Gautam Malkani

Walk into any Blockbuster video rental outlet and it is not hard to identify the big releases of the moment. This month, the stores have been practically wallpapered, shelf upon shelf, with video and DVD copies of The Last Samurai, the Tom Cruise epic chronicling the demise of the Japanese warrior tradition

Ominously, the film’s release on video last week coincided with Blockbuster’s launch of an alternative film rental service that has prompted observers to start chronicling the demise of another tradition – going to the video store.

Blockbuster has joined a growing list of companies offering customers a revolving selection of DVDs through the post in return for a monthly subscription. The model has proved successful in the US: it also emerged last week that Netflix, the company that pioneered the service in 1998, is considering expanding into the UK after generating $272m (£154m) of revenues last year from a subscriber base of 1.49m.

After watching Netflix challenge traditional rental stores in the US, Blockbuster appears to recognise that even multiple images of Tom Cruise lining the walls cannot smooth out the common problems of finding a parking space; limited selection; queuing; the couple with chronic indecision; the juvenile with no proof of age and the fumbling when you find that you have forgotten your membership card.

The two companies’ attempts to bring the revolution to the UK rental market presents a challenge for a small start-up company based near Clerkenwell in London. Video Island was formed two years ago by a former Microsoft executive hoping to import the Netflix model to the UK.

After £2.5m of investment from its founders and from Benchmark and Index Ventures, the venture capital firms, Video Island will not disclose the number of subscribers to its own website. But if it were just a copycat website, the developments last week at Blockbuster and Netflix would probably herald the company’s early downfall.

Unlike other DVD subscription outfits, however, Video Island’s rental website comprises only part of the company’s business. The other, more compelling part, is a “white-label” service it provides for well-known consumer brands that sound like much more credible adversaries to the likes of Blockbuster. Video Island provides the infrastructure for the service, but the brands the consumer sees belong to its partners, such as Tesco, MSN, Comet and Toys ‘R’ Us. All of them have signed with Video Island in the past four months amid the bubbling interest in DVD subscription services. The partnerships have contributed to 75 per cent month-on-month revenue growth in the three months they have been operating.

“If all we were doing was trying to replicate Netflix or Blockbuster this wouldn’t be that interesting,” admits Saul Klein, the 33-year-old chief executive and co-founder. “But the dynamics of the entertainment industry have changed in the last few years. It’s not just the entertainment companies that offer entertainment services any more, so we are also seeking to accelerate that trend.” Through its various partner brands, the company claims to have more than 20 per cent of the British market for online video rentals, including DVDs.

Mr Klein has no qualms about borrowing other people’s business models and brands. “There’s no point trying to be a hero and creating a new brand and a new business model with a new customer proposition,” he says. “Netflix defined the service so the cat was out of the bag in terms of the business model.”

But as well as providing a bolt-on entertainment subscription business for non-media and entertainment companies, there are other reasons for Video Island’s white-label approach. Not least is the sheer cost of starting a new brand. “Our expertise lies in defining and delivering this service, not necessarily marketing it to the end customer,” he says.

He also points to the importance of reaching the mass market rapidly. “Our strategy is to offer this to the mass market through mass market brands. Our existing partners allow us to reach 5.9m online customers and it’s going to be expensive for [Blockbuster and Netflix] to reach that number of online shoppers cost-effectively.”

Tesco, which launched its service with Video Island in March, also cites the need to start a service fast and cost-effectively as one reason for entering the market through a partnership. “We observed a growth business in the US and looked for the best partner around,” says Laura Wade-Gery, chief executive of Tesco.com. She likens the arrangement to Tesco’s partnership with Royal Bank of Scotland, which has helped the supermarket group enter the personal finance market.

As a result of its partnership model, Video Island’s website and the third-party websites it powers are variations on each other. Users compile a wish-list from a selection of 15,000 film titles. Depending on the specific subscription package, customers are sent a rotating batch of three titles for a monthly fee of about £15, with their selection replenished from the list every time they post a DVD back in a pre-paid envelope. There are no “due back” dates and so no fines.

Mr Klein is also aware of the potential threat the rising popularity of DVDs poses to pay-per-view film channels on TV, especially as he does not believe digital TV or broadband internet connections will be able to offer as wide a selection as his service for some years to come, if ever: “We think of this as the common man’s video-on-demand because it’s here today, whereas people have been talking about video-on-demand for 10 years.”

But he is careful not to overstate the competition, and argues that pay-TV channels, DVDs and now postal subscription services should increase the film- going audience rather than carve it up. “We’ve got a business that’s designed to partner with these guys [TV channels and film studios] as opposed to designed to compete. If you are a movie fan, the way you access a film is less relevant. So if as a business you offer movies, you should be interested in offering them in every window [from cinema, to TV to DVD rental].”

Stephen Foulser, commercial vice-president of Blockbuster UK, agrees. “I don’t think we are cannibalising our high-street business; the outlets only reach about 55 per cent of the UK population. Also, the online subscription service is niche – it’s for heavy renters and people with busy lives.”

In Blockbuster stores, another image is now as ubiquitous as Tom Cruise – that of Uma Thurman gracing the DVD covers of Kill Bill, the Quentin Tarantino film that depicts a more modern kind of Samurai.

NO COMPANY IS AN ISLAND IN THE SEARCH FOR
NEW WAYS TO REACH CUSTOMERS

Hollywood has always taught the importance of getting into bed with someone with a big name. Video Island has followed this advice, forming partnerships with well-known consumer brands such as Tesco and MSN, which has drastically cut the marketing budget it would have needed to reach potential customers alone.

Saul Klein, chief executive, highlights the difficulties of going it alone by citing Amazon and Netflix as the only companies to have built long-term businesses combining the internet with retailing from scratch. Laura Wade-Gery, chief executive of Tesco.com, adds: “You’re paying your money up-front to someone whom you are then trusting to send DVDs out of thin air, so it’s helpful to be working with a name that people know and trust.”

For Tesco and the other consumer brands, the partnership model makes it possible to launch the service in a much shorter time, as well as giving them access to technical expertise.

Suppliers such as film studios are often apprehensive about new distribution mechanisms, so rental companies need to make sure there are benefits for them too. “The studios love this because it helps people go back into the catalogue,” explains Mr Klein. “When you offer ‘The Last Samurai’ you can also showcase the whole Tom Cruise catalogue. When was the last time you saw a Blockbuster store showcase a copy of ‘Risky Business’?”

While a new venture needs to grab market share from wherever it can, there is no need to make enemies out of everyone. For example, Video Island markets its service as a complementary opportunity, not a threat, for pay-per-view digital TV movie channels. A collaborative effort might even help enlarge the potential market.

In a similar vein, even your direct rivals can benefit your business if you are both promoting a new service that requires a change in consumer behaviour.