Renting movies is a bad business to be in, at least if you’re a traditional movie rental store.

Yesterday Netflix announced a limited version of their mail-order video rental service is now available in Canada. Rather than offering the full gambit of services, (mail order rentals and an online streaming service) Netflix decided to offer only the video on demand online service. This is an interesting choice, considering many Canadian internet service providers have bandwidth caps limiting the amount of video someone could watch.

Fittingly, yesterday Blockbuster officially filed for Chapter 11 bankruptcy protection. The writing has been on the wall for a long time, at least according to this observer. The debt was a bloated $1 billion, which is expected to be cut to about $100 million after the bankruptcy. The business model is broken, with competition coming not just from Netflix, but Apple as well, and to a lesser extent companies like Amazon (cheap DVDs) and movie theaters both in lowering their prices and investing in better screens and technology. Watching Avatar on IMAX is a pretty cool experience.

I explored this issue back in 2006(!) on a now defunct blog. Because I have no other friends, let me quote myself yet again:

This just in: Movie rental stores are going away. Forever.

Okay, anyone with any amount of common sense could have told you that. Why would you go rent a movie when Netflix or Blockbuster will send you one for the same price? A quick google search for “online movie rentals” brings up a half dozen Canadian companies that’ll send two movies to anyone with a credit card and a pulse

I wrote that regarding now bankrupt Movie Gallery back in February 2006. It was obvious to me even almost 5 years ago that the traditional movie rental place was going the way of the dodo. Fixed costs are too high. Staff get paid to do nothing. And regarding both Movie Gallery and Blockbuster, they both loaded up on crippling debt during the times when any company could get debt. The world around them changed and rather than change with it, they tried to become bigger versions of an outdated model. It was only a matter of time before they fell.

I’m sure you’ve noticed the small movie rental kiosks located in grocery stores and the like. The kiosks do a good job of only stocking the new, hot movies, rather than the large selection of older or lesser known films at the video store. I’m not sure what the revenue split is between the rental company and the store, but the owners of the kiosk have to be giving something to the store for the space. I’d be curious to see how profitable the model is, considering the kiosks I’ve seen rent a movie for 24 hours for only $1.49.

There’s always going to be a segment of the population that will rent movies as an impulse purchase. I don’t care enough about movies to have a Netflix account, even at only 8 bucks a month. Typically when I want to see a movie I either (a) go to the video store and rent it or (b) wait for the feeling to see the movie to go away until I see it on tv 5 years later. This happens about twice a year. I am not a good movie customer.

In the small town that I live, the video store owned by Movie Gallery recently closed. An independent owner has taken over the space, paying what I’m sure is an inflated lease price (the building is less than 10 years old) and trying to make a go of it. While inventory is about 1/3 of what the old store was- a good move in my opinion- I struggle to see where profit will come from. Will this store do enough volume to make it? I’d be surprised. I think the store may be forced to do some innovative things to make ends meet, or most likely, shut down after a couple years.

Tell everyone, yo!