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Online DVD Rental's - The Early Years
I'd like to welcome everyone to tonight's DVD Talk Chat - Online DVD Rentals Tonight we have a panel from three notable online DVD Rental stores, who are here to discuss the phenomenon of online DVD rental. Please help me by welcoming: Marc Randolph - President of Netflix.com, Laurence Master - President of DVDOvernight.com, and Chris Watanabe - President XrentDVD.com. Welcome everyone....

Laurence Master [DVDOvernight]: Glad to be here, thanks for having us.
Marc Randolph [Netflix]: Pleasure to be here.
Chris Watanabe [XrentDVD]: Great to be here.

Fist question is for Marc Randolph of Netflix: What do you do with the dvds of popular titles that you stock up on when they become unpopular later on? Do they sell them for cheap??

Marc Randolph [Netflix]: We actually have never needed to sell anything. We've gotten pretty good at balancing demand, and growing quickly hasn't hurt.

Do you ever see yourself selling any of the titles used?

Marc Randolph [Netflix]: Well, my office is currently wallpapered with copies of "The Siege", so no need to sell them. We're renting everything we've got.

Laurence, how about you, what do you do with the titles that start hot but lose favor?

Laurence Master [DVDOvernight]: That makes two of us! I have to agree with Marc on that one, every once in a while you get an overload of a popular title in that you find yourself overloaded with.

Chris, is the same true for Adult titles?

Chris Watanabe [XrentDVD]: Well as a fairly new start-up, I can't give an accurate first-hand answer. However I do see very big growth ahead and more than likely selling used titles is not in the near future.

Our next question has to do with all those DVD cases, what the heck do you do with them? (are they wallpaper in your office)?

Marc Randolph [Netflix]: We've got more DVD cases then we know what to do with. Basically we throw them away. All of our DVDs are shipped to customers in a plastic sleeve.
Chris Watanabe [XrentDVD]: Some of the boxes we save, others...they make great landscaping material. You should see my backyard, nice planter boxes!

What is your all time highest rented dvd?

Laurence Master [DVDOvernight]: I would have to say an adult title, "Flashpoint" however "Enemy Of The State" has been real hot.
Marc Randolph [Netflix]: I'm a little embarrassed to say that in 1998, it was Six Days Seven Nights. This Year it was the Seige. with Barney's Christmas making a strong run for it at the last minute.
Chris Watanabe [XrentDVD]: Country Comfort, a Vivid title starring Devon. But as an adult title, I'd give you a different answer next month.
Laurence Master [DVDOvernight]: We wish Barney was a bigger seller over here!

How many rentals do you actually ship out every week??

Marc Randolph [Netflix]: How many rentals? I could tell you, but then I would have to kill you.
Laurence Master [DVDOvernight]: What's interesting is that rentals really peak on Monday and Tuesday nights for those who want to have their rentals arrive for the weekend.
Chris Watanabe [XrentDVD]: Hard to say. Again as a new start-up (I should probably macro this line), I'm lucky if I can just get all the orders to the post office in time.
Marc Randolph [Netflix]: For perspective, I CAN tell you that we stock as many as 7000 copies of the most popular titles, and keep most of them busy.

How many times on average can they rent a DVD before it gets damaged?

Laurence Master [DVDOvernight]: On average, we notice that a title rented about 6 times starts to get iffy.
Marc Randolph [Netflix]: Our damage is micro. Less than 1%. We've had some discs that have made nearly 100 round trips and are still going strong.
Chris Watanabe [XrentDVD]: So far, no damage. Give me more time.

On a related topic, how many times does it take to rent a DVD before it turns a profit?

Marc Randolph [Netflix]: We lose money on every rental -- but we plan to make it up in volume. No seriously, with DVD growing so quickly we have been investing ahead of the curve. For example, because we are expecting a huge 4th quarter, we are already investing in new facilities, new equipment, and all those things cost more than the current volume supports. But it's important that we keep our service levels strong.
Laurence Master [DVDOvernight]: It all depends upon the title, how many you stock and it really is a volume business like Marc says.

Any horror stories about DVD's you've gotten back in less than perfect condition?

Laurence Master [DVDOvernight]: I could share a few, put it this way, only the adult titles carry the horror stories on occasion.
Marc Randolph [Netflix]: There was one customer who had all his mail in the back of his pickup truck -- along with a few quarts of penzoil. But we just washed the discs off and they were fine.
Laurence Master [DVDOvernight]: Same here!
Marc Randolph [Netflix]: We've also had customers who said, and I am not making this up, that "their dog had eaten their rentals".
Chris Watanabe [XrentDVD]: Adult DVD horror stories...something to look forward to.

Still on the topic of Damage: What is your policy on damaged dvds? what do you define as a 'damaged dvd'? ie. if i return something with a few scratches, but they still play okay is that considered damaged?

Marc Randolph [Netflix]: Every time a customer reports something damaged, we put it aside to test it on several of our test machines. If it plays well on all of them, we'll leave it in circulation. We also randomly check discs.
Laurence Master [DVDOvernight]: If it plays it really is not damaged, however we always test discs that customers say gave them a problem and credit them if there is one.
Chris Watanabe [XrentDVD]: We'll test any discs that are in question and as Marc has said, we randomly check titles to verify workability

Do any of you have problems with DVD's which are out of print, but still for rent like Platoon?

Marc Randolph [Netflix]: Four Wedding and a Funeral is a good one. It was available for months, but when MGM bought Polygram's catalog it was pulled from circulation. They are currently reworking it with additional material and is going to be re-released in September.
Laurence Master [DVDOvernight]: On occasion we'll have requests for titles we carry but only have so many copies of because they've gone out of print since our initial order.

Do DVD extras effect how popular a title is or are there other factors? If so what are they?

Marc Randolph [Netflix]: Extras are HUGELY important! Definitely affect a title's popularity. One of the best examples is Tomorrow Never Dies SE which rents much better than the generic (lamo) version.
Laurence Master [DVDOvernight]: Extras in terms of Adult have been a huge allure for first time customers curious about multiple angles etc.
Chris Watanabe [XrentDVD]: Concerning adult titles, multiple angles seem to have a definite impact on rentals. But the most appealing aspect of DVD is the video quality which the consumer views.
Marc Randolph [Netflix]: I hate when I get to the end of a movie and there is nothing but "cast and crew" . What a let down!

How do you handle DVD's with more than one version (Armageddon, Patch Adams)? Do you try to stock each version and let the customer choose? Laurence Master [DVDOvernight]: We have many requests for DTS as well. At this point, when we get many requests for something, we'll stock it regardless of what we have online already.
Marc Randolph [Netflix]: We have both versions of RoboCop and Tomorrow Never Dies and we carry every DTS title, even if we already have it in 5.1

On a new movie coming out, how many copies of something would you buy for instance 8mm, how many copies did you get?

Laurence Master [DVDOvernight]: We're really not supposed to say due to a few things going on over here, however, you really have to have a substantial amount on release day.
Marc Randolph [Netflix]: We have about 2,000 copies with additional copies "in reserve" in case it surprises us.
Chris Watanabe [XrentDVD]: Fortunately as far as stocking goes we bring in an initial amount of titles. The warehouses for the studios is local and we can pick up inventory as we need.

Is there a grace period on rentals? How much a factor is the US Mail in getting titles to and from your online store?

Laurence Master [DVDOvernight]: It depends at times on what region movies are ordered. Usually it's a 2-3 day period.
Marc Randolph [Netflix]: We ship every order the same day we receive the order (as long as it's before 1:00 PM PST) and we've had great success with the post office.
Chris Watanabe [XrentDVD]: Knock on wood, no problems with the post office yet.
Marc Randolph [Netflix]: We allow 3 days for it to get there and we beat that most of the time, but if the Post Office is late, we'll extend the customers rental period. They will ALWAYS get at least 7 days to enjoy the DVD

On the return date... do you use the postmark or does it have to be back in your store by the date?

Chris Watanabe [XrentDVD]: We go by the postmark on the return envelope. This insures an accurate return date.
Laurence Master [DVDOvernight]: The USPS is surprisingly dependable. We always allow 4 days, then pro-rate 8 more days until the return date.
Marc Randolph [Netflix]: We use the postmark. It's pretty reliable.
Laurence Master [DVDOvernight]: Postmark as well.

For the adult dvd renters: please describe your packaging ...what should i expect it to look like when i get it in the mailbox?

Laurence Master [DVDOvernight]: As plain as a letter. Nothing that gives it away as to the contents.
Chris Watanabe [XrentDVD]: Plain white envelope, nothing which would indicate anything other than a piece of normal mail. Of course the envelope is somewhat larger in size.
Marc Randolph [Netflix]: We only rent the "softer side" of Adult and it all comes in our standard packaging. Your postman will know that you got something from NetFlix, but not much more than that.
Laurence Master [DVDOvernight]: Getting over the concern of privacy with people is a big one.

Marc, does Netflix have any plans for renting other adult titles? Laurence and Chris what issues do you face renting adult DVD's?

Marc Randolph [Netflix]: We don't really see a need to change.
Laurence Master [DVDOvernight]: Many people are renting mainstream as well as adult titles for the first time with us, and they're concerned about anyone finding out about it.
Chris Watanabe [XrentDVD]: One of the challenges is finding acceptance within the mainstream. I've tried to position XRentDVD as a 'mainstream' adult content site, not to be confused with other types of adult sites out there.
Laurence Master [DVDOvernight]: There is a whole new market out there of people who have never rented adult before who are now willing to try because of the discretion.
Chris Watanabe [XrentDVD]: Let's face it, sexually is a universal theme, my job is to deliver something in a classy, professional manner.

Marc Randolph [Netflix]: Xrent: Do you guys screen certain zip codes? Do you ship everywhere?

Chris Watanabe [XrentDVD]: There are certain states and zip codes which we will not ship to, such as in the bible belt and the whole state of Utah.

One of the things that seems to be in flux is pricing, where do you see prices on Online DVD Rentals going? Will all these new customer promotions continue or will we reach a point of business as usual?

Laurence Master [DVDOvernight]: Pricing is a very important issue and will continue to be.
Marc Randolph [Netflix]: We're currently at $3.49 for a 7 day rental, and if you rent in volume, it goes as low as $2.99. That feels right to us.
Laurence Master [DVDOvernight]: We have to stay competitive with the local stores, give people excellent service and quick turnaround to stay competitive in the marketplace, and I think that goes for all of us here tonight.
Chris Watanabe [XrentDVD]: We try to maintain a value-oriented package for the consumer. All our titles are $3.99 and will probably remain so. We provide quick service and selection.
Marc Randolph [Netflix]: We're spending more time working on getting the right shipping and handling prices. A few months ago we lowered them to .95 per order and .99 per disc. and customers love that.
Laurence Master [DVDOvernight]: We offer all of our titles at $4 with flat rate shipping regardless of quantities.
Marc Randolph [Netflix]: Fundamentally it's not about price . . . it's about selection, convenience, and service.

How do you see your relation to brick and mortar video stores? Do you think you're business will kill mom and pop video stores?

Marc Randolph [Netflix]: No. The one thing we can't deliver is Spontaneity. That's something the neighborhood store is great at. But if you are willing to plan just a day or two in advance, we have virtually every DVD, virtually always in stock, and we let you do your browsing in your underwear.
Chris Watanabe [XrentDVD]: The one advantage that your traditional brick and mortar stores have is instant gratification. And that's it.
Laurence Master [DVDOvernight]: Marc mentioned convenience and service, if emails are answered immediately, people feel that they are being served. Speed is another issue Geoff, all of us work hard at getting product out immediately.

Do you think the big names in the traditional video rental world (Blockbuster, Hollywood) will open online stores?

Marc Randolph [Netflix]: The B&M stores are going to have a hard time getting into DVD aggressively enough. Only 2% of their customers have DVD players so they are not going to want to spend much more than that per month on building a DVD section.
Laurence Master [DVDOvernight]: Space is also an issue at retail stores right now.
Marc Randolph [Netflix]: Online DVD is just a blip on their radar right now. It's only a tiny percent of their business and the online piece would be even smaller.
Chris Watanabe [XrentDVD]: Hard to judge, one of the appeals of online is privacy and anonymity. This model definitely works in favor for renting adult content material.

What percentage of the rental market do you feel will be online in the next 3-5 years?

Marc Randolph [Netflix]: I think online rental is going to be big as the online guys become more and more compelling.
Laurence Master [DVDOvernight]: If people keep getting their rentals quickly and there continues to be a huge selection available, we think that the marketplace will grow very large, very soon.
Marc Randolph [Netflix]: The BAM stores are going to "improve" by carrying DVDs. Just think what Laurence, Chris, and I can do to our businesses over the next 3 - 5 years. It's unimaginable how much different (and better) we're going to be.

How long exactly has renting dvds online been available?

Laurence Master [DVDOvernight]: I think Marc was the pioneer on this front. Over a year now.
Marc Randolph [Netflix]: We launched our site on April 14, 1998. so about 15 months. Feels like 15 minutes.
Chris Watanabe [XrentDVD]: XRentDVD, just opened shop recently. But I'm a longtime customer of NetFlix. I've even bought their rental packs!
Marc Randolph [Netflix]: We're really glad to have DVDOvernight and Xrent in the market. The more people there are making online DVD rental visible and popular, the better for all of us.
Laurence Master [DVDOvernight]: We've been around since April 1999. We tried to launch on the 14th but thought that would look ridiculous!

Personally, what is your favorite DVD?

Laurence Master [DVDOvernight]: Being that I've never seen an adult title, can you give me a minute?
Marc Randolph [Netflix]: I'd have to say , Country Comfort (hah, hah, just kidding).
Chris Watanabe [XrentDVD]: Hmmm...hard to say. Star Trek: Insurrection
Laurence Master [DVDOvernight]: Would it be to snobbish to say that Woody Allen in digital is a dream come true. Marc: Country Comfort?
Marc Randolph [Netflix]: No actually, it's probably Austin Powers. A great movie. A great transfer. Great extras.
Laurence Master [DVDOvernight]: Dark City is a wild one with great extras as well!
Marc Randolph [Netflix]: I also demo Apollo 13 when friends come over

How did each of you get started in Online DVD Renting?

Chris Watanabe [XrentDVD]: Got started? You can blame NetFlix. I was on their website renting when I scratched my head and asked myself why they didn't carry harder adult content. That's when the light bulb went off.
Marc Randolph [Netflix]: I was at the VSDA (video rental convention) just about 2 years ago and everyone was talking DVD, but at the time, DVD express was the only one's selling DVDs. We thought that people would definitely want to RENT DVDs as well and thought we could do a pretty good job.
Laurence Master [DVDOvernight]: The traditional problem with the internet and new media in general has always come down to commodity. After working on many online ventures, I thought that DVD rentals were something that would eventually be in demand.

If you had the execs from the major studios in a room for a minute, what would you ask them to do that would improve the DVD market in general (and the rental market in particular)?

Laurence Master [DVDOvernight]: Promotion which they're finally coming around on.
Chris Watanabe [XrentDVD]: Get standards in line with the hardware manufacturers and for God's sake...get rewriteable in the public!
Marc Randolph [Netflix]: 1) Day and Date release 2) Unlock the treasure chest of classic back catalog 3) More hats
Chris Watanabe [XrentDVD]: And T-shirts....
Laurence Master [DVDOvernight]: Classics is a biggy! We constantly get requests for them Marc Randolph [Netflix]: I'm wearing a Warner T-Shirt as we speak

On average how many DVD's do people rent per order?

Chris Watanabe [XrentDVD]: Surprisingly the average is 3.1 titles per rental. Just ran Excel awhile ago and crunched those numbers.
Laurence Master [DVDOvernight]: It always surprises us when a customer only rents one which happens often, especially with adult. On average, people rent between 3-5.
Marc Randolph [Netflix]: Several

Do you think there might be a price hike on DVD's (like with VHS) where they debut at a rental price and then drop to "sell trough"?

Laurence Master [DVDOvernight]: I've heard that there probably won't be for quite a while. It's still very early however.
Marc Randolph [Netflix]: That's a hot topic right now. Some of the studio execs are pressing for Lower prices. Others can't wait to get to "two-tier" pricing. I don't think things will change until DVD penetration gets north of 15% -- at least 2 to 3 years.
Chris Watanabe [XrentDVD]: From what I've seen so far I'd say no, if anything I'm seeing lower pricing being put out (at least where adult titles are concerned)

What role do you see the Death of DIVX in online DVD rentals?

Marc Randolph [Netflix]: Its a victory for open DVD, which is a victory for all movie buffs.
Chris Watanabe [XrentDVD]: It's more a confirmation of the existing standard (DVD). I don't think that DIVX really had a chance from the start. It had way too much going against it.
Laurence Master [DVDOvernight]: It's really hard to say. I think it can only help us all. I think people feel taken advantage of.
Marc Randolph [Netflix]: We have always had lots of Divx customers renting open DVDs from us. We had to mail it to them in plain brown wrappers.
Marc Randolph [Netflix]: And now we'll finally get "The Fly" and "Something about Mary"

How many titles do each of you carry?

Marc Randolph [Netflix]: 3600 and going up quickly.
Laurence Master [DVDOvernight]: We carry 100s of adult and 100s of mainstream and our expanding into Japanese Animation, Classics, Foreign and Independent films.
Chris Watanabe [XrentDVD]: Over two hundred different titles. We're in the midst of negotiating with Metro and Digital Playground and adding their inventory.
Laurence Master [DVDOvernight]: Selection is very important, but as important, is helping people navigate and find what they want. That's the small challenge of online vs. BAM.

Do any of you plan to move over into DVD Sales as well? Are you afraid stores like DVDExpress, Reel or Amazon may get into the rental market?

Laurence Master [DVDOvernight]: We sell as well as rent all of our adult titles, probably cheaper than most around.
Laurence Master [DVDOvernight]: I don't think those players want to go the rental route. It really is considered alot of work from what they're used to.
Chris Watanabe [XrentDVD]: Anytime you have competitors of that stature enter this arena, for us it could be cause for some concern, but the real winner is the customer.
Marc Randolph [Netflix]: As far as sales -- been there, done that, bought the t-shirt. I certainly don't expect Express or Amazon to get in, but it's hard to tell what Reel's relationship with Hollywood could cause.
Chris Watanabe [XrentDVD]: Agreed. Rental is considerably more labor intensive than just your pick-pick-ship operation.
Marc Randolph [Netflix]: You know that Reel "used" to be in online VHS rental and dropped out. Burned once, twice shy?
Laurence Master [DVDOvernight]: I think that Marc is right, Reel is the only player with history here, which tells you that they hopefully learned something from the past.

Before we do tonight's giveaway I want to thank Marc, Laurence and Chris for being our guests tonight. I hope they will be able to stick around for a little while to answer more of your questions when we go back over to free form chat...

Marc Randolph [Netflix]: It's been awesome. Thanks to everyone for coming.
Laurence Master [DVDOvernight]: Thanks everybody, enjoyed it!

Tonight's giveaway - 5 people win 6 pack rental from DVDovernight, 2 People 10 pack from Xrent, and 2 a 10 pack from Netflix
Here are the winners:
For DVDOVernight: fizgig, JPRO, urthling, stingray, Z-MAN For NETFLIX - DVDanime, cyberdogl2 For Xrent - BOrtiz, cybermama Congratulations winners!


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