As DVD stores fade into the sunset, fringe providers grab centre stage

Netflix Inc. is poised to post its first Canadian profit in its short history – just as the last of the country's national movie chains finishes liquidating its inventory.

Since launching two years ago, the subscription-based service has struggled to break into the mainstream, particularly because of distribution difficulties that have kept many popular releases out of its Canadian library.

But the Los Gatos, Calif.-based company said its Canadian operations will be "sustainably profitable" by the beginning of next quarter, a significant milestone in the country's slow shift toward non-traditional rental channels. The news comes less than a week after Rogers Communications said it would stop offering movie and game rentals at its retail stores.

"Even with our continued content investment, we anticipate a small contribution profit in Canada [next quarter]and will remain profitable," the company said. Netflix doesn't release exact Canadian subscriber information for its $8-a-month service, but said it has doubled its base since the same time last year. It credited its increased programming for the bump, especially a content agreement with the Canadian Broadcasting Corp. that has made shows such as Dragon's Den and Arctic Air available on demand.

The news wasn't all encouraging for the company on Monday – it posted its first loss in seven years as it reported first-quarter results, suffering $4.6-million in red ink as content costs increased. Revenue climbed 21 per cent to $870-million.

The company ended the quarter with 26.6 million subscribers around the world, an increase of about three million following its launch in Britain and Ireland.

The combination of streaming video and rental kiosks devastated the U.S. video store industry over the past decade – stores' markets share for movie and tv rental sales fell to about 20 per cent, according to Convergence Consulting Group.

But the services were never seriously marketed in Canada and face content licensing difficulties that have diluted their offerings. Sixty per cent of all movie and tv rental sales in Canada last year took place when someone walked into a store and grabbed a movie off the shelf, according to Convergence.

With a bankrupt Blockbuster Canada officially out of the game and Rogers stepping back, the race is on to build market share.

Rob Hall is probably happier than anyone to see video stores across the country close their doors. But the founder of Zip.ca has one quibble – he wishes it had taken just a little bit longer for the country's bricks and mortar video store industry to collapse.

Services such as Zip.ca – which offer mail-order rentals as well as standalone retail kiosks – were founded with the assumptions that movie stores were doomed. But they didn't expect it to happen so soon.

"I wish they could have held on a little longer," said Mr. Hall, whose company has about 115 machines in Ontario and the Maritimes. "As you can imagine, we have a lot of people asking us for them and a lot of locations wanting them. It's the perfect storm for us of 'How fast we can build them and roll them out?' You'll see us in every province"

While kiosks have made up a tiny fraction of the Canadian rental space, the companies that own them are accelerating their expansion plans. As Zip.ca looks to move across the country, electronics retailer Best Buy wants to double its machines – which are typically found in Western Canadian convenience stores – to 130 by the end of the year.

The dominant U.S. kiosk player, Redbox Automated Retail LLC, has said it intends to expand into Canada but hasn't formally laid out its plan. It has 29,000 kiosks in the United States.

Still, there may be a role for smaller operators that have been struggling to keep up with the industry changes but say they're benefiting from the closing of the national chains. Convergence estimates that independent stores will earn 75 per cent of store-based revenue in 2012, up from about 50 per cent last year.

"There's trouble in the industry, I know that," said Robert Lecuyer, who has run his Ottawa video store for 26 years. "All we can do is take care of our business and get the best films possible ... we're like a museum of movies."

With files from reporter Marina Strauss