A business that actually thrives in dot-com land

Netflix v. Blockbuster battle looms online

One of the most closely watched battles in homevid centers on a distribution segment so small studio execs consider it a niche business. Yet, it’s promising enough that retail heavyweights Wal-Mart and Blockbuster are trying to download it from market leader Netflix.

So far, however, the dot-com credited with developing the online rental business isn’t feeling the heat. Netflix, which began renting DVDs online in early 1998, posted its first profit in the second quarter. And earlier this week, it reported third-quarter revenue of $72.2 million, up 77% from a year ago, as well as another double-digit subscriber gain, all despite a new lowball subscription plan from Wal-Mart’s online DVD rental operation.

Netflix’s 1.3 million sub base is 74% higher than a year ago, when Wal-Mart launched its pilot online rental subscription program with an $18.86-a-month rate. Wal-Mart now offers a $15.54 option well below Netflix’s popular $19.95 rate, but subscriptions still lag behind, studio execs say. Wal-Mart doesn’t release subscriber data.

Blockbuster entered the business a bit earlier after acquiring FilmCaddy.com, but is considered an also-ran in the online rental biz y, which accounts for about 3.5% of DVD rentals.

Netflix also comes out ahead in comparison tests conducted by magazines like PC thanks to ease of use. Cineastes love its deep selection, and the company has even managed to tap into the niche Indian market with Bollywood pics. “We’ve built a better mousetrap,” says Netflix founder and CEO Reed Hastings.

He acknowledges that Wal-Mart — the undisputed king of brick-and-mortar DVD retailing — is a formidable competitor, but remains confident about Netflix’s ability to survive the challenge. “We’ve always had a lot of doubters. When we started, rental was considered passe. We had people say we would never get to 1 million subscribers. We just keep proving skeptics wrong.”

MGM homevid exec marketing veepee Blake Thomas points out that Netflix has already faced formidable competition from brick-and-mortar rental specialists such as Blockbuster and Hollywood Video, and managed to establish a new consumer dynamic — not exactly the easiest thing to do — with its online subscription plan.

“Netflix has been successful establishing a niche while being smart about how they spend their marketing money,” Thomas says.

DreamWorks homevid head Kelley Avery also praises the Netflix model, but cautions it remains to be seen how much a market there is for online rentals. “We’re really talking about a select customer base,” Avery says.

Hastings projects that the company will earn $1 billion in revenue — from its current $265 million — in four to seven years as DVD continues to gain in popularity. The company also is poised to offer video-on-demand services — but not in the near future.

In the meantime, Hastings doesn’t mind the niche label, pointing out that Starbucks started out that way. “The question is, do you have a good niche? We think we do.”

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