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Update: Subscriptions Grow as Shelf Space Tightens

3 Sep, 2004 By: Jessica Wolf

The face of home entertainment retailing has changed over the past few years with the explosion of DVD and a consumer shift to sellthrough. But there's still room for numerous retail and rental variations, retailers said during this week's Entertainment Media Expo (EMX) in Hollywood.

Netflix CEO Reed Hastings, in his keynote address, compared the transformation his company's subscription rental service wrought on the home video business to that of Starbucks, the company that “transformed the coffee market.” Hastings said Starbucks' growing cultural influence transformed the coffee industry, and Netflix intends to use its growing cultural impact to grow the overall video business.

Hastings also accepted the EMX Retailer of the Year award.

With literally no shelf-space issues and the ability to match users to videos they may like but may not have been exposed to before, Hastings said Netflix can be both a broader distribution channel for suppliers with niche, arthouse or documentary product and provide a more diverse, yet more personalized, selection for consumers.

There is “inefficient demand creation” for movies that made less than $25 million at the box office, Hastings said, which is where Netflix comes in.

As for competition, bring it on, Hastings said, noting that the rental market is likely to be dominated by subscription offerings in the next five years.

Even No. 3 chain Movie Gallery is starting to get into the subscription mode. At a retailer panel later in the day, Movie Gallery's SVP of marketing, Ted Innes, said the company began testing subscriptions in 70 locations.

Matthew Smith, SVP and GM of content for Blockbuster, said his company looks at subscriptions as not only an important potential new revenue stream for the rental giant, but also as a way to offer its customers a “wider range of product.”

Shelf space is a precious commodity in the market these days, any retailer knows.

“It's a challenge,” said David Alder, SVP, products and marketing, for Virgin Megastores. “We carry an average of 15,000 SKUs of DVD in every store.” Virgin, he said, is beginning to shift some DVD product — like music, fitness and even titles that appeal to the dance/club culture — out of traditional alphabetical DVD sections and into “cultural zones” to be cross-merchandised with CDs, books and clothing in areas with special-themed d?cor.

The amount of product out there is putting major pressure on limited square footage, Blockbuster's Smith said.“We're becoming more selective,” he said. “The benchmark [for bringing in product] is getting higher.”

Mass merchants' loss-leader pricing has frontloaded sales of DVD, which also keeps shelf space at a premium.

“The first-week sales phenomenon does not bode well for filmmakers and film fans,” said Ted Sarandos, chief content officer for Netflix. If a title is only as good as the numbers it can ring up in one week of sales, it could have an impact on the kinds of movies that get made in the future, he said.

The shelf-space crunch also continues to force more VHS stock off the shelf. Blockbuster may have 5 percent of its stores offering only DVD by the end of the year, Smith said.

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