No pause in DVD rental wars
Netflix and Blockbuster one up each other to nab new subscribers
Nor has supermarketer Wal-Mart made much of a go of DVD-by-mail. Wal-Mart moved into the online rental market in 2002, undercutting Netflix with a $17 monthly fee and the expectation that its retail know-how would put the flimsy little start-up to shame. But Wal-Mart, which has a smaller DVD library and is slower to deliver than Blockbuster and Netflix, has had little impact. "For Wal-Mart, this is just another line of business," says Kishore. Indeed, Netflix subscriptions have grown from 700,000 to 2.3 million since Wal-Mart entered the market. "Customers come to us to watch DVD s, then they go to Wal-Mart to buy them," says Hastings, who believes Netflix can be to movie lovers what Starbucks is to coffee lovers. "Our role is to embody the love of movies."
To that end, Netflix, whose subscribers each rent an average of seven movies a month, has developed a ratings system to recommend movies to them. Roughly 70 percent of Netflix rentals are from its library, whereas the bulk of Blockbuster's business is in new releases. To build up its library and increase store traffic, Blockbuster will begin buying customers' DVD s and video games for store credit later this year.
Turnover. Still, Netflix is not without problems. The firm said last week that its churn rate--the percentage of customers who leave and are replaced by new subscribers each month--will probably be at the high end of expectations for the latest quarter. It costs Netflix about $38 to sign up each new subscriber, and marketing expenses have already driven down profits.
The day is also coming when neither the car nor the mail will be fast enough to deliver DVD s. Still, video-on-demand won't come soon or easily. "We're looking at years before downloading movies from the Internet to your TV really makes sense," says Kishore. For now, it still takes nearly as long to download a movie as it does to watch one. Plus, movie studios want to be protected when it comes to profits and piracy, and those issues are unresolved. There's also not much incentive to help the TiVos of the world. A DVD, for example, makes most of its profit during the first three weeks on the market. "With the money the studios are making from DVD s, they're going to be very careful," says McAlpine. "There has never been a better reason to keep the [release] window right where it is."