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Last Updated: Wednesday, 22 March 2006, 23:22 GMT
The online DVD rental war
By Will Smale
BBC News business reporter

DVD sent out by online rental firm
The online services all pay the first class postage both ways

A sea-change is taking place in how people rent DVDs, and it appears historic market leader Blockbuster is having to work overtime to catch up with its newer rivals.

Over the last year, there has been an explosion in the popularity of renting DVDs via the internet.

Most providers offer a broadly identical service. For a monthly subscription fee, your chosen DVDs are mailed out to you, and once you have watched a film, you simply post it back in the provided pre-paid envelope.

There are no walks to and from your local DVD store and no late fees.

You simply manage your account from your provider's website, adding extra titles to the list of DVDs you wish to watch next.

As soon as you send back the DVD you have just watched, another from the list is automatically posted out.

And as there are no stores to put a physical limit on the amount of DVDs available, the biggest providers offer you a choice of more than 53,000 different titles.

Changing market

Such is the ease and convenience of the service that from a virtual standing start in 2004, it is predicted to account for almost two-thirds of overall DVD rentals in the UK by 2009, according to independent media market research group Screen Digest.

Blockbuster store in Dallas
Independent figures suggest Blockbuster's stores will be squeezed

Online renting is also proving equally popular in the US and continental Europe.

For specialist online DVD rental firms such as the UK's Lovefilm, which enjoyed a 530% rise in business last year, all this is marvellous news.

But for Dallas-based global rental giant Blockbuster, which has dominated the industry ever since the first days of video cassettes back in the 1980s, the new way of renting DVDs via the internet has posed a few problems.

Blockbuster now has its own popular internet renting service on both sides of the Atlantic. But critics say it was slow to react to the change and has had to play catch-up ever since to US online rental market leader Netflix and the UK's two leading firms - Video Island, owner of Screenselect, and Lovefilm.

Unlike its new competitors, Blockbuster also has a network of tens of thousands of traditional High Street outlets to think about, including 720 stores in the UK.

While its new rivals simply operate from anonymous warehouses, thus keeping their overheads to a bare minimum, Blockbuster still has to pay for the upkeep of all its shops.

Shops which, according to independent market research, are going to see a sharp decline in their revenues.

Numerous brands

Blockbuster is insistent that the future will be a happy "symbiosis" between both its traditional stores and online operations, but it has yet to convince its investors.

Screenselect - 200,000
Lovefilm - More than 120,000
Blockbuster - Not revealed

So much so that its share price has halved over the past year.

And while Video Island and Lovefilm are happy to talk about their current subscription numbers in the UK - 200,000 and 120,000 respectively - Blockbuster says it cannot reveal its own figure.

Lovefilm and Video Island - which are both backed by private equity firms - have also further cemented their domination of online renting by running the services of other providers.

Video Island operates Tesco, ITV, MSN and Easycinema's operations; while Lovefilm handles Sainsbury's, WH Smith, CD Wow and Film Four's services.

"Online-based DVD renting isn't rocket science, but it is one of those great new services that is so convenient, it really adds to people's lives," says Lovefilm's marketing director Simon Morris.

"Our warehouse is now sending out in excess of a million dispatches a month.

"Put it this way, I wouldn't want to be in that business [renting DVDs from stores] - everything has its day."

'Complementary businesses'

Alistair MacRow, managing director of Blockbuster Online in the UK, points to the number of independent awards it has won for the quality and ease of use of its service.

LoveFilm's distribution warehouse
The new online rental firms operate from larges warehouses

"I believe we invest more money in our service and buy more copies of each DVD than other providers," he says.

"And we are very proud to be one of the main drivers of this new market."

Mr MacRow insists that the online service will complement, rather than take business from, Blockbuster's physical stores.

"For many people, there will still be no substitute to walking into a Blockbuster store and picking up a DVD," he says.

"The online service is fantastic for major film watchers, but DVD rental is not a frequent habit for the vast majority of people who only rent a DVD about three times a year, and only make the decision within four hours of taking one out.

"We also find that people who start to rent online also continue to come into our stores.

"The customers are the most important thing at the end of the day, and while online helps us reach new customers, the store model will continue to satisfy a great many people."

Blockbuster's future share price should show which way things turn out.

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