Some interesting data in the Guardian’s business pages on the decline of the video/DVD rental shop in the UK. The market value statistics first: the rental market started declining in 2001, sales first overtook rentals in 2003, and by 2006 they were outperforming the rental market by 2-to-1 (sales £229m, rentals £116m).

On the face of it, the story is that this rapid shift appears to be driven by technology – whether on demand downloads or near-video-on-demand. But it may have more to do with continuing rising levels of affluence and the same supermarket squeeze on prices which has been seen in the books sector.

(And as it happens, the same journalist, Katie Allen, has a story in the following day’s paper on research by YouGov which says that people are reluctant to use download sites because they are not fast enough and not reliable enough. The research was commissioned by CacheLogic, which provides architecture for a web-based film distribution).

Average prices of DVDs have fallen from £17 in 1999 to just under £9.50 now; the industry, inevitably, claims that illegal copies are a factor, with versions selling at £3.50 or thereabouts. Supermarkets also discount the hits which rental shops rely on for business; Asda was selling the most recent Bond film, Casino Royale, at £7.

The rental shops business model hasn’t helped either. Their profitability depended on late fees, which could be steep (and unpopular). This meant that the subscription-based services, which combined online ordering and postal delivery and return (at least as much old tech as new tech) could differentiate themselves easily by redesigning the business model. They did away with late penalties in exchange for a subscription agreement and some flexibility about delivery of titles to customers. The revenues of the online/postal players are still going up.Simon Calver, of the one of the three online/postal players, is quoted as saying,

“You have to look at the value proposition. To the customer, online works out at about half the price with no late fees and much more choice.”

One can imagine what the ‘blue ocean‘ consumer strategy map’ would look like.

Rental shops which have managed to compete have tended to follow the online/postal market, with large range of choice, especially in niche areas (world/art films) and extended rental periods for all except recent releases. In other words, more stock, lower margins.