The Future of Video Stores

Economics in the real world!

Tim Clodfelter of the local Winston-Salem Journal wrote a very interesting piece on the future of brick-and-mortar

Tim Clodfelter

video stores and video rental places such as NetFlix and Red Hat.

I happened to be quoted in the article as an economist (the comment about “reducing the average cost every time we watch a purchased video” was supposed to be a joke!), but actually met up with Tim in my role as mom and pseudo-agent!  Let me explain.

My 15-year-old daughter was standing in a very long line of young ladies waiting to audition for the Coen Brother’s remake of True Grit. Tim was there to get the story on the open casting.  I asked him over hoping he would talk to my daughter.  He and I got to talking instead; he found out that I was an economics teacher, and pulled out his notes on the Video Store story.  He ended up talking to me and several other parents in line, all of whom had a different approach to viewing movies.  The resulting article follows with permission to publish on Learning from Dogs.

By Sherry Jarrell

Sunday, December 20, 2009

Winston-Salem

Don’t count video stores out yet

Journal photo illustration by Richard Boyd II

Here are some of the advantages (and disadvantages) of different methods of renting movies:

Independent video stores

Pros: Can have eclectic selection, more personalized service; helps contribute to local economy.
Cons: Few stores left; have to leave home.

National chain

Pros: Large inventory, special offers. 
Cons:
Mostly mainstream titles; declining industry; have to leave home.

Rent-by-mail DVDs

Pros: Don’t have to worry about late fees; large inventory. 
Cons:
Harder to browse; have to wait for movies to arrive in mail.

Vending machines

Pros: Convenient, quick.
Cons: Only mainstream titles; still risk late fees; have to leave home.

On-Demand

Pros: No need for a DVD player; quick. 
Cons:
Limited offerings.

Buying movies

Pros: Good way to build a library of favorite films; don’t have to pay to watch a movie multiple times. 
Cons:
Can get pricey; storage may become an issue; risky with unfamiliar titles.

By Tim Clodfelter

JOURNAL REPORTER

Published: December 20, 2009

Changes in the video industry have led Carol Baker to diversify the offerings at her store, King Video Station in King, in recent years.

“We’re still hanging on,” she said. Her store, which began renting videos back in 1983, added tanning beds eight or nine years ago, and also sells lottery tickets and acts as a payment center for Duke Energy.

“We’ve had to add those things in order to compensate for the loss of video sales,” she said. “For the ones who have ample space, it just makes a good mix.”

But she is looking forward to the holidays, saying that winter is traditionally a busy time for video rentals.

“During the vacation period between Christmas and New Years’ is a good rental period,” she said. “Until that, though, everybody is busy shopping.” Her store also sells gifts cards during the holidays.

If independent video stores are struggling, it’s because there are almost too many options available to consumers.

Once upon a time, the only way to see a movie on your schedule was to drive to the local video store. Now, you can rent movies by mail or watch them in streaming video online or through a device that connects to your TV set. With Redbox, you can rent the movies from a vending machine, many of which are at the front of grocery stores and large retail stores. Cable and satellite have video-on-demand options that offer the latest hits and catalog titles. And many public libraries offer videos for free.

But don’t count video stores out just yet, said Shawn DuBravac, the chief economist and director of research for the Consumer Electronics Association.

“I don’t necessarily see them going away, but their business models are evolving,” he said.

Changing times

The NPD Group, a market research firm, found that video rentals from traditional brick-and-mortar video stores accounted for 47 percent of the rental market between January and October, down from 63 percent in the same period of 2008. Rent-by-mail was 28 percent in 2008 and 33 percent this year; vending machines grew from 9 percent in 2008 to 20 percent this year. The study did not include video-on-demand options.

Video rentals from all sources have declined from a peak of $10.4 billion in 2001 to $8.2 billion in 2008. But the numbers are back on the upswing, said Denis Cambruzzi, the vice president of corporate development at Adams Media Research.

In 2001, traditional video stores accounted for the majority of rentals, with $10.3 billion. That figure dropped to $5.5 billion in 2008.

A report from Adams Media Research found that in 2009 there are still more than 19,000 stores nationwide that specialize in video rentals, a number that declined by more than 3,800 between 2001 and 2008. The number of nonspecialty stores that included video-rental departments, such as grocery stores, fell much more sharply, going from more than 17,000 in 2001 to just 712 in 2008, many of them closing their departments and leasing space to vending machines.

“We’ve seen a tremendous amount of innovation in delivering video to consumers just in the last two years alone,” DuBravac said. “There are different pricing models, delivery methods, and you can pick it up at a convenient location.”

Blockbuster, for instance, added a rent-by-mail service several years ago and is installing vending machines around the country. By the end of 2009, the chain will have 2,500 machines nationwide; by the end of 2010, that number is expected to expand to 10,000, according to Michelle Metzger, a spokeswoman for Blockbuster.

Blockbuster also offers video-on-demand through TiVo and some Samsung devices. But the company remains devoted to brick-and-mortar buildings.

“There’s still something to be said for the family ritual of going to the video store to rent movies,” Metzger said. “We still have over 3,000 stores here in the U.S.”

Independents to chains

In the 1980s, there were a number of locally owned video stores in the Winston-Salem area, such as Action Video and Video Village. Over time, national chains such as Blockbuster, Movie Gallery and Family Video moved in, drawing away their business. Now, only a handful of video stores, most of them chains, remain.

And even the numbers of chains are dwindling. One of Blockbuster’s Winston-Salem locations, on West Clemmonsville Road, closed this year. Another, at North Point, is in the process of closing, selling off its inventory and moving employees to another location.

Kaisha and Kelvin Jones of Winston-Salem were loyal customers at the North Point Blockbuster.

“We’re movie fanatics,” said Kaisha Jones as she browsed through the used DVDs on sale at the store. “We have small kids, and it’s expensive to go to a movie theater.”

She said they have tried Blockbuster’s online rent-by-mail service, but found that they were coming into the store more often.

“They have real nice clerks giving customer service,” she said. “And you run into friends while you’re here. I’m still a people person.”

They use Redbox as a backup, but, Kelvin Jones said, “There’s more of a selection here.”

They plan to switch back to Blockbuster Online, but said that they would miss the store.

Rent by mail

Rudy Schmidt, a retiree from Clemmons, said she prefers Netflix. She said that rental stores “are too expensive, and it’s a pain in the neck to bring stuff back.”

With Netflix, she said, “you can hang onto it as long as you want, and get the movies in what order you want them.”

She subscribes to one of the least expensive Netflix plans, allowing her to rent one DVD at a time for $8.99 a month. She returns one disc and gets the next usually within two days. Options are available for renters to get as many as eight discs at a time, which costs $47.99 a month. But the most common plans are for up to three movies at a time for $16.99 a month.

Netflix started in 1997 and now has more than 10 million subscribers who can access up to 100,000 titles. There are more than 50 distribution centers in the United States, the closest being in Greensboro; if a title is not available at the nearest hub, it will be sent from farther away.

A few specialty video stores, such as Video Vault in Alexandria, Va., offered rentals by mail in the age of videotapes. But rental costs were high because of shipping expenses. DVDs and Blu-rays are much smaller than tapes and easier to mail, which made Netflix and similar services such as Greencine and Blockbuster Online viable.

“Netflix continues to grow, and video stores continue to decline,” said Steve Swayze, the vice president of corporate communications with Netflix. He said that the company has had 28 percent year-over-year growth. Of its 100,000 titles, 17,000 are also available as streaming video.

Rent by box

Redbox, which started in 2004, focuses more on the current hits, with each kiosk holding 150 to 200 titles. The kiosks are found in more than 17,500 locations nationwide, including Wal-Mart, grocery stores and McDonald’s. Rentals cost $1 a night.

According to a company spokesman, Redbox rents more than 1 million DVDs each day. Though most of its titles are new releases, the company says that it does carry some popular classics and children’s titles in response to customer feedback.

Laurie Hardin, a Winston-Salem resident, said she frequents Redbox machines at Harris Teeter stores, combining trips to the grocery store with video runs. She has been using Redbox for six months and uses an online option that lets customers reserve titles before they come in the store.

“I love it,” she said of Redbox. “If they ever took it away, I’d be heartbroken.”

Sherry Jarrell, who teaches economics and finance at Wake Forest University, said she can’t imagine traditional video stores making a comeback.

“Brick-and-mortar stores are having an uphill battle,” she said. “It’s so convenient (online). The availability is higher online and the costs are lower. Once people switch, they never go back.”

Jarrell doesn’t use Net flix or Redbox, but goes with another option: She buys most of her movies rather than renting them. “I don’t like the hassle and late fees,” she said. “I have a big collection, and we like having them and being able to re-watch them.”

Plus, the more times that she watches a movie, she said, the more cost-effective it is to buy it.

DVDs have a different business model than videotapes. Videotapes were initially released for the rental market, with prices averaging $60 to $70 a tape, so stores would buy them to rent out to customers; about four to six months later, the cost would drop to a retail price in the $20 range so individuals could buy them. But DVDs are sold at retail prices, generally $15 to $25, at the same time they come out for rent, making them a more attractive option to buy.

Rent on demand

DuBravac said that the rental world will be undergoing even more change in years to come.

The Consumer Electronics Association expects digital-streaming video to grow more popular in the next few years. Netflix streaming videos can be watched on a computer or on a TV set that is equipped to show Web content, or one that has a Netflix-compatible Blu-ray player or PlayStation 3.

Another streaming video option is video-on-demand, or VOD, which is available through cable services and some satellite providers. Time Warner Cable has seen steady increases in its video-on-demand in the past few years, said George Douglas, the vice president of marketing for Time-Warner Cable’s Carolinas region.

“One of the things that really ramped up use of VOD pretty heavily was when we added free On-Demand,” Douglas said. Those included content from channels such as CNN, Golf Channel and Cartoon Network.

The company now has an average of 5,800 hours of on-demand programming available on 50 channels in the Triad. The average customer, he said, watches four to five video-on-demand programs each month, ranging from music videos to movies.

Despite the changes in recent years, DuBravac said that physical media — DVDs and Blu-ray discs — will remain in the equation whether they are rented, ordered through the mail or picked up at vending machines.

“One thing we know,” he said, “is consumers will have access to more content than they know what to do with.”

tclodfelter@wsjournal.com

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