When Amazon in the UK and Germany decided to offer online DVD rentals, at a fraction of the going rate, we said at the time that it was just an experiment and that given the margins that Netflix in the US operates at, and the margins the Amazon is more used to, it would go nowhere. Well it took a while but it turns out that our assessment is right and the experiment is now at an end with the announcement that Europe’s biggest online DVD rental company LOVEFiLM is now going to take over the running of the service.
Online DVD rental is popular, with each customer allowed a number, be it 2, 3 or more DVDs out at any one time depending upon their monthly payment, and whenever they return one, they get one of the next requested DVDs on their wish list, which is posted to them. But in order to have enough DVDs so that most people can get their next choice (and not their 5th favorite selection) each service has to have a huge number of each DVD title, and in a market where the number of requested titles is as high as 65,000, having a few thousand copies of each can slash the margins on the business.
As Netflix has found, it take years and some subtlety to balance customer expectations and your DVD inventory and still make any margins above 2% or 3%, which is what it had until recently.
LOVEFiLM is now starting to have the kinds of customer numbers to do that, but like all online DVD businesses, if the costs of the physical media could be taken away and the costs of the delivery dropped to the floor, and most of the staff that pack and send out DVDs eliminated from the equation, then it would be immensely profitable. And while LOVEFiLM has built an online DVD download and streaming system, it is more interested in working an easier route to cost reduction by eliminating its customer acquisition costs, by backing big name brands, such as supermarket chain Tescos, in offering an online DVD rental service
Now LOVEFiLM will acquire Amazon Europe’s DVD rental business in the United Kingdom and Germany and in return Amazon Europe will also make a cash investment and become the largest shareholder in LOVEFiLM and the two companies will enter into a multi-year marketing agreement whereby Amazon becomes a core promoter of LOVEFiLM’s services so far only in the UK and Germany. Potentially such a deal could spread all over Europe.
Completion of the deal is subject to regulatory approval in the UK and Germany and following completion of this deal, the new LOVEFiLM subscriber base will total over 900,000 customers in the UK, Germany, Sweden, Norway, and Denmark.