Today's New York Times has a good overview article on the online DVD industry:
nytimes.com
December 26, 2004
SPENDING
More Companies Say, 'The DVD Is in the Mail'
By EVE TAHMINCIOGLU
SUSANNE MORTON enjoys watching movies, but she gave up renting DVD's from her local video store because she could never get them back on time and ended up paying late fees of as much as $15 a month.
But in May, Ms. Morton, of Baltimore, signed up with Netflix, the online DVD service, at the urging of two co-workers at the University of Maryland, where she works as an assistant professor of physical therapy in the graduate school program.
For a flat fee of $22 a month, she was able to rent up to three movies at a time, with no monthly limit, and have those films mailed to her, postage paid. And the best part: no late fees. "I decided to use their free two-week trial and see how I liked it," she said. "I ended up canceling cable and becoming a permanent subscriber to Netflix."
Ms. Morton, 32, is one of a growing number of consumers who, irked at forking over hefty late fees, are signing up for mail-order services. Americans paid about $1.3 billion this year in late fees, said Tom Adams, president of Adams Media Research, a market analysis firm in Carmel, Calif. He said 4.7 million Americans will have subscribed to a mail-order DVD service by the end of this year, and he predicted that number would jump to 17 million by 2009.
Netflix, based in Los Gatos, Calif., created the industry in 1999 and still dominates it. The company expects to end the year with 2.5 million subscribers, up from 1.48 million a year ago, said Reed Hastings, the chief executive, who came up with the concept after having to pay a $40 late fee for an overdue rental of the film "Apollo 13" in 1997.
The mail-order system "is a dramatically better value for consumers," he said.
And the value has gotten even better now that more companies, including Wal-Mart Stores and Blockbuster, have moved into the industry. In October, a price battle ensued as rumors circulated that Amazon.com might enter the market. Netflix lowered its monthly fee to $17.99, and Blockbuster, which started its mail-order business in August, quickly lowered its monthly fee from $19 to $17.50 and then, last week, to $14.99 - and also recently eased its in-store late fees.
Blockbuster's online offer is unique in that it comes with two free in-store rentals a month. Wal-Mart, in the market since June 2003, dropped the price of its three-DVD's-at-a-time plan, which also permits unlimited monthly rentals, to $17.36 in November, down from $18.76. It offers a four-DVD plan for $21.54, and a two-DVD plan for $15.54, its most popular.
How low will prices go? No one is ruling out further price reductions. "It's something we are always continuing to evaluate as we review the changing competitive landscape," said Amy Colella, a Wal-Mart spokeswoman.
If competition intensifies, prices could fall again while variety is likely to expand, Mr. Adams said. Amazon.com is mum about any plan to enter the market in the United States. But it introduced a service in Britain earlier this month. "We are in a good position to offer online rentals in all our geographies," said Jorrit Van Der Meulen, director of subscriptions for Amazon.com, based in Seattle.
Here's how the typical mail order service works: a customer signs up online and creates a list of movies in order of preference. The DVD's, two to three at a time depending on the service, are then shipped to the customer's home in that sequence, depending on availability. The DVD's (the largest three companies do not rent videocassettes) come with return-postage-paid envelopes that the customer can use to mail the film back. In a day or so, the online account is updated to show that the DVD has been returned, and the next film on the list is mailed out. Most services notify customers via e-mail when movies are shipped and returned. Movies can be returned all at once or one at a time, because separate return postage is provided for each film.
Deciding whether mail-order rentals are cost-effective is simply a matter of reviewing your DVD viewing patterns. If you rent two new-release movies a week from a video store, at the national average price of about $3.50, your monthly cost is $28, plus any late fees. A mail-order service for under $18 might make sense.
If you rent just two or three DVD's a month, a subscription service is probably not right for you - unless you want the convenience of home delivery, or you often rack up late fees.
For most consumers, monthly subscription services are probably not a great deal, said Michael Goodman, senior analyst for the Boston-based research firm Yankee Group. "You have to rent five movies a month, and that's a fairly heavy rental schedule. Just to break even, we're talking 60 movies a year. Are there 60 movies a year you want to watch?" Also, if customers keep the same DVD's the entire month - or even two or three months - without returning them, their credit cards continue to be charged, even if no new films are shipped.
Mr. Goodman said video-on-demand might overtake online DVD rentals in five years or so, and most mail-order companies are already looking into migrating into the on-demand technologies that will allow consumers to view movies on their TV or computer screens instantly after downloading them from a central server.
In the meantime, some traditional store-based video stores have updated their late fees. Blockbuster recently announced that it would change its late-fee structure as of Jan. 1, and add a one-week grace period to all in-store rentals. But if the movie is not returned after that week, Blockbuster automatically sells it to the customer, who has 30 days to return it and get an account credit, minus a "restocking fee" of $1.25.
Under its current store plan, Blockbuster charges an additional rental fee, generally about $3.99 plus tax, for each rental period (usually two days) that a new release is overdue.
Timing is crucial in making online DVD services worthwhile. Customers must be diligent about mailing the DVD quickly to get new DVD's shipped by the time they want to watch them. Most services will have a new DVD in a customer's mailbox two or three days after the old one is returned.
Despite the lack of immediacy, Ms. Morton of Baltimore said she enjoyed her Netflix plan. "After I select a movie I like, they recommend other movies of similar type or with the same director or actor that I may not have ever heard of," she said. "I find movies that I'm interested in more easily than I would at the rental store." |
