How Online DVD Rentals are Changing the Motion Picture Industry

When Reed Hastings was hit with a 'late return' fee, he took to the venture capital circuit to build an entirely new type of DVD rental service. The company was called Netflix and, at the time, it worked similarly to the rental shops it's now pushing into bankruptcy. Movies were rented on a one-off cost basis, with late fees and other shipping costs external from the company's standard charges.

But in 1999, everything changed. Netflix introduced a subscription-based revenue model, changing the way that movies were rented and ushering in a new era of movie rentals. It was the one and only online rental service for close to five years, fighting little in the way of competition and sending out films to a relatively small customer base that was, quite surprisingly, immensely loyal.

Today, it's far from the only kid on the block. There are hundreds of online DVD rental services, the vast majority of which are based in the United States. Several large Australian rental providers now offers a service similar to that which Netflix pioneered, indicating a drastic change in how our cities and major regional centres consume their movie, video game, and other visual entertainment.

But despite its rapid growth and immense levels of profitability, the industry isn't all positive cheer and constant praise. There are several controversies and potential problems that the industry stands to face, three of which are explained in detail below.

'Throttling' and its effect on online DVD rentals:

While early online DVD rental companies operated using a similar business model to retail DVD rental stores, today's biggest players operate almost exclusively using a subscription-based income model. This has resulted in a wide variety of profitability levels for each subscriber, as earnings can vary depending on the number of films rented, and the amount that these films cost to ship.

Netflix and other major players have countered this 'profitability drain' by implementing a throttling system for heavy users. Subscribers that choose to have movies delivered on a daily basis may find themselves subject to slow shipping and cheaper delivery options. This has attracted controversy, although it was originally implemented to offer faster rentals to all subscribers and customers.

How renting DVDs online has eliminated standard rental companies:

Over the last five years, there has been a noticeable downturn in the revenue that companies such as Blockbuster Video, Hollywood Video, and other offline rental services have generated. In the case of Blockbuster, it's been such a sudden and sharp downturn that the entire company has been forced to file for bankruptcy. This has been caused, in part, by the popularity of online DVD rental services.

However, it wasn't just online DVD rentals that pushed Blockbuster into bankruptcy. Rental kiosks such as RedBox and the popularity of digital file delivery has contributed to the downfall of regular rental services too, as the immense revenue of programs such as iTunes can demonstrate. As online DVD rentals continue to increase in popularity, it's likely that other rental companies will close.