the netflix model

Filed in archive Technology on March 15, 2005

I must say I was never a big believer in the Netflix model but some people are obviously. Here is an interview (done by e-consultancy.com) with Saul Klein, CEO of Video Island a british copycat that recently merged with Screenselect:

"E-consultancy: Video Island wasn't quite the first online video rental company to open its doors in the UK, but it has become one of the biggest players in a fast-growing sector. Can you provide some detail on how you've gone from zero DVDs per month to 500,000+?

SK: Video Island wasn't the first but we were the first in the UK and worldwide to pursue the platform approach of supporting multiple branded services from a single integrated software, logistics and customer service platform.

Now we are operating five brands on our platform, including our own brand Screenselect.co.uk, as well as Tesco, MSN, ITV and from this week easyCinema. This strategy along with a focus on offering the UK's largest selection, conveniently delivered and well priced has allowed us to scale the business very quickly.

In 2004, Video Island rented nearly 3.5m DVDs which the Royal Mail tells us represented around 45% of all DVDs rented by post last year - apparently our next nearest competitor had around 30% share. We expect to maintain a leadership position this year but expect both blockbuster and Amazon to make inroads into the marketplace. "

E-consultancy: VI's partnerships have been key to establishing your brand, given the fact that the UK market was still very new a couple of years ago. How have deals with Tesco, MSN and ITV helped you? How did you manage to win this sort of business at such an early stage in the company's development?

SK: Partnerships with the UK's biggest brands have been instrumental to the Video Island strategy and we have focused from day one on trying to work with the largest players in the retail, online and media sectors - companies which believe that home entertainment is strategic and a major growth area for their business.

We have also pursued and landed long-term, multi-channel relationships to market and distribute our Screenselect.co.uk brand with the likes of Comet, Currys, Dixons, Boots, Virgin Megastore, Toys r Us, Real Networks, Sunday Times, Loot, Radio Times and Top Up TV as well as with online stalwarts such as Figleaves, Firebox and ASOS.

In terms of being a young company and building partnerships, I think our focus and the fact that we were addressing a clear market opportunity with a strong value proposition was very helpful.

Also in terms of key partners, we were very specific in our targeting, believing in a "less is more" approach to strategic partnerships and to have succeeded in landing relationships with Tesco, MSN and ITV has been a marvellous endorsement of this approach.

E-consultancy: VI and ScreenSelect, now merged as a bigger entity, both won the support of VCs at a time when very few were prepared to dip their toes back into the stagnant dotcom water (in a show of support for the emerging online video rental market). How important was VC backing in securing partnerships?

SK: Video Island is the only company in our space to have won backing from VCs and I think a major attraction was the platform approach which allowed us to focus on building a business rather than just spending money on branding.

In terms of winning this sort of business, I think both our partner-focused model and also the very significant financial backing of Index, Benchmark and subsequently Cazenove Private Equity also reassured our partners that not only were we serious but that we were here to stay.

E-consultancy: Can you explain more about why VI and ScreenSelect merged? It seemed to happen so soon after both companies had launched. Was this about strengthening the team in the face of bigger competition such as Netflix and Blockbuster (not that I think either had launched in the UK at that time)? In other words, consolidate now rather than compete each other to the brink, until the bigger fish enter the water?

SK: Video Island's model was inspired by Direct Wines - the company behind the Sunday Times Wine Club, as well its own direct-to-consumer brand, Laithwaites. Screenselect's direct to consumer approach, slotted in perfectly with our long term vision for Video Island's business.

Bringing the businesses together allowed us to get where we wanted to go faster, as Screenselect.co.uk became Video Island's Laithwaites.

In addition the teams complemented each other very well and at a time when Netflix was about to launch, Blockbuster had launched and the spectre of Amazon was around it made sense to bring the businesses together.

E-consultancy: Is online video rental going to become another commoditised sector now that low-margin Amazon has entered the fray? Did you see that one coming? How much of an issue is price vs brand these days? What's your focus?

SK: Having a platform business allows us to focus on evolving the pricing and packaging of each individual brand - Screenselect.co.uk, Tesco, ITV, MSN and easy - in ways that best suit their customer bases.

There are nearly 10m adults in the UK who rent a DVD at least once a month and we are big believers that "one size does not fit all". Different people want to receive the service in different ways. So Video Island supports unlimited, fixed and pay-as-you-go DVD packages, with prices starting at �7.96 and going up to �14.99 depending on the package.

I think we're a long way from understanding the bulls-eye but letting consumers choose from a range of options while helping brands evolve different propositions is the best way to go.

E-consultancy: Online video rental made the local video store seem terribly outmoded, yet we aren't too far away from a new challenge for you to face up to: on-demand broadband movie services. When do you expect this to become feasible in the UK and do you expect to be a part of the action?

SK: In our first serious year of operation in 2004, Video Island took nearly 4% of the total DVD rental market in the UK and our sector took nearly 7%. This is amazing considering the IMRG Xmas shopping figures suggest it took e-commerce 7-10 years to take 7% of all retail sales.

We certainly see amazing opportunities to extend our "on-demand" model of providing home entertainment from next day to download and you'll see us make substantial moves in this direction in 2005.

E-consultancy: The video game industry is bigger than Hollywood in all its forms, so surely there are doors to open in that area? GamezNflix has pioneered this model in the US, but perhaps there are some key differences between the profile of a gamer vs movie buff?

SK: It's definitely an interesting area and our model would certainly allow us to look at it, although right now we are very focussed on building out our core businesses and offering our subscribers more ways to get hold of great movies & TV by allowing them to rent, buy and download.

E-consultancy: What have you found to be the best customer acquisition channels? Offline vs online? Search vs offline advertising? How can you convert more traditionally-minded people to your online rental services?

SK: There's no doubt that if you are trying to acquire online customers then the best place to find them is online. It takes time to figure out the best approaches but we are now being very successful with search, e-mail and affiliate marketing.

Most of our core partnerships are with customers who have great relationships with online shoppers and by working with the UK's biggest brands we are finding more and more people are becoming aware of and adopting our services.

E-consultancy: Where do your most loyal customers come from vs those that are more likely to create customer churn? Have you seen any evidence that some channels (such as affiliate / PPC) are good for conversions but poor for retention / increasing customer lifetime value?

SK: It's early days for this yet, we track each source and channel religiously, but we keep the results close to our chest.

E-consultancy: And your favourite films are.?

SK: Magnolia, Blade Runner, Once Upon a Time in The West.