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Netflix CEO Reed Hastings shows off the company's set top box at Netflix headquarters in Los Gatos, Calif. (Paul Sakuma/AP)
Netflix CEO Reed Hastings shows off the company's set top box at Netflix headquarters in Los Gatos, Calif. (Paul Sakuma/AP)

Netflix to shake up Canadian industry Add to ...

This is one movie that the incumbents in the Canadian video-rental industry would prefer not to see.

Netflix announced on Monday it would bring its streaming online movie rental service to Canada this fall, marking a long-awaited international expansion for the U.S. company, which rents movies there by mail and online.

Netflix's entry into Canada poses a serious threat to players like Blockbuster Canada and Rogers Communications Inc. which, until now, have largely avoided the pricing wars that have decimated brick-and-mortar rental chains in the U.S.

Since it was founded in 1997, Netflix has helped to create an upheaval in the rental market south of the border, kicking off a pricing war aided by automated rental kiosks like the Redbox machines operated by Coinstar. In-store rentals now account for less than half of the rental market in the U.S.

The picture is very different in Canada, where rental stores still dominate the market and generate a steady stream of profits The online movie rental business accounts for just 0.6 per cent of the Canadian market, and kiosks take up only 1.4 per cent, according to Convergence Consulting Group, which tracks the industry.

That will change in the months ahead. Netflix is just the first in a series of challengers looking to take a piece of the $1.3-billion Canadian market for movie rentals.

One such challenger is Zip.ca. At its distribution centre near the Ottawa airport, a worker in white gloves holds a DVD over a machine with a white fabric disc, pressing a button that makes it whirr loudly as it delivers a high-speed polish.

Zip was created in 2004 to be essentially the Canadian version of Netflix's postal service: subscribers pay a monthly fee to receive movies through the mail. When they are finished watching, they return the disc in a postage-paid envelope and Zip pulls another DVD from the customer's Internet wish list of titles and sends it off. Monthly subscriptions range from $11 to $50, depending on how many DVDs a customer wants to have out at a time.

"We have room for expansion, as you can see," said Rob Hall, chief executive officer of Zip's parent company, Momentous, as he gestured around the former FedEx shipping centre that houses the operations.

But whether from a lack of marketing or some other reason, Zip hasn't grown at the speed that Netflix did in the U.S., where it reaches 14 million subscribers. Zip doesn't disclose its membership numbers, but Convergence Consulting estimates its mail business at 50,000 subscribers as of the end of 2009.

"The disruption in the channel in the U.S. is that the value proposition was quite good … mail undercut the store business," said Brahm Eiley, a principal at Convergence. "In contrast to its American cousin, [Zip is]more expensive, and its library is smaller."

Staff at Zip.ca in Ottawa label and stuff envelopes with movie rentals to be mailed out.

Enter the vending machine

Zip is also attempting to compete in the world of automated rental kiosks.

"One-dollar-a-day rental changed the market in the U.S. We're hoping to change it here too," said Zip.ca CEO Scott Richards.

Zip is finishing a pilot project with Metro grocery stores in Ottawa and Montreal, and in the fall will install the machines in 800 Metro stores across the country in a revenue-sharing deal.

Other players in the kiosk space had about 400 units in Canada at the end of 2009, compared with 27,000 kiosks in the U.S., meaning the market is still open for competition.

The new frontier: online streaming

There is no part of the rental business quite as poised for change in the coming months as online.

"Prior to the Internet, any street in America had a travel agency … and you don't see travel agencies that much any more," Netflix spokesperson Steve Swasey said.

The company is pursuing the digital market: On the day the iPad was released, Netflix released an application for the device. Netflix is also coming to the iPhone, and it has put out job postings for developers for the Android mobile platform. It has deals with Blu-Ray disc player manufacturers to connect its online content to TV sets.

Zip.ca also plans to launch an online rental service in the fall, and Cineplex, which dominates the theatrical movie market in Canada, will expand its online DVD store to allow customers to purchase movies for download, or rent a movie in the same streaming format.

"Netflix is starting with zero base in Canada. We have 70 million people coming through our doors annually. I think we understand the movie business," Cineplex CEO Ellis Jacob said.

Cable giant Rogers Communications Inc. is also looking into this side of the business: In addition to its brick-and-mortar rental stores, it has already launched Rogers On Demand Online to allow its subscribers to watch online whatever is available through their cable subscriptions. It is now looking at expanding the service to rent movies online, to complement its video-on-demand service that allows customers to rent through their television sets.

"We basically go where the customer goes," said John Boynton, executive vice-president of marketing for Rogers.

Even as competition heats up, Blockbuster Canada is confident in the strength of its traditional rental business, said Barry Guest, vice-president and general manager.

"The stores still play a prominent role in rental in the Canadian marketplace," he said. Blockbuster is also looking online, though he wouldn't give any details as to when such a service might be available. "It only makes sense for us to deliver our content any way customers would like."

Blockbuster is right to be confident, for now, Mr. Eiley said. But with a host of new competitors, the market could look very different soon.

"We're going to see change in this country ... but give it a couple of years," Mr. Eiley said. "There's going to be disruption."


How Netflix streaming works

Think of YouTube, but with full movies and TV episodes, and not free. Netflix streams content online - meaning you watch as it plays, as opposed to obtaining a copy that lives on your computer.

In the United States, Netflix operates a movie rental service that sends physical DVDs to its members through the mail; the streaming service comes along with that subscription, at a cost of about $9 (U.S.) a month for the cheapest option, which provides one mailed DVD at a time and unlimited online viewing.

In Canada, Netflix will not be operating a mail service. The company has not yet announced its pricing, but one could assume a monthly subscription fee would apply here as well, with the same unlimited online viewing of its movie library.

Susan Krashinsky

Follow on Twitter: @susinsky


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