New entrants to the online DVD rental business; competition for Netflix (NFLX)? Not really

Includes: MVGRQ, NFLX
by: David Strahlberg

During the past week, two companies announced their entry into the online DVD rental business.  Neither will impact Netflix's (ticker: NFLX) business.

Stelious Haji-loannou, founder of numerous low cost businesses including easyJet airlines (ticker: EJETF), announced the launch of easyCinema in the U.K.  The online DVD rental service will charge about 2 pounds per rental, which is about equal to Amazon's (ticker: AMZN) cheapest rental plan (4 DVDs per month for 7.99 pounds).

Quick comment:  This announcement should not have any real impact
on Netflix (ticker: NFLX) and may even turn into a slight positive.  The U.K. DVD rental market was already very
crowded prior to Amazon's entry and NFLX has already pulled out of it.  In addition, because it is a geographically small country, it takes far fewer distribution centers to service the U.K., meaning that the cost on entry is even lower than it is in the U.S.  This could turn into a slight positive for NFLX if a price war in the U.K. prompted Amazon to abandon the business entirely, but that is very unlikely.

Movie Gallery/VHQ Entertainment
During its March 18, 2005 earnings conference call, Movie Gallery (ticker: MOVI) had the following to say about VHQ's existing online DVD rental business:

…it's a very, very small number of their sales….what we do like about it is their approach has been very frugal, very low-cost… with respect to bringing it into the states right now…the pricing model has been very irrational by some of the other participants in that arena, so we have no intentions of bringing it stateside at this point...

Quick comment:  After watching the brutal Netflix/Blockbuster (ticker: BBI) pricing wars, MOVI intends to remain on the sidelines, or at least north of the border.  There are already numerous online DVD rental companies in Canada, including VHQ's tiny effort.

Both of these announcement underscore what already is well known about the online DVD business model: its low barriers to entry.  The real key to this business is the cost of acquiring customers.  Amazon has a natural advantage in this regard because of its massive online traffic;  easyCinema and VHQ do not. 

(Quotes from the CCBN StreetEvents transcript.)