The future of DVD rentals

Vending machines are the new (or are they the interim?) distribution channel for DVD rentals. Market leader Oovie—which was bought by Hoyts in 2009—and market challenger Video Ezy Express are battling for the business of Aussie movie renters.

But are they fighting the wrong fight?

It is clear that the DVD rental market is suffering at the hands of legal online distribution channels—such as iTunes and Netflix (coming to Australia soonor maybe not)—and illegal online downloads. Blockbuster, the world’s biggest movie rental company, filed for U.S. bankruptcy in 2010 due to the pressure put on it from alternative distribution methods.

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So why are Oovie (soon to be renamed as Hoyts Kiosk) and Video Ezy Express playing in the DVD kiosk space?

Well, firstly, Oovie added over $1 million profit to Hoyts’s balance sheet this year.

While these DVD rental vending machines are still relatively new, they are popular. Some of the busiest locations (like the one at Vogue Plaza on Chapel Street, South Yarra) rent in excess of 70 DVDs per day! At $3.50 per rental, that’s nearly $250 per day in revenue. And for a kiosk style business, the overheads a quite low. Rent for a 2m × 2m block of space is significantly less than shops with large floor space. There are no staff wages to pay. And, once you have the system set up, it’s basically self sufficient.

Because of these operational benefits, DVD kiosk’s offer two benefits to consumers: price and convenience. New release movies are priced at $3.50 per night at Oovie, half the price of conventional new release movie rentals. The service is quick and easy, with no membership required. Customers simply swipe their credit card and keep the movie for as long as they desire (keep in mind rentals cost $3.50 per day). Customers can also rent and return these DVDs to any of the thousands of locations Australia-wide. Common locations for kiosks include shopping centres and supermarkets. In fact, Oovie has a strategic alliance with Woolworths who loves hosting them because they bring in extra snack purchases for the supermarket giant.

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Earlier this year, Franchise Entertainment Group (FEG)—parent company of Video EzyBlockbuster and EzyDVD operations in Australia—invested $15 million setting up Video Ezy Express, their DVD kiosk offering. This is likely in response to slowing DVD rentals through traditional video stores. Analysts predict hundreds of video stores to be closed down over the next few years under the pressure of new distribution methods. Understandably, FEG is future proofing their retail business.

But surely FEG must know the physical distribution of film media is slowing and moving online? They have had years of experience retailing DVD rentals to consumers in which to observe this trend. Unless, there’s a hidden strategy behind these DVD kiosks …?

It does seem Hoyts has a hidden motive behind Oovie. Hoyts is pursuing DVD kiosks to gain market share which they will attempt to parlay into subscribers of their forthcoming Hoyts Stream service. But this seems like a pretty risky strategy.

Video Ezy Express’s long term strategy? Who knows.

The future of film entertainment is clearly headed in the direction of streaming movie services or on demand digital downloads (possibly both). The expansion of Australian 4G mobile networks and the National Broadband Network (NBN) are sure to make Australia a prime choice for these kinds of services.

In a 2011 interview with Oovie’s co-founder Ian O’Rourke, the question was asked about what effect digital downloads would have on Oovie’s business model. O’Rourke agreed that “… all entertainment will [eventually] end up being downloaded … [but] it will be a few years before there is mainstream adoption of video on demand. We’re capitalising on a window that’s open at the moment.”

At least Oovie realises their business model is likely to dry up soon. FEG managing director Paul Uniacke’s opinion of the digital downloads model is that: “It’s not profitable.”

What do you think? Are DVD kiosks too little, too late? Or, is there a bigger strategic move at play here? How much longevity is left in this market?

18 Comments

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  1. Matt says:

    I dont know how profitable they will remain. Even discounting the rising digital downloads, the oovie in Vogue Plaza has had a Video Ezy Express installed right next to it which would most likely lead to price competition as it is essentially the same service they are offering (once Video Ezy get the same level of saturation as Oovie, that is). And there is only so low these already cheap offerings can go . . . .

    • Adam Jaffrey says: (Author)

      Thanks for your comment, Matt.

      Isn’t that the great thing about the move towards digital content, though? There is almost no minimum price since the cost of distribution is virtually zero. This can only be good for consumers.

  2. Jessica says:

    In Australia I think there will still be a market for DVD kiosks for at least 5 years, because outside of the major cities, the internet sucks. Not everyone has access to the internet, or enough internet to download what they want. Plus some people are too lazy or simply don’t understand how to hook their TVs up to watch the downloaded content. Older people in particular are very hesitant to move to anything that involves credit card details online and they are often tech-averse so they avoid downloading in favour of hard copy. Considering that Australia has an aging population, I’d imagine there will still be demand for physical DVD kiosks for quite some time. But then again, they say the over 50s are the biggest growth area for iPad sales too, so maybe you can teach an old dog new tricks.

    Strategically, it could be a move for these businesses to build brand awareness and loyalty to ease the transition into an online rental system.

    As for Australia improving the 4G network and NBN, I think that will again only benefit major cities and certain areas. I know that where my parents live, NBN will have zero impact because the network will still run on copper lines, not fibre optic.

    • Adam Jaffrey says: (Author)

      Jess, I guess what you’re talking about is that “… window [of opportunity] that’s open at the moment”, which I discuss in my article. But, there will come a time when the physical distribution of media becomes obsolete. You are right though, that time it is probably longer than expected.

      I agree that there could be a larger strategic move for these companies. I did alude to Hoyts pursuing a DVD kiosk strategy in order to leverage that market share into subscribers of Hoyts Stream, down the track. I question whether this is a solid strategy, though.

      Regarding the NBN, fast broadband access will reach the majority of the population. Couldn’t you argue that these are the people you’re trying to access with services like streaming/on demand media, anyway? Maybe it doesn’t matter that the NBN won’t impact rural areas, since you said these people don’t seem to be interested in streaming media. They are outside the target market for on demand media.

  3. Alex says:

    Was talking to a mate who works at Telstra the other day about this and this is the kinda conclusion we came too.

    The biggest problem for Australia with streaming is the internet. No doubt it’s getting faster and download limits are increasing, but so much content is hosted overseas and we’ve only got a few big cables that go out of australia and expose us to the world. Not so much the cables that are limiting us, but more where the cables go.

    Whenever we access content overseas, telco’s have to pay for line rental to foreign companies who own the infrastructure there. If someone in New Zealand access something in Australia, same deal, a company here gets money, but that’s a lot rarer. Hence the concept of “time” and “download” limits were created, to limit people’s use of other company’s infrastructure.

    So the solution is, to create a server in Australia to take all the Australian visitors and that’s what a vast amount of companies do. Youtube, Facebook etc. all have Australian servers, but they were all services that were released in a foreign country first and became popular enough to warrant the investment in Australia.

    Streaming entire movies in HD from America to Australia just isn’t incredibly possible to do to help start up the business when you factor in licensing costs for all the content to be shown in another country, its a huge amount of hassle…

    Since we don’t really have an incredibly large population, the 5-10% of us who are incredibly “tech-savvy” and would jump all over Netflix or other services if they came to Australia, really don’t represent a solid investment for many streaming services to setup and maintain servers, licensing etc to be incredibly worthwhile…

    Sucks, but we gotta wait until the entire population is caught up more and we might need to suffer through some incredibly bad services first, or even an alternative mail or other delivery service (like these vending machine rental services), before a company gains enough public awareness and capital to warrant moving to streaming based model.

    • Adam Jaffrey says: (Author)

      Very interesting insight, Alex. This will be a perpetual problem because the majority of the western world’s content is made and hosted in the U.S.

      I think Australia’s biggest hope for on demand media will come from a large company expanding from overseas. There has been talk of services like Netflix expanding into Australia (or, not …). The benefit these established companies have is they already have capital to invest, they already have relationships with content owners which they can leverage and they have expertise in the delivery of digital content.

      You have made some fantastic points in your comment! Hopefully this all comes to fruition sooner rather than later.

  4. Mum says:

    Very insightful – Mum xx

  5. Veronica says:

    Hi Adam,
    I enjoyed reading your post and I want to ask you one question are the barcodes free from any sort of spoofing? If so then certainly this idea is awesome.

    • Adam Jaffrey says: (Author)

      I’m not exactly sure what you mean, Veronica. This article analyses the business and strategic elements of DVD vending machines, not the usability factors.

      • Yas says:

        Hi Adam,
        I think the bricks and mortar stores will probably last three years. FEG is being very ruthless and shifty with both their VE and BB franchisees – bullying them into investing in kiosks. There is still purchasing of DVDs involved, coding them, lease of machines, 7% charge to banks per cc transactions plus the franchise fees. The returns might not be worth the headaches but FEG are being very aggressive with the franchisees – wasn’t long ago that the FEG head honcho ridiculed kiosk model in TV and six months later changed his tune. Lack of foresight, greed on part of FEG and the DVD distributors – who refuse to acknowledge the pressure mom and pop stores operate under – plus have shown their impotency when dealing with illegal downloading problems – will eventually sink the industry – which is a big shame.

        • Adam Jaffrey says: (Author)

          Thanks for the comment, Yas.

          I don’t know whether that’s entirely true. Maybe they’re just responding to market pressures? Maybe they’re responding to consumer wants and needs? That is, after all, how businesses become successful.

  6. Greg Meier says:

    Hello, my name is Greg and I have been in contact with FEG about buying a kiosk, as a franchisee. What are your thoughts on having the best success in doing so.

    • Adam Jaffrey says: (Author)

      Hi Greg, thanks for checking out my article!

      Based on the discussions in the comments here, it would be wise to look for areas with less tech-savvy consumers (possibly less affluent areas, but that might not be true) and maybe areas with low broadband penetration.

      You’d obviously also want to look at things like foot traffic and competitors in the area, too.

      Hope that helps!

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