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Joining the Online Rental Revolution

28 Feb, 2003 By: Holly J. Wagner

While Netflix has garnered much attention as the great online rental experiment — first to market, to an initial public offering and now to a million subscribers — the number of smaller competitors it no doubt inspired has been increasing steadily over the past couple of years with little fanfare.

An Internet search for “online DVD rental” turns up at least 40 businesses renting DVD through the mail. About three-fourths of those are operating in Region 1, the United States and Canada. Whether or not these businesses ever take on Netflix doesn't necessarily define success.

“Netflix has proven that there is a substantial number of consumers that value the convenience, and a lot of people are following that lead,” said Sean Bersell, VP of public affairs at the Video Software Dealers Association (VSDA). “Netflix has pioneered in that market, but that doesn't mean there isn't room for others to come in and succeed.”

The variety of models is surprising. While Wal-Mart follows the Netflix model of a flat monthly fee for unlimited rentals almost precisely, its monthly subscription fee is $1.09 lower.

Blockbuster clearly takes the threat seriously. The No. 1 rentailer quietly bought DVDRentalCentral.com last year and has renamed it FilmCaddy.com.

“We purchased a small, tiny little Internet rental-by-mail company to look at the business and the business model,” CEO John Antioco told investors recently. “We continue to believe that the size of the business is somewhat limited and the profitability model is difficult. Churn is very high, acquisition cost is very high, the profit model becomes a little bit questionable. We think the growth is in our core business.”

But others offer tiered subscription prices and even a la carte rentals by mail.

Some offer subscription discounts to those who sign up for extended periods of time, such as three or six months or a year. Others cater to specific niches so narrowly defined they might not sustain a brick-and-mortar business, but thrive because they transcend the limits of geography.

“The great thing about capitalism is that once somebody is a success, everyone else tries variations to see if they can do it better. What's great about the country is that they will try 20 different variations and see if there is something that is better for the consumer,” said Netflix CEO Reed Hastings. “There are a number of specialty sites, and those companies will compete to a degree with us. It's our challenge to serve the niche community better than they do.”

Even with the variety of models, most mainstream online rentailers profess to have between 10,000 and 13,000 titles available for rent, roughly the same amount as Netflix.

QwikFliks.com had 12,034 titles at press time, and CEO Phil Brodhagen said he is always adding more. “The number of copies of each will range from just a few to thousands. It depends on the popularity of the movie,” he said. Brodhagen buys his titles through traditional channels, but, like other startups, he looks for ways to maximize profits. He is investigating expanding the site to include sales of used discs, which also could expand rental stock.

“Our inventory comes mainly from studios and distributors,” he said. “We do receive offers of sale on used discs from consumers, and we are looking into developing a site for consumers to sell used discs directly to us. Since we have many polishing/finishing/verifying machines, we can make used ones play like new.”

Some sites, such as Bay Area-based Greencine.com and CafeDVD.com, followed shortly after Netflix to cater to a more bohemian crowd, with broad selections of alternative, independent, art-house and otherwise unusual titles.

CafeDVD advertises just 3,000 titles and has been in business since 1999, founded, as the site declares, “by a group of independent film directors, marketing and engineering professionals who themselves were frustrated by the lack of selection at local video stores.”

But those are far from the only niche players. Others cater to specific genres, exploiting the Web for its greatest advantage: transcending geography to reach a larger audience with narrower tastes.

Recent startup Coreflix.com has just 400 titles available, but is virtually the only rental destination for action sports enthusiasts who would otherwise have to scour surf, skate and ski shops to buy the same titles.

“Our business model is based on aggregating a dispersed geographic community,” said CEO and co-founder Joe Agliozzo. “There might be a hundred or a thousand surfers in one community, but we can reach an audience nationwide.”

The small number of titles catering to the niche doesn't deter him.

“You really can't rent these films anywhere. You can't get them at Blockbuster and Hollywood. We felt that if we launched this site, we could get an audience of

aficionados,” he said. “We're unlikely to be as big as Netflix. We know that this is a small market. This is an underserved community, and if we do it well, we will be successful.”

The same holds true for several American and Canadian sites that specialize in Bollywood. While Netflix offers about 800 Bollywood titles in its mix, sites like DVDwood.com, DVDworld.com and DesiDVD.com specialize in Indian cinema.

Some critics regard them as flashes in the pan, but others see the advantage of expanding beyond the community that can — or will — walk through the door.

Several sites, like SugarDVD.com, offer adult product rental subscriptions, which seem like a natural fit with the anonymity of the Web.

“That's definitely a market that could be tapped, especially with a wide selection and a well-defined product they're putting out. Even in a mom-and-pop, it's a small selection,” said Alexander & Associates analyst Pat Moran. “A Web site with a wide selection could do well. If people will pay for [adult] streaming video, why wouldn't they pay for DVD as long as they know who they are dealing with and who they are actually paying for the product, because a lot of stuff on the Internet is very suspect. If it was straightforward billing, I don't think there would be a problem for a consumer to come into it.”

Although industry analysts tend to measure success by Blockbuster-Hollywood-Movie Gallery-Netflix scale, startup CEOs like Agliozzo and Brodhagen are mindful of competition, but want growth to track with management and fulfillment capacity. Coreflix is marketing to the content audience, and QwikFliks is using undisclosed stealth marketing tactics to attract new customers.

“How, I cannot say — since the competition may butt in,” Brodhagen said. “But it is quite effective in allowing us to grow at a controlled rate. Otherwise, we would end up with a lot of unhappy customers.”

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