Opinion: Internet pioneer revisits movie rental business model

Economics still favour DVDs over streaming

Rob Hall was into the Internet before there was one. In high school in the 1980s, he dabbled in web technology and was ready for the Internet revolution circa the early 1990s.

I met him when he was a young man cabling buildings for one of the first Internet service providers that set up in Ottawa, which it turned out he owned. This was back in the day when it was one modem for every PC, so Mr. Hall had cupboards and mobile trailers full of them.

He was also ready for the landrush that befell Canada when .ca domains were released from the control of the University of British Columbia into general use. By that time, he owned two of the major registrars in Canada – Internic.ca and DomainsAtCost.ca – and had opened up multiple channels to the Canadian Internet Registry Authority, a quasi-governmental organization that was and still is responsible for managing Canada’s brand on the Internet. Within a few days, Mr. Hall’s registrars had scooped up tens of thousands of domain names for their clients and put several million dollars in their bank account.

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Appropriately named Momentous Corp., the parent of all of Mr. Hall’s ventures was safely launched. Today, 120 people work in a remodelled 30,000-square-foot warehouse on Auriga Drive that was previously owned by a major overnight delivery service. Mr. Hall, believing in diversification of assets, also owns his real estate. Estimates are that the company’s head count will double in the next year to about 240 because of fast growth in several of its four main business lines: registrar group, domain name backorder and auction service (based around pool.com), DVD home delivery service (Zip.ca) and MAD Inc., which is its digital marketing agency headed up by the energetic 35-year-old Aimee Deziel, who was recently promoted to chief marketing officer for the entire collection of companies.

Intriguingly, Mr. Hall – a big believer in Internet-based businesses – is moving the company’s DVD-to-home delivery service into an even more traditional retail environment. It has relied on Canada Post to deliver its DVDs for years, moving approximately 40,000 DVDs each day using that method. But now it is rolling out hundreds of mini-stores – kiosks really – in locations across Canada. This doesn’t sound much like an Internet business to me.

Mr. Hall corrects me.

“(There’s) $300-million-worth of business looking for a home now that Blockbuster has shut their doors in Canada. Secondly, our recommendation engine builds up individual profiles for each Zip customer, so we can tell them that if we don’t have what they want in one of our Zip warehouses, they can go to one of our new kiosks near where they live and pick it up from there.

“We also know what the right mix is for … our kiosks. Family films, for example, work well in suburban Barrhaven, but not so well on Rideau Street.”

Inventory management and demand prediction are crucial, as is the company’s recommendation engine, which is similar to what Amazon uses to get customers to buy more books and add to individual order sizes. So while it looks like a fairly straightforward operation, it’s like everything else – there are secrets to Zip.ca’s success that are a lot harder to copy or knockoff than one might expect.

To an extent, its inventory management reminds me of Walmart’s – the retail giant always gets the right number of basketballs to Nashville stores and hockey skates to Ottawa stores at the right times.

I asked Mr. Hall if video streaming is in the company’s future. He responded by saying: “Not this year. Let me explain the economics of this.” He goes up to a nearby whiteboard and begins to sketch out his business model.

“We buy a DVD for $20. People can go to a Zip kiosk, where the average transaction size is $4. They’re paying $1 for an older film, $2 for a new one. About three or four weeks after a new release, we start shedding the DVDs out of our kiosks; they’ll go into Zip inventory for snail mail delivery. After awhile, we’ll sell the DVDs as previously viewed for $5 each. That’s the life cycle of a DVD. It’s far more profitable than a streaming service, since Hollywood studios take most of those revenues leaving services like Netflix.

“We are in a downstream release window instead where there’s less competition – especially now.”

Professor Bruce M. Firestone is entrepreneur-in-residence at the University of Ottawa’s Telfer School of Management; founder of the Ottawa Senators; executive director of Exploriem.org; and a broker at Century 21 Explorer Realty Inc. Follow him on Twitter @ProfBruce.

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