The day before, it was all over the news that YouTube was in talks with Hollywood studios to rent and view new movies online. This was an interesting development. I’m aware that iTunes and Netflix does this. But, the fact that YouTube was looking at this opportunity as a viable revenue stream meant that it wanted to tweak its ad-supported business model. Which meant that Google was looking to get back into the online video rental business. Incidentally, they got out of it, when they bought YouTube for $1.76bn three years ago. Rather than merely muse about what could be, I’d like to present an analysis (objective mostly & some subjective) on what this means for the industry.
The Online Video Rental market today :
In March 2009, Adams Media Research released a report (Video Rental Report 2009: Innovations Halt Long Decline) which stated the following :
- Traditional transactional rentals at bricks-and-mortar stores would continue to remain the most popular option for renters with a 48% market share by 2013.
- Online subscription is projected to grow 41% to $2.9 billion (~27% market share)
- Kiosk revenue will triple to $1.2 billion (~10% market share)
The 3 points above highlight potentially good news for Blockbuster, Netflix and RedBox respectively.
While the traditional packaged video rental market is projected to remain steady at $8.2 billion through to 2013, digital rental services (Internet download) is projected to grow to $300 million by 2011, a 3% market share.
The overall video rental market is projected to grow to $11 billion by 2013 up from $9 billion in 2007. Technology innovation seems to be the driving force behind the growth of the video rental market segment, providing consumers with more choices and options for video entertainment.
Traditional bricks-and-mortar video retail outlets still seem to have a strong cultural entertainment position in the market. The reason why they still remain a major force in the video rental market is that while price and convenience have a significant effect on consumer spending habits there is a strong “consumer entertainment/experience value” involved when a consumer visits a video store to browse the physical media and explore something new in entertainment. Other than that, consumers can browse online video sites, have DVD’s delivered in the mail, order a movie on-demand on their cable box or go to the local supermarket and get a DVD from a Redbox.
The Digital Rental (Internet Download) Segment :
There are four major players in this space – Netflix, Blockbuster, Amazon and Cinema.now.
Netflix is a subscription service. You pay a monthly fee for a certain number of physical DVDs and can stream all you want on demand during that month. It’s possible to watch a Netflix video stream on your PC or on your TV via a special $99 Netflix set top box or on an Xbox or a new line of LG TVs that will have the technology to get Netflix’s video stream directly. Blockbuster is a pay-per view service – you pay for the video you want to watch. So for those who stream a lot, Netflix is probably a better choice price-wise. While those who rent less often would probably be better served by the pay-per view model. For those consumers, who want more choices there’s TiVo where one can get PPV from Amazon VOD, Jaman, or CinemaNow.
Amazon offers around 40,000 titles for streaming. There is currently a video on demand service provided by Amazon.com which offers television shows and films for rental and purchase. The service became available on September 2006 as Amazon Unbox. In September 2008, the service was rebranded as “Amazon Video on Demand.” The Unbox name still refers to the locally-installed player, which is now optional. Amazon concentrates on new releases, typically charging $3.99 to stream each film.
In Jan 2009, Blockbuster recently inked a deal with rival CinemaNow for technological support for Blockbuster’s digital storefront. Both companies combined their digital libraries under the joint service, to be called Blockbuster Powered by CinemaNow. CinemaNow, a movie download service will now be Blockbuster-branded. While this will make movies bearing the Blockbuster logo available on a new range of devices including TiVo with access to a million households, it does little to advance Blockbuster in the digital realm though CinemaNow’s services will now carry the Blockbuster brand.
Blockbuster had been running their own download service “Movielink” which they acquired some time back. Movielink received funding of $150 million from various studios to build a download service that was supposed to transform digital delivery. But the Blockbuster service was a distant fourth after Netflix, Amazon, and CinemaNow. This was an attempt to increase market share as well as make a technological leap in having 
their products available through a wide variety of outputs like NetFlix. That gives them a big boost in their effort to catch up with Netflix – which is already on TiVo, not to mention Xbox 360, the Roku player, a couple of Blu-ray players, etc.
The YouTube dynamic :
According to comScore, 158 million U.S. Internet users watched online video in july 2009, the largest audience ever recorded. Online video reached another all-time high in July with a total of 21.4 billion videos viewed during the month.
Top 10 Video Content Properties by Videos Viewed
In July, Google Sites (YouTube) continued to rank as the top U.S. video property with a record 8.9 billion videos viewed, making up 42 percent of all videos viewed online. Viacom Digital ranked second with 812 million (3.8 percent) followed by Microsoft Sites with 631 million videos viewed (3.0 percent).
It’s important to understand the nature of the audience viewing Youtube’s videos. The biggest aspect of those videos that we take for granted is that they’re FREE.
Some more statistics from comScore indicate that more than 158 million viewers watched an average of 135 videos each during the month of July. Google Sites surpassed its all time high with 121 million unique viewers during the month (74.1 videos per viewer), followed by Microsoft Sites with 65 million viewers (9.8 videos per viewer) and Fox Interactive Media with 52 million viewers (10.8 videos per viewer).
How will the casual Internet surfer/video watcher at work take to YouTube’s new pay-per view fare? We know that he/she would rather go to Hulu to view TV episodes. According to the online buzz, Google wants to do this only for new release movies which is not necessarily a bad idea. The plan is to run a three-month test of the online service this month.
Typically studio receives about 60% of the revenue from each rental. Assuming that a rental is $3.99, a studio gets $2.40, which means that Google gets about $1 (Assuming that admin, selling, marketing expenses come to $0.59 ) net per video viewed. That’s not bad. It’s hard to gauge the subscriber numbers for Netflix, Blockbuster et al but Netflix did boast that they have a million subscribers who are watching streaming video from them. In any case, with Netflix’s model (You pay a fixed fee for physical rentals as well as online movies), it’s unlikely that they’ll gravitate to a higher cost model of a pay-per-movie that YouTube will have. The real competition to Youtube’s PPV products would be Comcast, Blockbuster, Verizon etc.
Let’s make some further assumptions based on comScore’s data. If 1% of the $150 million visitors to YouTube decide to watch a movie and pay the $3.99 to do so, from the numbers above, YouTube just made a profit of $1 per movie watched. For 1.5 million movies, the math works out to $1.5M net profit. Heck, if 0.5% of the $150 million monthly visitors to YouTube decided to watch the new PPV movies, YouTube would still make a net profit of $750K.
Bottom Line : With increased broadband speeds and the increased integration between electronic entertainment, it’s surprising that YouTube didn’t pull the trigger on this earlier.The potential with the online video streaming market is enormous and should Google decide to go Netflix’s way where they provide unlimited streaming for a fixed fee and provide hardware set-top boxes to aid the viewing experience, Netflix will have to think of newer technologies to meet this threat.
