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