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Online Rentals On the Grow

17 Nov, 2005 By: Holly J. Wagner

Netflix is testing lower priced plans to make sure it leads that market.

Netflix CFO Barry McCarthy told analysts at a conference Nov. 16 the company plans to reach 20 million subscribers long term.

"Along the way we will test lower prices … the reason we are testing it is we think the market is price-elastic," he said. "We want to get bigger because the bigger we get the more video stores we put out of business. The more marginally profitable video stores we force to close the bigger our available market."

Netflix customers are avid DVD consumers and about a third of them buy used discs, McCarthy said. The service began selling used discs a few months ago.

Next-generation DVD — most likely Blu-ray — will be good for the rental business, especially if the price is higher than standard DVD, he said.

"I think it's pretty clear that Blu-ray is the one. Even Warner has licensed to release technology from Blu-ray," he said. "I think the format war is a thing of the past. I think it will be Blu-ray. I think the content will get priced at a 25 percent premium and I think it's going to roll out slowly over time. If it is priced at a premium it will be good for the rental business, it's going to extend the life of DVD and it'll roll out slowly."

Based on disclosures from the two leading online rentailers in America, Blockbuster Online and Netflix, the market here is already more than 5.5 million subscribers — a number many in the industry thought would never be reached when the services began.

Meanwhile, analysts at London-based media researchers Screen Digest issued a report saying online video rental will account for more than 25 percent of the American video rental market by 2009.

The report states that by the end of this year there will be more than 6.3 million online DVD rental subscribers in the US and Europe, but that number likely has already been reached if smaller services like Greencine, DVD Avenue and some of the specialty services are counted.

"The dramatic growth of the online rental sector shows how appealing the model is to consumers. Our cash-rich, time-poor society values convenience very highly, and is willing to pay for it," said Screen Digest research analyst Angus Wood. "At the same time, online retailers aren't restricted by the constraints of shelf space: They can afford to stock a wider choice of DVDs. It's that marriage of choice and convenience that is fundamentally changing the experience of video rental."

The U.K. accounts for about 40 percent of the million-member European market to date. By 2009, Screen Digest projects, more than half the U.K. market and nearly 40 percent of the German market will be online rentals.

The online DVD rental market will generate more than $1 billion in consumer spending in the U.S. and Europe this year, according to "The Outlook for Online DVD Rental." Among the key findings from the report:

  • The U.K. dominates the European market, followed by Germany, where Amazon.com launched its second rental service, and emerging markets in France and Scandinavia.

  • The online sector already accounts for more than one in 10 video rentals in the U.K.

  • Almost 45 million DVDs will be sent to online subscribers in Europe in 2005, while more than 381 million will be delivered in the U.S.

  • Many see online DVD rental as a precursor to the delivery of films via video-on-demand (VOD). Recommendation engines, customer reviews and other features are easy to adapt to a download model, and Screen Digest suggested that training customers to go online for movies positions them for a head start, even though Netflix earlier postponed an initiative aimed at offering downloads this year. Until content download licenses are freed up, the executives said it's not worth the effort.

    "There needs to be an abundance of content, and it has to be available on the TV, not the PC," McCarthy said. Also, "licensing for digital delivery is much more complicated. The licenses in Canada are different licenses than in the U.S. The licenses are different in the U.K. than in the U.S."

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