VHQ Entertainment Inc. has bought the assets of another Canadian software development company to allow its entry into the market for online DVD movie rentals.

VHQ president and CEO, Trevor Hillman, said his Red Deer, Alta.-based company

will be the first major home video retailer to offer the online rental option in Canada. Hillman, who won’t disclose the name of the firm until the deal closes in April, said even Rogers Video and Blockbuster Canada haven’t tested the local waters yet.

“”There are some people that, when they want a movie, they want to go grab it right now. Then there are others that are willing to go online and pick several titles that they like to watch and just watch them at their convenience,”” explained Hillman, who hopes to earn revenues of $25 million to $30 million in online rentals at VHQ over the first few years.

Other companies serving the Canadian market include Zip.ca (which began operating in February), Rentadvd.ca, Cinema Flow and Movies For Me. Although Blockbuster and Wal-Mart offer DVD rentals in the States, they have yet to extend the service to Canadians.

Rick Anderson, vice-president of marketing at Zip.ca, estimated the value of the Canadian market for DVD rentals to be US$1 billion, but cannot pinpoint the online rental share because it’s still in its infancy.

In the U.S., traditional DVD rentals are estimated at US$8 billion in annual sales, with online rentals accounting for five per cent to 10 per cent of this market.

The growth prospects of online rentals is good because “”DVD rental as part of the entertainment business is growing faster than almost anything else,”” said Anderson. He said Canada has seen 30 per cent growth in DVD players each year over the last few years and a corresponding increase in rentals.

He said online VHS tape rentals failed because it’s more expensive and unmanageable to ship, compared to DVDs that can be mailed “”for the price of a regular stamp. You can’t do it with VHS.””

VHQ, which is set to enter this business, operates a chain of 59 retail stores in Alberta, Saskatchewan and the Northwest Territories. “”We’d like to further expand into Alberta and Saskatchewan and then start moving into B.C…over the next couple of years.””

Some may say Canadians outside the three regions in which VHQ has physical locations, and who are interested in renting over the Internet, may prefer a retailer they’re more familiar with.

Hillson isn’t fazed, though. “”That’s possible, but Rogers just came out themselves and said they’re not going to be doing them. They don’t believe in the model, I guess.””

John Williams, founder of the J.C.Williams retail consultancy in Toronto, believes VHQ will have to invest in a marketing campaign to increase consumer awareness outside the western market and change purchasing habits. He doesn’t view it as a major challenge, however, because “”No one heard of Amazon or eBay”” before they began promoting themselves.

Williams agreed with the old argument Internet retailers must have a physical presence as well, which would put VHQ in an opportune position. “”Any time you’re dealing with people at a distance, it does help,”” because customers can always seek a face-to-face meeting if they run into problems, he said.

Probably the largest competitor in the U.S. —— and the one others are modelling themselves after —— is Netflix of Los Gatos, Calif. Launched in 1998, it has more than 1.5 million subscribers who have access to more than 15,000 DVD titles.

Last month, Netflix predicted it would have US$480 million to US$505 million in revenues and up to 2.7 million subscribers by year’s end, and US$1 billion in revenues and five million subscribers by 2006.


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