Rent-by-mail biz is going digital

Netflix-type outfits looking at new mode of delivery

Netflix may have pioneered the rentals-by-mail business in the U.S. but its European equivalents such as Paris-based Glowria and London-based Lovefilm are aggressively expanding beyond packaged media into the nascent world of digital downloads.

The postal DVD business has attracted major industry interest in France and the U.K. Lovefilm now accounts for 20% of the total DVD rental business in Britain while Glowria has quickly become the No. 1 operator in its home market.

Both companies have recently expanded into Germany — Glowria by the acquisition of two companies and Lovefilm through a start-up in conjunction with Deutsche Post.

Glowria, which claims about 150,000 subscribers in France and Germany, also is partnering with similar services in the Netherlands, Spain and Italy. Lovefilm has acquired a rentals-by-mail operator in Scandinavia and now claims about 400,000 subscribers across Europe.

DVD rentals by mail were initially seen as breathing new life into a largely moribund and piracy-plagued business in the U.K. and spurring an almost nonexistent rental sector in France. Greeted enthusiastically at first by distributors, some are now not so welcoming.

"The difficulty we have with rentals by mail is that we just don't make enough money out of it," says one major distributor, noting how such companies target back-catalog movies rather than new releases.

"They've got a great model there that can turn around a piece of product 50 times or so — you don't get your first choice as a consumer because they're working it from a stock-keeping perspective. If they're buying from us at say 10 and they're renting it 50 times, you can work out how much we're getting per rent. It's not too clever."

Glowria CEO Mihai Crasneanu confirms that DVD rental by mail is a library business. "The long tail really works — 70% of what customers rent on an online DVD rental platform is back catalog and 95% of our catalog is rented every month," he says.

The bad news for distributors is that the consumer is showing a marked enthusiasm for renting again — even if it is now dressed up as an online subscription.

Says Screen Digest senior analyst Helen Davis Jayalath: "Online DVD rentals have the potential to re-energize the sector in France, where it has always underperformed, and Germany, where the video rental shop was traditionally seen as a place where you went for pornography."

She predicts the rentals-by-post business could have the potential to be a very significant part of the market, especially in the wake of the high-definition DVD format war. "Consumers may hold off purchasing the more expensive new discs until they know which format is going to stay the course, but might be prepared to rent them."

But, says Crasneanu, the prize is not just about delivering discs to homes. His goal is to grow Glowria into a cross-platform home entertainment supplier. Rapidly expanding broadband access in France has made the video-on-demand/digital download business a reality.

"The good thing is that people are educated about VOD now," he says. "They buy a PC and get a broadband connection and the first thing they do is look for content. They are ready for it. We had VOD in mind since the beginning. Now it's growing pretty fast but the big issue to address is the depth of the catalog." He forecasts VOD revenue running to several millions of euros for Glowria in 2007.

Lovefilm International CEO Simon Calver also is convinced about the cross-platform approach. "Our whole business model is built on choice. We've got rental, we've got retail, we've got games rental, we've got cinema (tickets for Vue Cinemas), we've got TV and VOD," he says.

Both operators are keen to offer download-to-burn shortly as well, claiming it will unlock the download market.

"People are reluctant to buy if they cannot burn it and (if) they are (not) sure it can play on any DVD player," Crasneanu says. "People love immediacy — they want something now and click, they've got it."

But Screen Digest chief analyst Ben Keen counsels caution on the size of the download business. "Our projection for how this is going to go is that it will start very slowly," he says. "Let no one kid you that it is otherwise."

Neither Calver nor Crasneanu would disagree, both saying that in the midterm at least, DVD will continue to be the driver. In October, Lovefilm mailed a record 107,000 discs out of its Peterborough, Cambridgeshire, distribution center in one day. It is now routinely shipping and accepting 4 million pieces of mail a month.

"Awareness of online DVD rental is pretty low still — probably only just over a third of the country understands what online DVD rental is — and if you think about the brand name Lovefilm, less than 20% of the population would have heard of it," Calver says.

A forthcoming major marketing campaign could change all that. Following a test campaign in Scotland, sign-up rates to Lovefilm are a staggering 200-300 times higher than usual.