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New opportunities as brick and mortar video stores disappear


May 12, 2011
By Michael Oliveira | The Canadian Press

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New opportunities as brick and mortar video stores disappear
The video store used to be a buzzing hub of activity, a place guaranteed to be packed on weekends with movie buffs standing elbow-to-elbow casually poring over vast selection of films to take home.

May 12, 2011, Toronto – The video store used to be a buzzing hub of
activity, a place guaranteed to be packed on weekends with movie buffs
standing elbow-to-elbow casually poring over vast selection of films to
take home.

Adam Grant wistfully recalls the glory days at his local shop, where strangers became fast friends over their mutual admiration for a film or a director's work.

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But he fears those days are pretty much over.

There's less excitement now during Grant's still-regular trips to the video store and he frets that his local haunt in Toronto, a Blockbuster store, is on borrowed time given recent news that the chain's Canadian operations were forced into receivership, putting its 400-odd stores in limbo.

"What I really liked about it was the social element, you go in there on a Friday or Saturday night – even a Monday or Tuesday if you're bored – and you could spend an hour or two in there easily, engaging and educating yourself," says Grant.

Blockbuster may not disappear – U.S. creditors are looking for suitors to purchase the Canadian business – but there's no question the industry's best years are behind it.

Rogers (TSX:RCI.B), which owns the second-biggest chain in Canada, saw its video revenue drop by 41 per cent in the first quarter of this year, partially as a result of closing 74 underperforming stores. As far back as 2005, Rogers has been telling investors that it was seeing its rental business decline. In its most recent annual statement, it reported video revenue was down to $143 million in 2010, a 31 per cent drop from the previous year, resulting in a retail-related loss of $38 million. And the company said it will continue to shutter some stores due to a "continued decline" in the business.

And plenty of smaller stores are hurting too. A Vancouver indie institution, Videomatica, recently announced it'll be closing shop in the months ahead after 28 years in business.

Grant, a fan of physical media and collector of VHS tapes, DVDs and Blu-rays, fears the digital world isn't really ready to fill the void should video stores vanish, and he's worried it'll get even harder to find rare films.

The limitless nature of the Internet suggests cinephiles should one day be able to view any movie, any time, much like streaming music services now serve as an enormous virtual jukebox with millions of tracks instantly available. No more having to canvas video stores across town for a hard-to-find title, or being forced to buy a copy because no one has it to rent.

But we're nowhere near that reality yet, especially in Canada.

While Netflix has made major inroads since launching here last September, with 800,000 subscribers now paying $7.99 a month for unlimited access to thousands of movies and TV shows, critics complain that the streaming site doesn't have many new releases and its library is still limited.

Meanwhile, a number of channels exist for renting new releases and older titles online, such as Apple's iTunes, Cineplex and Rogers on Demand Online. Most of the latest movies are available, particularly hit Hollywood fare, but to say there are gaps in the online back catalogues is a huge understatement.

"I think it's a really scary trend that things will go completely digital at some point. A lot of movies could disappear because I don't think the digital service providers will find much point in streaming them," Grant says.

The fear is not completely unfounded, given that digital video represents just a tiny slice of rental revenue today.

The rental video business in Canada – including retail stores, mail-order services and digital offerings, but not TV video on demand products – totalled about $970 million in 2010, down 12 per cent from the previous year, says Brahm Eiley of the Convergence Consulting Group.

Bricks-and-mortar stores commanded a 94 per cent share of those revenues.
Video on demand rentals through TV cable and satellite companies generated another $210 million in revenues in 2010, up 20 per cent over 2009.

Video stores are far less dominant in the United States, with just 43 per cent of the industry's revenue, but their position was eroded as part of a 10-year trend that saw rental kiosks and Netflix's mail delivery service take hold, Eiley says.

Even in the U.S., which has far better access to digital content in terms of the numbers of titles available, the digital share of the business was only about three per cent last year.

"Digital is the future, it's obvious, but it's not reality yet," Eiley says.

Zip.ca, the Canadian company that currently rents videos by mail, is readying its jump into the digital market through a partnership with Samsung to offer rentals through Internet-connected TVs, Blu-ray players and other home theatre products.

CEO Scott Richards also hinted in an interview that the company has a plan to offer an all-access Netflix type plan in the future, although he conceded "it's not in 2011."

He hopes online rentals will complement Zip's current business and help solve a problem that's frustrated customers: long waiting lists to access new releases. If Zip customers really want to see the latest movie they'll be able to – if they're willing to pay the rental fee.

"When a hot new movie launches, we've never been able to satisfy demand by mailing DVDs, we've just never been able to keep up with it, the hotter the movie the more people we've disappointed," Richards says.

But the "sleeper piece" of Zip's strategy is not digital, Richards adds, although it is rooted in a new technology: kiosks. Zip has a fleet of vending machines currently in production that will expand on a pilot project that put kiosks in grocery stores in Ottawa and Montreal. Kiosks are already a huge business in the U.S., with market leader Redbox having deployed 27,000 machines across the country, offering rentals at $1 a day.

Richards expects Zip's pricing will be set at $2 a day for new releases and plans to roll out the new kiosks in the Greater Toronto Area first.

While he believes in digital, he expects it'll take time for mainstream consumers to migrate online and hopes Zip's kiosks will scoop up business where video stores disappear.

"If it turns out that a lot of brick-and-mortar stores start to close there's going to be a huge vacuum that the kiosks are going to play a major role in, as we transition over time to digital," Richards says.

"The majority of Canadians are still taking a DVD and sticking it in a player, that's the most typical thing that still happens, so we're not guessing as to when a tipping point comes (exactly). The factors of what happens to Blockbuster here, the factors of what happens with studio deals in years to come, those will all play factors in how fast we as Canadians adopt digital."

Rogers says it has a theory as to when digital will take over – which it won't publicly divulge – but the transition has clearly begun, says chief marketing officer John Boynton.

"The dramatic growth in video on demand on the cable side, the transfer of some people who want to watch it online, and our explosive growth in the Rogers on Demand Online product is a good indication that customers are looking for way more flexibility than some of the old traditional models," Boynton says.

But the demand to rent physical discs hasn't gone away – and probably won't soon – so Rogers is continuing to fine-tune its stores rather than just shut them all down. In recent years, stores have become customer service hubs for Rogers' different businesses and now carry cable boxes, mobile phones, computer products and video game consoles and games. And, of course, movies.

"The customer doesn't suddenly stop (wanting to rent videos) tomorrow … that doesn't happen," Boynton says.

"These trends happen over time and more and more, more of our effort and emphasis in terms of what happens in that store will start to move more and more to some of the vehicles you're already starting to see take off."

That's good news to Grant, who doesn't look forward to the day that all video discovery is done on a screen.

"There's something to be said for the tangible item in your hand and being able to look at the cover, look at who's in it and what it's about. And I think it loses intimacy when you have to have it just in digital format," he says.

"At the video store you could find a movie to change your life, or change your viewpoint on so many different things.'"