An industry merger has set it up for an eventual move into digital downloads, but DVD rental company Fatso is relaunching to take advantage of an increasing move towards subscription services.

Fatso, Movie Shack and Sky-owned DVD Unlimited all started in New Zealand in 2004 but struggled for a share of the pie with a business model that was still in its infancy.

All had a vision of attracting subscribers who would get DVDs sent direct to their homes.

The companies merged at the end of 2008 and became Screen Enterprises Limited, with Sky TV taking a 51 per cent share and Westside Media (Fatso) and Movie Shack as minority shareholders.

A new-look website has been five months in the making and will be launched next month with extra content and a recommendation engine.

The merger has seen the list of available DVD titles grow from 20,000 to 27,000, and Fatso's customer base increase from 10,000 to 20,000. The company also now has the biggest selection of rental Blu-ray Discs in the country.

Fatso owner Rob Berman is general manager of the new company, with 25 full-time staff.

"As an owner-operator I had my finger in all pies, but working with Sky has given us more oomph to call on others," Berman said. "They've provided support with accounting and human resources and helped increase brand awareness."

Video shops still dominate DVD rentals in New Zealand and Fatso holds only a 5 per cent share of the market.

Even so, stores around the world are struggling, with 30 Video Ezy stores going down the tubes in New Zealand in the past four years.

The tough times have been particularly evident in the United States, as witnessed by the demise of Blockbuster and the growth of web-based Netflix. The online American rental company offers on-demand video streaming over the internet and online video rental of DVDs by mail. It started its subscription service in 1999 and now has 10 million subscribers.

Berman said he hoped Fatso would follow Netflix's lead by fitting within Sky's iSky service if an additional option for non-Sky subscribers was created.

"There's a potential for us to move within that service or utilise the platform Sky has developed. So instead of being shipped movies, people could watch them live via the internet as well."

But challenges such as New Zealand's slow broadband speeds needed to be overcome before mainstream digital streaming was possible.

Some Sky subscribers could already watch movies on their PCs through iSky, but it would take up to 10 years before 75 per cent of the country could access ultra-fast broadband, he said.

Some devices in New Zealand could already access on-demand movies through tools such as iTunes, but the choice was limited. Despite the growth of streamed content in America, physical DVDs would be around for another 10-15 years at least, Berman said.

"Big movies are released to DVD first. The retail revenue is huge and nobody wants to undercut that model."

The key with online streaming was to come up with a way to watch content on your TV, something Sky was working on.

"Most people aren't interested in watching content on the computer screens. It's a solitary versus shared activity."

CHEWING THE FAT
* Fatso merged with SKY TV and Movie Shack in 2008.

* The new company, still called Fatso, has a third more DVD titles, and has doubled its customer base.

* Fatso pricing plans range from $9.95 a month for two DVDs (one at a time), to $37.99 for an unlimited number a month.