July 19, 2005 11:16 PM PDT
DVD-swapping site presses retailers for play
The company runs a site through which participants can sell DVDs to one another for 99 cents. "You get rid of 'Caddyshack' or 'Rambo,' and pick up 'The Aviator,'" is how CEO Billy McNair described the process during an interview at the AlwaysOn Conference taking place at Stanford University this week. "We have a guy in Florida that trades 60 movies a month."
The Menlo Park, Calif.-based company is negotiating deals with retailers to conduct promotions under which the retailer would bundle a few free Peerflix trades with a new DVD.
Although retailers (and the film industry in general) typically frown on the used media market, the deal could help these giants to move stock off the shelves, he said. DVDs are an impulse buy, he said. When stacked near the cash register, they sell. But if given a chance to think about it, most customers put that $17 disc back in the rack. "They might only watch it once, so they'd rather rent it," he said.
By linking with his service, retailers can effectively give customers two (or more) DVDs for the price of one. These discs could then subsequently be swapped for others for 99 cents a pop.
The used DVD market, he added, is growing rapidly. A few months ago, the stock available on the Peerflix network amounted to 3,000 discs. Now it's up to 40,000. Roughly 33 percent of all the titles put on DVD can be found on the company's network.
McNair added that the peer-to-peer service does not violate copyright laws. "It is legal because ownership (of the disc) transfers and no original is being retained," he said. "We have had no negative outreach from the studios."
The company's business model also allows it to keep operating costs low. The company never takes ownership of the discs. Owners swap them with each other and Peerflix pockets the 99 cent fee for brokering the exchange. Hence, unlike rental outlets Blockbuster or Netflix, it doesn't have to buy or stock discs. From a consumer's perspective, a disc costs 99 cents, a fee that can be paid for with a credit card or by selling a disc to someone else.
Peerflix does not pay postage--consumers have to--but it has designed the envelopes used by its members in such a way that the envelope with one disc only weighs 0.9 ounces. As a result, it only costs 37 cents to send a disc.
The company's gross margin, or profit left after the costs of sales, on each trade is about 60 cents. Its expenses largely revolve around running the peer-to-peer site, advertising and providing customer support. Rapid growth a few months ago caused customer support problems to climb, but the company has resolved most of these issues, he said.
While many original members on the site used it to get rid of old discs and buy new ones, it is evolving into something of a rental system. People will trade five or six movies in for five or six new ones, and then often get rid of that second set of films about a month later.
"We look at what they do and how quickly they trade," he said.
Consumers, of course, can keep the discs they obtain permanently, he added.
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