In the words of the chief executive of Lovefilm Simon Calver the high street film rentals market has "completely imploded" with 50 per cent less stores trading today than a mere two years ago as consumers continue to flock online to hire their movies.Speaking at the First Tuesday 'Retail Revolution' event in London this week Calver said there are simply more attractive options online for film fans, with the internet now accounting for 45 per cent of the total rentals market, as it provides a platform for more choice, greater convenience and better value-for-money.
But he added that people often forget that the online model also has a number of other desirable attributes that make it particularly attractive to merchants - it has an impressive cash conversion cycle, the subscription model ?is a thing of beauty? when done correctly, and the management of inventory can be handled so much more efficiently than within a store estate.
Although questions about the longevity of the business model of companies such as Lovefilm (that mail-out physical DVDs to people's homes) have been raised, as result of downloads now starting to gain traction and garnering much media coverage, Calver remains unworried.
He takes the view that there is still much mileage to be had from the physical DVD market because before downloading becomes a mainstream activity there has to be a shift in what is actually available online to download and for the development of successful business models. And Calver reckons that consumers are likely to be in need of help during the transition - especially as the industry is awash with acronyms for various download services including DTO, DTR, DTB and SVoD.
But he acknowledges that downloading is inevitable: ?Most things people watch online are short, viral and free. We are going to overcome these barriers in the next three to 10 years so downloads will happen.?
This is why he suggests it is essential that any company in the ?physical space? must future-proof their businesses for when downloading is the prevalent method for acquiring film content. To this end Lovefilm has been dipping its toe in the download pool.
Calver has also been gradually moving the business away from what he describes as a logistics company to more of a media business. This has included not only reinforcing the wide choice of titles available (it stocks 65,000 films compared with an average 1,500 in a rental store and even less in retail outlets) but also crucially complementing this with much more of a ?community? aspect to the Lovefilm site. This means film reviews and recommendations from other customers.
Calver suggests this helps consumers make choices and enables Lovefilm to avoid its massive selection putting people off through too much choice. And it appears to be working because 90 per cent of its business is related to films that are more than three years old, which disproves the original argument that Lovefilm would fail because demand was chiefly for only the most recently released films. ?The reason that many people join us is for our film recommendations,? he says.
The company's shift to being a media organisation has included the re-launch of its website, which now incorporates a shop, cinema ticket sales, and full UK cinema listings. In addition Calver says: ?There is also a big opportunity as a media company to get a greater share of studio marketing spend that can be a hybrid of online and offline marketing such as branded envelopes and inserts promoting new films.? Although he admits that this aspect of the business is still small he expects it to grow significantly.
One of the major challenges for Lovefilm and other merchants in the media space is the downward pressure on pricing. ?UK retail prices have fallen like a stone...and price is 62 per cent of the reason why people buy a DVD. And as younger people are so much more price-sensitive there will be increased price pressure.?
To address this issue Calver says the company has also shifted its focus away from its earlier proposition of just offering all-you-can-eat subscriptions to now providing much greater flexibility in how people are able to consume films. Having found that two-thirds of the population rent less than two films per month, a lot more lower-priced entry-points such as 'capped' packages and pay-as-you-go options have been introduced.
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