Video rental industry

After starting in 1979 with a single retail outlet in Los Angeles, the video rental industry boomed during the 1980’s and became a fixture in consumers’ spending during the 1990’s, grossing an average of $1 billion yearly. With the arrival of digital versatile discs (DVDs) and the Internet during the 1990’s, the industry experienced a period of increasing technological sophistication that has led to the creation and reinvention of new business models.

The history of the video rental industry is linked to the introduction of videocassette recorders in the consumer market. In 1977, Andre Blay established the Video Club of America to sell the first prerecorded motion picture videocassettes. Blay’s success inspired George Atkinson, GeorgeAtkinson, a small-store owner in Los Angeles, to create the first video rental outlet, the Video Station, in 1979. Most analysts predicted that Americans would prefer to buy rather than rent videocassettes, but Atkinson’s great insight was that videocassette recorders (VCRs) would decline in price and become a mass-market item. In December, 1979, competition between the Radio Corporation of America (RCA) and Sony pushed prices of VCRs below $1,000 for the first time. Atkinson’s idea was so successful that many followed in his footsteps.Video rental industryRental industry;videos

As VCRs proliferated, film studios tried to diminish the rental industry by adding surcharges of up to $10 for each videocassette sold to rental stores; However, by 1983, most studios had revoked these charges and welcomed the rental industry. By 1990, the market had changed from one of small independently owned stores to one dominated by a few large firms. The biggest, BlockbusterBlockbuster, had more than two thousand outlets and controlled 15 percent of the rental market. By 1996, 85 percent of all American households owned at least one VCR, and videocassette rentals exceeded $1 billion per year.

Toward the end of the 1990’s, the rental industry underwent another change with the advent of digital versatile discs (DVDs). Film studios then began releasing DVDs at lower prices than those for videocassettes. Moreover, retailers could begin selling DVD versions of films on the same days that the videocassette versions were available only for rental. By 2003, DVD rentals were outnumbering videocassette rentals.

Only two decades after the first video rental store had appeared, an entirely new business model revolutionized the industry. In 1999, NetflixNetflix began renting DVDs through the mail for flat monthly fees to subscribers who used the Internet to place their orders. Within two years, Netflix claimed to have enrolled more than 3.5 million subscribers in the United States alone. This model was soon copied by other companies, including Blockbuster, some of which also rented other video-based materials, such as video games. By 2007, more than 9 million households had online subscriptions to video rental services, which were generating more than one billion dollars in annual revenues. Meanwhile, the annual revenues of traditional video stores declined to about $60 million.

In 2007, with the rapid increases in the number of online video downloads and new interactive services such as video on demand, many analysts predicted the imminent end of the video rental industry. However, 2008 witnessed a new reinvention of this always evolving industry, when Steve Jobs, chief executive officer of Apple (company)Apple, announced the addition of a movie-rental feature to iTunes. In February, Apple added 1,000 films to its library.

Further Reading

  • Dana, J. D., and K. E. Spier. “Revenue Sharing and Vertical Control in the Video Rental Industry.” Journal of Industrial Economics 49, no. 3 (2001): 223-246.
  • Narayanan, V. G., and Lisa Bren. That’s a Wrap: The Dynamics of the Video Rental Industry. Cambridge, Mass.: Harvard Business Publishing, 2002.

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