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Sinking Subs?

8 Sep, 2005 By: Erik Gruenwedel

As Netflix and rival Blockbuster Online amass collective subscriber bases approaching 5 million members, adoption of the subscription model by the rest of industry would appear to be negligible.

Walmart.com sold its once promising subscription service to Netflix, and separate forays from Hastings Entertainment (in-store) and Movie Gallery (online and in-store) came and went. Gallery subsidiary Hollywood Video continues to maintain an in-store subscription service.

In a survey of 225 independent video retailers, Home Media Research found 12 percent offered subscription programs compared to 41 percent that offered frequent renter rewards.

Among independent video retailers contacted for this story, just two offered a subscription service. Only one liked it.

With three locations in Massachusetts, Superstar Video launched an in-store service before Blockbuster and Netflix only to see its top customers' monthly expenditures drop from $100 to $20.

“You can imagine it is not our favorite promotion,” said owner Jon Cinelli, who said he has continued the program in one store for those customers who ask for it.

Hollywood Express, which has four stores and is located near Massachusetts Institute of Technology, initiated a survey with the Sloan School of Management and found that the majority of its customers were not interested in subscriptions.

New York-based Champagne Video, like many retailers, prefers pre-paid rental packages, coupons and other promotions to subscriptions.

“We do not see the positives [of subscriptions] other than competing with Big Blue,” owner Marc Oringer said.

Todd Zaganiacz, owner of Video Zone in South Deerfield, Mass., and head of the National Entertainment Buying Group, a consortium of 100 independent retailers across the country, said the number of member retailers offering in-store subscription plans was small, representing less than 5 percent of the buying group.

“For some that have tested it, they have found it has turned more of their higher paying customers into [lower paying] subscription customers than turning lower paying customers into subscription customers,” Zaganiacz said. “Unless I can encourage those consumers that spend $5 per month to spend $10, it isn't going to work.”

Bucking the trend, however, is Cinefile Video. The Los Angeles store offers two, three or five titles out at a time for $25, $30, $40 per month, respectively. Of course, it helps to offer an eclectic film catalog of silent films and foreign fare for which film aficionados are willing to pay top dollar.

“We are pulling a greater amount of money per day than we ever were before,” manager Robert Silvey said. “On average, we have about 15 renewals per day at minimum $25 per renewal.”

Web wars

With Blockbuster Online and Netflix both offering one-out plans for $9.99 per month, analyst Michael Pachter of Wedbush Morgan Securities in Los Angeles, said the online subscription model would soon implode.

With a $4 margin on the $9.99 plan, Pachter said, Netflix and Blockbuster need almost twice as many customers to reach the same profit of the $17.99 price, with a $7 margin.“If I am the average Joe who rents once a week, $18 is kind of a push for me,” Pachter said. “But $10 is a compelling value for me. Yet they aren't making money from me if I am renting four times a month.

“I think [Blockbuster and Netflix] will bloody each other until one of them gives up,” Pachter said. “I think you will see a surge in online subscribers at this [$9.99] price point, and then I think it is going to crush everybody.”

Blockbuster spokesperson Randy Hargrove said the $9.99 price is just one option Big Blue offers consumers in addition to two- and three-title plans, in-store Movie Pass and termination of late fees.

“We now have approximately 20 percent of the online rental customer base,” Hargrove said. “Based on all the industry data we are seeing, we believe we have clearly increased our share of the in-store rental market.”

He said the company continues to see increased revenue from online subscribers who also come into the stores driving incremental revenue.

“If you add the revenues we generated with our online service, domestic same-store rental revenues were up more than 11 percent [in the second quarter],” Hargrove said.One Blockbuster franchisee, who wished to remain anonymous, disputed the benefits of the in-store subscription plan, arguing that the average consumer basket (movies, games, popcorn etc.) has shrunk since inception of subscriptions.

“The idea with the in-store movie pass was the consumer would buy popcorn, candy or a previously rented DVD,” the owner said. “This is not the case. Not only did the consumer exchange his rentals without buying anything, the typical consumer would exchange his films once a day.”

Pachter said in-store subscribers are spending about $5 a month on merchandise, which he agreed wasn't a lot in the aggregate if they visited the store a lot.

“Blockbuster is doing this not to make money,” Pachter said. “They are doing this to keep from losing money.”

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