Helen Dickinson on retail: Downloads spell end of movie rental

Although I'm not a typical customer of the video rental stores, because we have a large library of films on DVD and video at home, it's difficult not to see how dramatically the industry is changing.

The number of high-street rental shops is plummeting as consumers are finding more comprehensive and attractively priced rental - and retail - services online.

To look at the high street, where shops are closing, you might think the rentals market is diminishing, but that would be a mistake: it is actually growing as more people shift their rental needs to the online specialists.

From no share at all just a few years ago, online rentals now account for 25% of the UK market, according to Lovefilm, one of its leading players. Evidence of how the explosion of online film distribution has hit the high street can be seen from the failure of retailer Silverscreen, which went into administration in March, and the fact that rentals stalwart Blockbuster has added a successful online offering.

Although the high-street stores undoubtedly have convenience on their side and cater very successfully for spur-of-the-moment rental decisions, one of their main challenges is that these customers tend to demand only the latest blockbuster films. Amazingly, as many as 50% of rental store revenues can be derived from as few as 25 films in the course of a typical year. This leaves the rentals companies with the issue of having to deal with vast numbers of the same DVD once demand for a blockbuster wanes.

Because the online players are catering for a more premeditated rental - and have massive storage space compared with a high-street shop - they are able to satisfy consumers' growing appetite for back-catalogue films and speciality titles much more easily.

While big players in the UK rentals market such as Amazon and Blockbuster are seeing their online market shares increase, the pure online rentals model is proving the most cost-effective. The risk of cannibalisation is minimised - of physical stores in the case of Blockbuster, and online sales in the case of Amazon.

That it is not so straightforward offering both a retail proposition and a rental service from the same online store can probably be seen from Sainsbury's recent decision to end its DVD rental service and concentrate solely on selling films.

The Sainsbury's rentals offering was provided as a white-label service by Video Island, which merged with Lovefilm earlier in the year, in a move that created one of the leading online rentals companies in the UK.

Although it could be argued that the online rentals market is relatively immature, such is the fast pace of technology that its postal-delivery method looks likely to be superseded by more advanced forms of distribution in the future. Films are being downloaded through TV service operators such as Sky and NTL, for example, which must represent by far the most convenient method of delivering films to consumers.

Although these services are in their infancy, and currently represent only a small fraction of the film rentals market, take-up is bound to increase as the technology develops - rather as the music industry has seen with downloadable music that is gradually replacing the physical purchase of CDs.

Once download services begin to offer a fuller array of titles, they will undoubtedly affect the mail-order rentals sector. The part of the market that is currently growing the fastest will then start to shrink, which gives some indication of just how fast this part of the retail market is moving.

Because the future is very much dependent on the advances of technology as well as the fundamental retail skills such as buying, merchandising and marketing, it makes it even more difficult for the industry to predict just where things are going in order to adapt their businesses.

- Helen Dickinson is head of retail at KPMG

30 SECONDS ON ... SKY BY BROADBAND

- Sky's movie download service was unveiled - alongside a broadband sports offering and the Sky by Mobile 3G service - in January.

- At launch the service offered 200 films for free, legal download. The company said it intends to make 1000 of its back-catalogue films available for download in due course.

- Sky by Broadband's movie offering is available free to consumers who subscribe to Sky Movies 1 and 2 via Sky Digital and have broadband internet access and a PC running Microsoft Windows XP.

- Once the subscriber has downloaded the film, that file remains in their 'library', usually for 30 days, during which the subscriber can watch the film as many times as they wish. At the end of the licenced period, the file is automatically deleted.

- The films can be watched only on the PC they are downloaded to; users are barred from burning them to DVD.

- Account-holders can fix parental control settings based on BBFC certifications.