telling that the DVD rental category is still robust.”

Tom Adams with Adams Media Research said Netflix’s streaming service has undoubtedly contributed to the company’s solid results and added to the general buzz about the rental market.

“Streaming is in a long line of innovations — from the superstore replacing the mom & pops to revenue-sharing copy depth problems, subscription and kiosk — that are all new ways to do the business,” Adams said. “It all keeps consumers happy and coming back.” 

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