Like most revolutions, the one ushering in DVD technology isn’t equally rewarding all of its staunchest supporters. Blockbuster may have helped lead the move to DVDs, but New York-based parent Viacom recently made quite a statement on the future of the rental market by announcing plans to divest itself of the movie rental king. Viacom cited a DVD rental market that is slumping because consumers are deciding to buy (primarily from large retailers such as Wal-Mart) rather than rent. Business is down in Canada as well, but Blockbuster, which operates 411 stores here, says it’s going to fight back.

It may be a difficult battle, according to Gino Scapillati, entertainment and media practice leader at Toronto-based PricewaterhouseCoopers. The value of the DVD market in Canada was estimated at $3 billion in 2003, split $1.8 billion for the sell-through market and $1.2 billion for the rental market. Unfortunately for the rental market, which is Blockbuster’s bread and butter, the future is headed south, with PwC predicting the growth rate in rentals to fall below 11% through 2007, compared to 20% growth in 2002.

‘DVDs are very attractively priced for the sell-through market,’ explains Scapillati, who points out that the bonuses of the format – such as supplementary content and the ability to capture specialty TV series – drive consumers to own rather than rent.

Dave Stewart, president of Toronto-based Blockbuster Canada, concedes there has been a flattening of the market over the last two years though increases in rentals continue to be in ‘double-digit’ figures. He blames ‘aggressive consumer electronic incursion’ for the decline. Blockbuster introduced DVDs to its stores in 2000 on a sell-through basis with rentals following in 2001. In just three years DVDs have become by far the dominant format. Stewart says VHS tapes today make up just 12% of rentals and he expects that by the end of 2004 all mainstream titles will be DVD.

But Blockbuster’s biggest challenge is new and aggressive competition in the retail channel. At Vancouver-based Best Buy, for instance, a typical store carries a whopping 6,000 titles. Lori DeCou, director of corporate communications, says the company’s advantages are price and selection.

‘We also haven’t reached the point in Canada where everyone who wants a DVD player has a DVD player,’ she adds. ‘So we have the added benefit that we’re also a destination retailer for DVD players.’ She says consumers who buy a player often walk out with a DVD or two as well. (According to PwC, DVD penetration is 50% and the firm expects that number to climb to 80% in the next five years.)

In addition to retailers, Blockbuster may also face challenges from on-demand television services via cable and satellite. However, Stewart dismisses these as still insignificant. ‘The bigger issue for us is contending with the fact that we’re not alone in the packaged home entertainment arena anymore. We have some very strong competition from the mass merchants in consumer electronics.’

He says the company’s strategy for dealing with the challenge starts with the brand. ‘When you think movies, what name pops to mind? Blockbuster is a very strong brand synonymous with entertainment,’ says Stewart.

It also means borrowing a page from the retailers and capitalizing on the company’s film-savvy retail staff. ‘Last year we came to grips with the whole sell-through arena, saying, ‘We have been rental experts; it’s time to become retail experts.’ We vastly expanded our selection and our retail copy depth and changed our presentation from the typical blockbuster blue and yellow to a more conventional retail red and white. So when you come in our stores you can now see a very evident retail presence.’

He also says that since 2000, Blockbuster has moved from a ‘promotional stance to a marketing stance’ and is employing what he calls ‘continuity television’ (meaning Blockbuster ads air for a substantial part of the year – 40 out of 52 weeks) to increase awareness among consumers. He says that in the three years since the rollout of the ‘Carl & Ray’ rabbit/guinea pig spots (by Detroit-based Doner Advertising), which Blockbuster intends to stick with for at least the remainder of this year, awareness scores among consumers have risen from 61% to 88%.

As further response to new retail competitors and subscription-based, on-demand TV, Blockbuster will also introduce a monthly subscription program by the middle of 2004. Consumers pay a fee, rent several DVDs at a time and keep them for up to a month. They can exchange the movies at any time for new ones.

‘There are other initiatives which are huge,’ adds Stewart. ‘One of them is trading. On the ownership continuum you go from rental, which is temporary, to sell-through, which is permanent, and somewhere in between is a temporary ownership called trading, and it appeals very much to renters.’

But perhaps the most startling revelation is that Blockbuster believes the current downturn is only temporary.

‘When you go through a platform transformation, one of [consumers’] primary concerns as new owners is to build a library,’ explains Stewart. ‘So it favours a period of sell-through. But gradually over time – when you’ve got your library built – the market will tend to revert back to rental. It’s a cyclical thing. We’ve got two more years of a flat market to maybe even a soft market and then a rebound in the rental business.’

Kevin Groh, spokesperson for Wal-Mart, doubts that and points to Wal-Mart’s success with new theatrical releases as proof. ‘The fact that Wal-Mart is placing so much attention on DVDs is a statement on their move to the mainstream. People didn’t slow down on purchasing CDs with the move from cassette or albums, so what you’ll see is existing or new market retailers adjusting to meet a changing need of customers.’

Strategy put several creatives and analysts in front of the big-screen TV and a copy of Dances with DVDs (limited edition director’s cut – perhaps you missed it), and asked them how to put the blockbuster back in Blockbuster.

Lisa Francilia, CD, TBWAVancouver

The first thing Blockbuster needs to ask itself is, who are they going after? The mom-and-pop shops or the Wal-Marts? It’s hard to tell through their communications.

Where as [Carl and Ray from the TV ads] are likeable and funny they have nothing to do with watching movies or [communicating] any benefit of going to a movie store. The spots are cute but I can’t recall anything they say. Blockbuster needs to sell the category of ‘going to video stores’ again. And it needs to do it in a way that’s memorable. I don’t think the rabbits and guinea pigs appeal to the heavy movie watcher target or influencers.

The spots don’t even mention that they rent video games, which is one of the biggest industries we have today – even bigger than Hollywood. Games have a higher price tag than movies and I’m sure parents would rather rent a game than have to buy one.

A video store should not compete on a brand/popularity level. There is no benefit to the consumer. [Competing on] customer service is also weak – I’m looking for a movie not a new computer. I don’t really think they can compete with convenience either, since cable and satellite are both more convenient. Blockbuster should probably be thinking about ‘selection.’ That is something they could own.

Ed Strapagiel, SVP, Kubas Consultants, Toronto

Blockbuster already does things like selling their old stock and providing snacks and candy, and they have already tried packaging all of that with a movie rental so they have pretty well gotten to the point where they have exhausted those things. One area they’ll probably do reasonably well in is video games.

[Introducing a subscription model] will definitely help them, but they’re just copying that strategy from people who are already doing it, like Netflix. But Blockbuster has a brand name behind that sort of scheme, so they might be seen as a safer bet among consumers.

They have probably investigated [on-demand distribution] already. But a video-on-demand system doesn’t really need Blockbuster. They would have to create their own as opposed to partnering up with somebody.

DVDs have fundamentally altered the price-value quality proposition. Compared to the old VHS movies, with the DVD you get more content, better quality and for less. And until that changes – and it’s not going to – it has closed the gap between buying and renting by a very significant [amount]. So the standard rental market is pretty well over now.

Phil Copithorne, CD, Ogilvy & Mather, Calgary

I definitely don’t think [Blockbuster should compete on] convenience. [Video-on-demand] technology is going to prove them very inconvenient. And in terms of the Blockbuster brand, I don’t know if it stands for much more than videos. I don’t know if they’ve done anything to tell us that they are anything more than a video store. And I don’t think the rabbit and the guinea pig are going to lead Blockbuster into the next era of their existence.

I would think they would want to address the issue of video sales more directly. More than an advertising solution it would probably be retail strategy, which would be all about selection and price. The question there is, should Blockbuster become a movie retailer? I think that all of the video stores need to start being able to compete [in that area].

It’s a completely different motivation if you’re out to buy a video rather than rent because you want to go to the places where there is a full selection. I don’t think Blockbuster carries the selection in terms of purchase.

It’s always struck me that the video store is going to become a thing of the past, no matter who it is. I assume that as we go into broader bandwidth through cable and satellite, we’ll get to a point where we can download movies almost on an as-released basis.