Helen Dickinson on retail: Downloads spell end of movie rental

Marketing 31-Aug-06

Although I'm not a typical customer of the video rental stores, because we have a large library of films on DVD and video at home, it's difficult not to see how dramatically the industry is changing.

The number of high-street rental shops is plummeting as consumers are
finding more comprehensive and attractively priced rental - and retail -
services online.

To look at the high street, where shops are closing, you might think the

rentals market is diminishing, but that would be a mistake: it is

actually growing as more people shift their rental needs to the online
specialists.

From no share at all just a few years ago, online rentals now account
for 25% of the UK market, according to Lovefilm, one of its leading
players. Evidence of how the explosion of online film distribution has
hit the high street can be seen from the failure of retailer
Silverscreen, which went into administration in March, and the fact that
rentals stalwart Blockbuster has added a successful online offering.

Although the high-street stores undoubtedly have convenience on their
side and cater very successfully for spur-of-the-moment rental
decisions, one of their main challenges is that these customers tend to
demand only the latest blockbuster films. Amazingly, as many as 50% of
rental store revenues can be derived from as few as 25 films in the
course of a typical year. This leaves the rentals companies with the
issue of having to deal with vast numbers of the same DVD once demand
for a blockbuster wanes.

Because the online players are catering for a more premeditated rental -
and have massive storage space compared with a high-street shop - they
are able to satisfy consumers' growing appetite for back-catalogue films
and speciality titles much more easily.

While big players in the UK rentals market such as Amazon and
Blockbuster are seeing their online market shares increase, the pure
online rentals model is proving the most cost-effective. The risk of
cannibalisation is minimised - of physical stores in the case of
Blockbuster, and online sales in the case of Amazon.

That it is not so straightforward offering both a retail proposition and
a rental service from the same online store can probably be seen from
Sainsbury's recent decision to end its DVD rental service and
concentrate solely on selling films.

The Sainsbury's rentals offering was provided as a white-label service
by Video Island, which merged with Lovefilm earlier in the year, in a
move that created one of the leading online rentals companies in the
UK.

Although it could be argued that the online rentals market is relatively
immature, such is the fast pace of technology that its postal-delivery
method looks likely to be superseded by more advanced forms of
distribution in the future. Films are being downloaded through TV
service operators such as Sky and NTL, for example, which must represent
by far the most convenient method of delivering films to consumers.

Although these services are in their infancy, and currently represent
only a small fraction of the film rentals market, take-up is bound to
increase as the technology develops - rather as the music industry has
seen with downloadable music that is gradually replacing the physical
purchase of CDs.

Once download services begin to offer a fuller array of titles, they
will undoubtedly affect the mail-order rentals sector. The part of the
market that is currently growing the fastest will then start to shrink,
which gives some indication of just how fast this part of the retail
market is moving.

Because the future is very much dependent on the advances of technology
as well as the fundamental retail skills such as buying, merchandising
and marketing, it makes it even more difficult for the industry to
predict just where things are going in order to adapt their
businesses.

- Helen Dickinson is head of retail at KPMG

30 SECONDS ON ... SKY BY BROADBAND

- Sky's movie download service was unveiled - alongside a broadband
sports offering and the Sky by Mobile 3G service - in January.

- At launch the service offered 200 films for free, legal download. The
company said it intends to make 1000 of its back-catalogue films
available for download in due course.

- Sky by Broadband's movie offering is available free to consumers who
subscribe to Sky Movies 1 and 2 via Sky Digital and have broadband
internet access and a PC running Microsoft Windows XP.

- Once the subscriber has downloaded the film, that file remains in
their 'library', usually for 30 days, during which the subscriber can
watch the film as many times as they wish. At the end of the licenced
period, the file is automatically deleted.

- The films can be watched only on the PC they are downloaded to; users
are barred from burning them to DVD.

- Account-holders can fix parental control settings based on BBFC
certifications.