DVD rental shake-up as stores battle websites

By Gill South

As Hollywood celebrates its annual awards season, New Zealand's movie-rental chains are lauding their successes after effectively seeing off the competition from a trio of upstart online DVD companies.

But this year signals a new shake-up in the movie world, as better technology gives the online companies such as Sky's DVD Unlimited, fatso.co.nz and movieshack.co.nz the ability to better deliver movies straight into the home - not through the mail.

The introduction of online DVD-rental websites has passed by most New Zealanders. About 15,000 are signed-up subscribers to the three websites, which are all unapologetically copycat versions of the grandaddy of them all, America's Netflix.

After three years - DVD Unlimited was the first to launch in 2003, and the other two launched more than 2 1/2 years ago - they have not been what you would call a huge success.

As Video Ezy operations manager Chris Osborne puts it, the company has as many people going into one of its larger stores, so the bricks-and-mortar players are not too worried. Video Ezy has around a million active members in the New Zealand $250 million video rental/retail market.

The online business model is pretty straightforward. Subscribers pay a monthly flat rate for a specified number of DVDs. They are sent these in the post, can return them whenever they like, with no late fees, and they have a choice of 15,000 DVDs. The companies say they want to "be in the game" - ready to respond to looming changes in the market, such as digital movie downloads.

In the US, Netflix is spending US$40 million ($58 million) this year on a new service to deliver movies and television shows directly to users' PCs. They will be in streaming video format built on Microsoft software, rather than as downloads, and films won't be stored on the computer. The service will be available on set-top boxes, television screens and portable devices.

"The market is microscopic," says Netflix chief executive Reed Hastings. "DVD is going to be a very big market for a very long time."

Netflix's success has been largely down to its slick logistics, which our embryonic start-ups are still getting right. Meanwhile, downloading a film is not yet legal in New Zealand, so there is some catching-up to do.

DVD Unlimited is the market leader, brought in to appeal to some of Sky's subscribers, going on 700,000. It is being run alongside the still successful pay-per-view movie channels and is part of a "multi-choice" strategy.

It is just one of the ways for people to watch movies, says Sky's communications director Tony O'Brien - who did not rule out buying one of the newer online companies. DVD Unlimited is "delivering steady growth", he says.

Sky will launch two other ways to watch movies in the next year.

In the second quarter, it will launch videos on demand. The movies will go to its MySky hard drive, and subscribers will be able to use MySky - Sky's $599 personal video recorder box - like a regular DVD player.

Then, early next year, Sky is introducing a "hybrid box" incorporating digital TV via satellite. Films will be downloaded over the internet.

In the meantime, the battle between the video stores and the online players continues.

"The benefit of Netflix and Fatso is they do drive demand in the long tail," says media analyst Michael Carney.

"We see ourselves as a movie gateway," says Fatso managing director and founder Rob Berman.

Berman doesn't think the market will be able to accommodate three players in the end, and he expects there to be consolidation to two long-term providers.

Although there are no industry figures, he thinks Fatso has 35-40 per cent of the online market, Sky's DVD Unlimited has 40-50 per cent and movieshack.co.nz has the rest.

While Fatso has taken software from Australia and made changes, movieshack.co.nz was set up by brothers James and Nick MacAvoy who wrote the software themselves.

Thanks to the hip design of the website, they have been approached by Asian and Australian companies to introduce it there. And there are plans for growth locally.

"We are looking in the next six months at tripling subscribers," says James, with a number of initiatives, including a promotion with ihug.

Progress with the bricks-and-mortar stores is steady with a slight upswing last year, according to Video Ezy. Andrew Cornwell, general manager at Sony Pictures, says the stores are more into retailing DVDs, and that market has some growth to go.

From a distribution point of view, it is now three-quarters retail and one-quarter rental. Years ago, the video market was 95 per cent rental and 5 per cent sales, says Cornwell.

Cornwell brings up the big issue of new disc technology from Blu-ray and HD DVD, which he sees as playing a big role in how people receive their movies. "Physical formats Blu-Ray and HD DVD are important for the future. With Blu-Ray you need 25 gigabytes of data [per movie]."

The key to the new technology, which doubles the resolution quality, is that it takes a lot of gigabytes to download these movies. People could wait overnight to download a movie. It would be quicker to go to a video store, and the studios know this.

According to Chris Osborne at Video Ezy, which has 163 stores nationwide and 45 per cent of the DVD rental market, the company is ready for any eventuality.

It researched going into the online market but decided against it.

"We are keeping a close eye on what is happening overseas. What we are committed to being is the biggest rental channel delivering product. If that means by electronic means, we will be involved."

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