Pushing the envelope - Netflix ends DVD rentals

Picture: Netflix

The DVD had barely been in existence when I moved to Silicon Valley at the beginning of 2001. I should know: I’d been involved in launching the format just four years earlier. It was, as tech executives are prone to say, a “game changer” - storing an entire film on, effectively, a CD with picture quality visibly superior to VHS tape. No wonder it was the subject of an obligatory ‘format war’ between rival companies promoting their respective high-capacity video disc platforms with the hope of benefitting from lucrative patents.

As the DVD was in 1998, the Internet was in relative mass-adoption infancy when 26-year-old former US Marine and Stanford computer science graduate Reed Hastings launched Netflix in the Silicon Valley satellite town of Los Gatos. Hastings cleverly combined the nascent DVD format with an online portal for home video rental to rent out new-release films for $6 each, with up to three discs at a time sent out by post. The first disc Netflix sent out was a copy of Tim Burton’s Beetlejuice.

Four years later the New York Times reported that Netflix was sending out almost 200,000 discs every day to some 670,000 monthly subscribers, a figure that soon ballooned to a million. By then, amongst hyper-tech savvy Silicon Valley residents, Netflix’s distinctive red envelopes were landing on doormats like leaves in an autumn storm. Moreover, it became routine for subscribers to go to ever-more creative lengths to post them back to Netflix before late fees were applied. I was travelling quite a bit within the US at the time for work, so I would take my return envelopes with me, looking for the most obscure and remote postbox locations from which to send them, just for a laugh. 

Equally entertaining was the creation of the wishlist from which films were chosen: unlike a traditional video rental shop, browsing Netflix’s menus ensured that at any given time, as soon as you’d returned one disc, another would be on its way. As a result, there would be tremendous expectation of a new disc or discs arriving in the post.

Of course, this all now seems rather arcane, given the overwhelming pivot toward on-demand services such as Netflix itself. But go back to the early 2000s and Netflix can be credited with not only driving the popularity of DVD, but also opening up a mesmerising choice of rentable titles, from big-budget blockbusters to independent productions, documentaries and cult Japanese anime films. 

Indeed at one point, Netflix was sending out more than a million discs a day drawn from a 75,000-strong library, enabling the likes of me to experience films I would never have watched had I been hurriedly scanning VHS spines - with my head cocked awkwardly to one side while trying to read vertically - in a traditional rental shop, the likes of which arguably Netflix put paid to.

Incredibly, though, Netflix has not stopped its DVD service, even after launching its now ubiquitous streaming platform in 2007. Until now: “After an incredible 25-year run, we’ve made the difficult decision to wind down at the end of September”, Netflix’s co-chief executive Ted Sarandos said earlier this year, hailing how the company’s DVD postal service had “paved the way for the shift to streaming”.

Picture: Netflix

Not surprisingly, maintaining the DVD rental business has, according to Sarandos, “become increasingly difficult”, accounting for just $126 million of Netflix’s total revenues of over $31 billion. Still, not a bad return. However, the end of DVD rentals does come at a time of changing fortunes for Netflix, for the first time in its 25-year history. Rival streaming services such as Disney+, Apple TV and Paramount+ have been increasingly eating into revenues and subscribers, leading to Netflix losing a million of them in the first six months of last year, its first audience decline in a decade.

To counter this the company began introducing new tiers of advertising-supported packages, as well as announcing a crackdown on so-called password sharing, a less-than popular measure amongst families seeing teenagers head off to university with barely the financial means to remain connected to their favourite shows.

At its peak, the DVD service had more than 16 million subscribers, but today the number is just 1.5 million, and all based in the US. Contrast that with the 223 million subscribers Netflix’s VOD service has globally. Given the relative numbers, winding up the DVD business will barely meet a whimper but there are still those who, 25 years on, swear by it. “When you open your mailbox, it’s still something you actually want instead of just bills,” subscriber Amanda Konkle of Savannah, Georgia, told Associated Press, having been using the platform since 2005.

Others have continued to rent DVDs from Netflix because, surprisingly, it invariably offers a greater choice of titles. Licensing conditions on the streaming service can mean that some films are available only during a particular window. 

Some subscribers even came back to Netflix’s DVD rentals during the pandemic as - incredible to think as it is - they ran out of things to watch via online platforms. Many - especially scholars of film history - have found Netflix’s vast library of vintage movies indispensable. 

That said, the company has been progressively winding down the DVD service, reducing the availability of many titles as logistics and other resources have been diverted into the main business. “Our goal has always been to provide the best service for our members,” Sarandos said in a statement, “but as the business continues to shrink that’s going to become increasingly difficult.” As the company itself acknowledged in a letter to investors earlier this year, the DVD service was the "booster rocket that got streaming to a leading position".

The DVD itself is not dead yet. Much like the optical CD technology from which it was adapted by Philips, Sony and their rivals at Toshiba, people are still buying DVDs. The Salvation Army says that DVD sales have more than doubled in ten years at their charity shops, as entire collections have been donated and then snapped up on a whim. Another charity, the British Heart Foundation, said that they had sold more than 1.9 million DVDs last year through their shops. 

Like collecting rare records and books, the ‘lucky find’ is helping, as those trying to find out-of-print titles or not available on streaming services come across rarities. And as the cost-of-living crunch continues to bite, families are even ‘cord cutting’ and returning to physical forms of entertainment that cost a fraction of the monthly cost of online packages. Similarly, there are plenty of households disenfranchised from video streaming due to the fact they live in communities with poor or even non-existent broadband.

There’s no doubt that the rise of streaming has created vast gaps on living room bookshelves - mine especially. My own DVD collection now occupies a sizeable corner of a storage facility (at some stage, to be bequeathed to a charity shop). There is always the chance that DVD might go through a vinyl-style revival, much as CDs continue to sell in the era of Spotify. 

But unlike the business model for music streaming platforms - which is great for the consumer but lousy for the artist - video remains in the grip of Hollywood pricing mechanisms. While it might seem like buying a film from video on demand service is not the same as owning it, I have far less emotional attachment to the DVDs now collecting dust than my CDs (which already went through one purge, 13 years ago, when my library was more or less halved).

I’m probably just not as attached to films as music, knowing that most of what I like to watch is available to stream to my living room TV or my iPad with equal ease and none of the clutter. That said, I can’t help but echo Amanda Konkle: back in the day, when those red envelopes appeared through the front door, there was a sense of excitement not generated since by scrolling through a menu with a remote control. The early days of the Internet, eh?

Mixed signals: buying records on your high street

Barely a fortnight after Sainsbury’s announced that it will stop selling CDs and DVDs in the face of streaming services dominating media consumption, and just a few days after the second Record Store Day ‘drop’ for 2021, dear old HMV has celebrated its 100th birthday by announcing that it is planning to 10 new shops this year.

While this is hardly a raging endorsement of physical media continuing to enjoy rude health, it at least is a positive sign that the oft-predicted death of such formats is being kept at arm’s length. Sainsbury’s said that its decision was the result of consumers increasingly getting their music and films online, although conversely it added that it would continue to sell vinyl records in some stores, a reflection of vinyl’s hipster appeal amongst everyone from teenagers to the middle-aged getting back into the format and succumbing to impulse buying while out doing the weekly grocery shop.

Notably, Sainsbury’s supermarket competitors are continuing to sell CDs and DVDs, so the decision isn’t necessarily the shock headlines might suggest. There is no denying that CDs, DVDs and even Blu-ray Discs are in long-term decline: I’ve blogged before about the minor conflict this has placed me in, having worked for Philips on the consumer electronics industry’s launches of DVD and Blu-ray Disc, the company having co-developed the CD with Sony in the decade before, starting the rise of the 12cm ‘optical’ disc as a multi-faceted carrier of digital entertainment and media content.

But, progress is progress. The irony of all this is that the CD and its various offspring were meant to kill off the vinyl record, and yet that format has enjoyed a resurgence, with UK salesreaching 4.8 million in 2020. Indeed, the BPI says that LP sales will eclipse CDs this year for the first time since the late 1980s. “Demand [for CDs] has been following a long-term trend as consumers increasingly transition to streaming,” a BPI spokesperson told the BBC. “Resilient demand is likely to continue for many years, enhanced by special editions and other collectible releases. If some retailers now see the format as less of a priority, this will create a further opportunity for others, such as independent shops and specialist chains such as HMV, to cater to the continuing demand.”

While I rarely buy a Blu-ray edition of a film or a box set these days (I now share a house with my family and don’t have the space for masses of media as I had in my single days, so online services make a lot of sense) I do still buy music, with a combination of vinyl, CDs and digital copies, depending on my mood, collectability (e.g. special editions) and even whether I’m purchasing an album on spec, as opposed to a must-have I might want to have on display. I wouldn’t be the only one who sees vinyl collecting as much as an Instagram fetish as about music appreciation. I am also of the High Fidelity mentality, one of those middle-aged men who still derive pleasure from rifling through racks in musty independent shops staffed by ever-so-slightly intimidating cooler-than-you types. It’s an age-old tradition and long may it continue.

There is, though, still a place for the HMVs of this world. When the chain went into administration in December 2018, threatening anyone with entertainment media on their Christmas lists, it cast a pall over the future of buying and owning records. One of HMV’s attractions, from a mass consumer point of view, was that it made ‘supermarket’ shopping for entertainment easy, with multi-buy bundles (e.g. “2 for £10” offers) a cunning ploy to part cash for more than you might have entered a shop in search of. My CD collection is certainly the beneficiary of deals like that (along with regular holiday raids to American chains like the now defunct Tower Records and Amoeba, particularly during the days of more favourable dollar-pound exchange rates).

News that HMV will open 10 new outlets this year is a glimmer of hope on a couple of counts: firstly, COVID-19 has hit the ‘non-essential’ retailing sector hard thanks to high street lockdowns over the last year and a half. This has been accompanied the double- or even triple-whammy of media sales shifting to core online retailers like Amazon for home delivery convenience, along with the continuing growth of streaming services. Doug Putman, the Canadian entrepreneur who bought out the HMV brand from administration in 2019, and has since reopened 107 sites, has warned that the future of on-premises retailing in the UK is still not guaranteed.

Doug Putman
Picture: Joe Fiorino/Canadian Broadcasting Company

Putman says the government needs to urgently fix business rates, which are based on property rates but are notoriously slow to adjust to market levels, resulting in retailers and other high street businesses continuing to pay very high costs in the face of rising competition from online services with a lower cost base. “If the government doesn’t fix the rates, high streets are going to see a lot more vacancies,” says Putman. “Business rates just don’t make much sense. You can pay zero rent and not make a profit on a store as rates are too high.” 

As seen recently by announcements by Gap and other fashion retailers, in-store shopping is facing an existential crisis, and the pandemic hasn’t helped, even accelerating its demise. It is sad, says Putman. “Outside of the illness, when you look at people’s lives, a big part of that is walking outside and going to the high street and doing some shopping. When you see bookstores and coffee shops, and HMVs, closed and everything online it is not as much fun as it used to be. Hopefully people have seen this world where everything is Amazon and it is not all that great.”

Steven Wilson launches his album To The Bone at the HMV store in Oxford Street

One of HMV’s priorities will be to restore its flagship to London’s Oxford Street. The retailer opened its first HMV shop in 1921 when, as the Gramophone Company (which became EMI in 1931), it took over an old clothing shop at no 363. The shop was closed as part of the administration process at the end of 2018, but Putman has said he would like to find a new location in Central London. The prospects of that, however, amid continuing schism in both domestic and foreign tourism to London, might make it unlikely in the short term, given that the cost of commercial property in the city is driving retailers out, rather than drawing them in.

The other challenge for HMV will be market dynamics. While Sainsbury’s might be getting out of CD and DVD sales in the face of slowing turnover for the formats, others, like Tesco and Asda will continue to take “market share” by undercutting traditional music retailers - be it HMV or the independents. Industry writer Graham Jones has noted that supermarkets stick to a narrow choice of CDs from popular chart acts like Ed Sheeran, rather than back catalogues and more eclectic fare. Indeed, in 2008 Jones discovered an independent record shop buying bulk copies of the latest Coldplay CD from Morrisons, rather than wholesale from the record company because the supermarket offered them for less.

Speak to more hardcore music consumers, as opposed to impulse shoppers, and the love of physical media continues to drive behaviour. One of the pillars of CD and vinyl buying to begin with, over streaming, is the belief that it’s always available, a point that does suggest continuing Luddite sentiment that the Internet can go down, or that titles can disappear due to licensing windows ending. This conveniently ignores the fact that lugging 12-inch records and even CDs around isn’t so convenient if you don’t have anything to play them on. But there’s no denying the emotional bond that people - yes, like me - have to the physical format. “I can't imagine a world where media is not in your hands and not yours,” one seasoned consumer recently told the BBC in response to the Sainsbury’s news.

There are, then, two issues at work when it comes to HMV expanding, a little further, as it tries like so many other bricks-and-mortar retailers to remain afloat on the high street. Firstly, there is the inexorable rise of online shopping - regardless of the pandemic - which is a convenience that is now just an established fact. And secondly, in HMV’s case, there is the cultural shift away from physical ownership as the shift continues to digital.

“People obviously love going out shopping,” Doug Putman told the BBC this week. “They like touching and feeling and that’s something that online is not going to replace. He remains sure that the high street, despite increasingly gloomy predictions, will not become one long parade of charity shops and coffee chains, as so many have become. “I’m still very optimistic on the [HMV] business and business as a whole on the high street,” Putnam added. “I still think the high street is just something so special.” He has a point, but it’s one that flies in the face of convention, and that high streets have become centres of the service economy rather than the destinations of discovery they once were. I do know that if HMV were to open up round the corner from me I’d probably be forever in it, but I suspect that I - and perhaps my vinyl-loving teenage step-daughter - would be the exception.