Indian Netflixes - Will They Work

Nowadays there is a lot of excitement about indian online DVD rental services. There are a lot of sites that have come up (A list is there at the end of this post).
And No, the business does not excite the entrepreneur in me. Having discovered my strengths and what I love to do - in my first failed venture - I can safely say this business is not one for me.

The first company I came across was www.madhouse.in, the second which Amit told me about CineSprite.com. And with the VC's running after this new opportunity, I expect much more action in this field. Anurag seems to have done a good study on these sites.

Let me put my black hat and discuss some of my apprehensions about the nature of this business. The apprehensions become more stronger as we go down the list.
1. Scattered market - Startups need to have access to concentrated markets they can attack and capture easily. Having a scattered market requires bigger army, dilutes the focus and eats into profits. Even in a city like Delhi, the target customer - A family owning a DVD player and having good access & inclination to PC use - has a very low denisty. The other disturbing aspect of the scattered market is - the target customer is everywhere. Not only in Delhi, the target customers will be equally likely to be present Mumbai, Bangalore, Hyderabad, Calcutta, and every other town. Most of the VC backed guys will jump straight at spreading their base by setting up a national presence - instead of attempting to dominate one geographic market completely.
2. Investment Intesive - The DVD market business is investment intensive. You need money for buying DVD's. You need money for advertising. You need money to setup new bases. And you need to duplicate your inventory at each new base. Then there are costs related to delivery. So the entry barriers are high. This again is generally considered a good thing for a startup. Higher the entry barriers, lesser is the competition. But markets with high entry costs also have one interesting side effect - exit becomes much more difficult.
3. No customer lock-in - If I am a cinesprite member, what would prevent me from switching to madhouse or seventymm, except the fact that Amit is a very good friend? And this creates a real problem - customer retention. Where's the lock-in? In the price wars that would ensue once these startups come face to face, customers will switch frantically. And this is where most of the smaller fish will slowly suffocate to death.
4. Inefficient courier services - The courier services in India leave a lot to be desired. Their inefficiencies will eat into the the profits of startups. Actually, this can be turned into a real competitive advantage. But I am not sure how many of these startups would consider doubling up as a courier company.
5. Piracy - Some people hate to pay when we can get it free. And this applies much more to some class of products like software, music and videos and even newspapers. Let us consider a hypothetical situation: Mr X is a subscriber of seventymm, and he gets the latest blockbuster DVD in office. How many people will he share it with? And If Mr Y, his close friend comes and asks the DVD to make a copy of it, will he refuse? Or will he not make a copy of this movie for viewing again at his ease? And then cut DVD's to share with friends and relatives?
6. The huge head - Chris Andrerson is probably right, there is a long tail. But what about the head? Suppose, seventymm has 1Lakh customers. How many copies of the latest blockbuster do they need to ensure that everyone gets to see the movie in the first month? Assuming a 3 day turnaround time, they need 10,000 copies to ensure all people get to see this movie within the a month. And I am telling you, if I can not get to see the movie even after a month in the queue, I am never going to pay you damn 500 Rs the next month. I would rather to go to the nearest library and rent a disk and watch it. So, to keep me happy sevendymm would buy 10,000 DVD's of MunnaBhai. And what would they do with these the next month? The long tail argument works best when there are no costs involved in inventory which is not the case here.
7. The internet is the enemy - We are nearing the tipping point in video delivery over the internet. Bandwidth is becoming cheaper like anything. YouTube has been aquired by Google, IPTV and the likes are here, and microsoft is promoting "pause your favourite show whenever you want". Amazon has launched its video unbox. How do you compete with zero inventory cost, zero delivery cost models that the beast called internet is about to unleash. There is no long term future for the inventory based rental services - (You can short netflix if it is listed ;-). To me, DVD rental is like pagers. They worked in America, before the celluar phones clicked. But in India, pagers came and vanished. Who needs a pager when you can really talk, and why wait for a DVD to arrive when you can watch on demand?
8. Why rent when you can buy - It is rumoured that moser baer is entering the movie DVD market. Whether they enter the market or not, one thing is pretty sure. The cost of DVD's will continue to go down till they become as cheap as CD's. So, a Rs 100 movie DVD may not be that far off. On the other hand, cost of distribution will only go up. How do you compete with low cost DVDs.
9. "Mobile is the Next PC" In 5 years, we will have mobiles with 100GB storage and GigaHertz chips. And TV's will have USB. So will we really renting DVD's or watching them on our plasma TV's via the mobile?

Enuff said to scare away the any entreprenuer even remotely willing to think about DVD rental as a viable business plan. I wish I am wrong, and this can really become a good business and many of these guys have good exits.
In any case, "Mobile is the Next PC". You can quote me on that :D

Cheers,
Ajay Dwivedi

I promised to give a list of the sites.. So here are the ones I know as of today.
ClixFlix
SeventyMM
Cinesprite
HomeView
Catchflix
Madhouse