Online DVD rental service

Introduction

According Easy Group newsletter (2004) on March 14th Easy group introduced new concept offering customers online DVD rental services. The introduction of new service offer was powered by Video Island who is one of the leading online DVD rental service providers.

The present report will discuss the rationale for EasyJet group to launch new service concept. The discussion will review the state of the online DVD rental market and the competitive landscape. Then, the discussion will review the way the entry of Easy group into online DVD rental market will affect the market balance and assess the competitive strength of EasyCinema’s service concept against the existing ones. This evaluation will identify the key service components that are offered by the concept and the way they match existing market demand. On the basis of comparative analysis the paper will assess the possible implication of group’s entry for competitors. The previous entries of Easy group into airline industry created a serious shift of market power, where group managed to pressurise large industry players.

Additionally, the report will assess the way new service concept fit into strategic portfolio of the group. It will compare the principles of operations management of the new concept with other concepts which proved to be very successful.

Finally, on the basis of the comparative evaluation the report will suggest the improvement strategy.

EasyJet and online DVD rental services
According to claims of Easy group (2005) their decision to enter into new markets are congruent with the group’s mission: ” to extend the Easy brand to more sectors whilst creating real wealth for all stakeholders ” (www.easy.com). Speaking in the business terms the group pursues aggressive diversification strategy entering emerging market niches and pursuing new market opportunities. The major component which makes the core of all services offered by ” Easy ” name is the Internet. The company strives to capitalise on the advantages of proliferation of Internet as an environment where commercial transactions take place.

Though the entry into online DVD rental market is purely diversification decision, already in 2003 the group launched EasyCinema concept. The new concept was designed to repeat the success of Easy Group in airline industry, where the idea of selling cheap and no frill services turned out to be huge industry success. It is worth mentioning that at the moment online DVD rental services are provided under the umbrella of EasyCinema. Hence, the entry into online DVD rental business is not just a new opportunity seeking move, but can be viewed as the step to extend existing business model of EasyCinema into new market, in order to capitalise on possible synergy of two related business units.

According to Datamonitor (2005) the current growth of UK DVD market is 9.4 % with current value exceeding $5,6 billion and expected value to reach $8 billion by 2009. DVD sales and rentals form the most lucrative sector and account for 81% of the UK total revenues. Moreover, UK accounts for 30% of the whole European market. Datamonitor (2005) observes the growing popularity of online DVD rental services. Blockbuster forecasts expect the dramatic growth of customer base already by 2008 (Adweek, 2004). At the same time the presence of strong competitors like HMV, Blockbuster, Amazon, Tesco and Virgin has already caused the major drop of prices.

From the picture described above it might be concluded that ” Easy ” enters into a steady growing market. The market growth rate proves that online DVD renting as innovation is at early growth stage (using the lifecycle typology proposed by Kotler (2000)). It means that existing and new entrants do not yet compete for each others’ customers. This aspect is very important for EasyCinema. According to Johnson & Scholes (2002) the entry into growing market requires less financial and marketing investments comparing to the entry into mature and saturated market where competitors are highly aggressive and profit margins are very narrow. At the same time various signs indicate that the competitive pressure is growing. The existing industry players seek to increase their competitive strength and market power by signing agreements with strategic partners. Thus, in February LoveFilm signed an agreement with Broadcaster Five to facilitate the entry of the later into online DVD rental market (Marketing Week, 2005). VideoIsland has the similar agreement with ITV. Williamson (2004) notes that Blockbuster seeks to maximise its competitive strength by increasing its distribution channels. It aims to reach 75 percent of the Web customers by concluding deals with such prominent players as America Online and Microsoft’s MSN. Blockbuster’s management admits that their overall strategy is to turn on all the online levers they have in order to maximise their coverage.

The other sign is the reaction of the industry players on competitors’ moves. The entry of big players into the market creates serious market shifts. As Datamonitor (2005) claims the decision of Blockbuster to enter into the subscription-based online rental space in May 2004 immediately affected market balance. The future competitive landscape can change dramatically with the emergence of new large international players. Thus, the anticipated entry of Neflix is expected to create a serious market shake-up.

The competitive position of new service concept

The principles of online DVD rental
According to Datamonitor (2005) the concept of online DVD rental was first introduced by Netflix is the US. Customers can rent DVDs (on average up to 3 at once) via the Internet, and then receive the order by post with no time limit on each title. The customer sends DVDs back by post and then, after DVDs are received by a service provider he/she can order new titles.

EasyCinema offer
Under EasyCinema brand the group offers customers online DVD rental service with the possibility to choose from over 25,000 titles for £1.99 on a pay-as-you-go basis (including postal charges) (www.easycinema.com). Additionally, the company claims to offer a “no late fees” system and customers may keep the rented DVD for up to 21 days. According to groups claims its offer is about half the price of its high street competitors and allows patrons to keep rented DVDs ten times longer than competitors.

Competitors’ offers
Datamonitor (2005) claims that at the moment there are more than 25 service providers. According to (www.chooserental.co.uk) who in turn refer to HitWise, ScreenSelect (the service owned by Video Island) is the UK leading online DVD service provider. It has the largest titles database exceeding 32 000 titles and offers the lowest monthly rental fee. The second largest service provider is LoveFilm with a large database 32 000 + and user-friendly web site (www.chooserental.co.uk). The offers of other top 10 competitors (including Tesco, DVDs365, MailboxMovies, MoviMine, MovieTrack and Cinema Paradiso) ranges within 16 000 – 25 000 titles with a monthly rental fee and free trial. According to Datamonitor (2005) the majority of online DVD rental providers charge a monthly subscription rather than a fee per rental, to maximise consumers’ value and push them to use service in a more frequent basis.

Comparing the offers using key performance objectives
According to Slack et al. (2001) what really differs one service concept from the other is the ability of operations management to meet customers’ expectations for fast and dependable services at a reasonable price and expected quality. The previous section showed that despite the growing nature of online DVD rental market the competitiveness will increase. The ability of new venture to generate profit will depend on its ability to retain existing customers and attract new ones.

The evaluation of the competitive strength of EasyCinema offer against the competitors will be based on five performance objectives:

• Quality.
• Price.
• Speed.
• Flexibility.
• Dependability.

Quality
Quality is not a singular but a multi-dimensional phenomenon, which might include not only the quality of product. Crosby (1984, cited in Slack et al. 2001) defined quality, at its most basic, as “conforming to requirements”.  The definition implies that the organization’s goal is to comply with requirements, established by market conditions. Provided that online DVD rental services comprise various elements like DVD boxes, the range of titles, the quality of titles, the way they are enlisted on the web site. To address various dimensions of quality the comparisons will be made against the following categories derived from Garvin (1980, cited in Slack et al. 2001), Slack et al (2001) and Zeithaml (2002):

• Product based quality – This category views quality as a precise and measurable set of characteristics that is required to satisfy the customer. Following this logic the “quality” is perceived to be high if customers’ demands and expectations are closely met. This approach is defined by Craig & Hart (1992) as product advantage strategy which is the “the degree of specific benefits not previously available, the extent to which customer needs are better satisfied, the product’s relative quality, and the extent to which the product solves customer problems better” (Craig & Hart, 1992).  In case of online DVD rental service the quality might be evaluated by the range of titles offered by a service provider and the quality of offered titles. As previous section showed ScreenSelect and LoveFilm provide greater number of titles then EasyCinema.
• Value added quality – This category views quality in terms of overall value added. Santos (2003) believe that in case of online services, value added elements of service concept do not play the role of mere facilitators, but do affect the overall experience from the service encounter. He defined e-service quality as overall as a customer assessment of e-service delivery. In case of EasyCinema, the value added elements might be additional services which the company might include to original offer. For instance, Blockbuster offers to members 2 free In-store Movie or Game Rentals each month.   At the moment the group does not include value added elements.
• Web site quality – The lack of tangible attributes of online DVD rental service offer means that it is difficult for the service providers to communicate its advantages and add-value benefits in an explicit way.  Because of its intangibility a consumer can not apply physical perception in order to evaluate it. As Zeithaml (2002) puts it in online environment customers typically interact with web-based applications. In other words they do not interact with employees or other customers during the selection of DVD titles. Hence, user interface of a web site becomes the major enabler of desired transaction. Under such conditions, Santos (2003) stresses the potential of web site design quality as the way to appeal to users. He found that large number of customers formed their overall evaluation of e-service encounter experience on the basis of web site quality.  Santos (2003) adds the design of web enables users to find what the desired information or items using a dependable and fast-performing web engine, providing flexible and comprehensible browsing capability. For instance, www.chooserental.co.uk views the user-friendliness of LoveFilm web site as a significant competitive advantage.  In comparison to the web sites of competitors the web site of EasyCinema not user-friendly or appealing. It looks more as an add-on to EasyCinema offline offer rather than separate service offer.
• Trialability – The other important drawback of EasyCinema against competitors is the absence of free trial offer. Various authors (Santon, 2003; Zeithaml, 2002) believe that the opportunity for customers to test the quality of service prior to committing to particular service provider reduces the degree of perceived risk.

Price
According to Datamonitor (2005) price has become a key performance attribute which determines the selection of a service provider. Having studied online DVD market Xing & Tang (2004) found that various online DVD sellers use pricing mechanisms to attract new customers. The discount approach was found to be the most frequent pricing tool. At the same time Zeithaml (2002) questions the absolute importance of price factor with regards to selection of e-service provider. She states that price becomes important in case of the lack of differentiation between various offers, where patron use price as signal of better offer. However, if an e-service provider introduces value-added components they might create relationship bonds and reduce price-sensitivity.

As it was discussed in a previous section EasyCinema does not include any value-added components into its offer, hence price becomes the major determinant of consumers’ choice. In terms of price the offer of EasyCinema is inferior to the offers of the competitors. According to the stance of www.chooserental.co.uk  the price of EasyCinema is extremely high. They put the following argument: “when it’s costing a lot more than it should or could be (for literally a penny more you could be buying exactly the same service and unlimited rentals with Tesco) it’s a pretty disappointing scenario” (www.chooserental.co.uk).

Speed
In the context of EasyCinema’s operations speed objectives can subdivided into two aspects: internal and external. External speed implies for such an organisation of customer processing which minimises the time required to serve each customer.

The internal aspect implies the degree of operations’ reaction on market requirements which translates in the availability of required goods. The main aim of the speed objective is to provide efficient replenishments by reducing ordering cycles and reducing stock holding; efficient stock ranges by deciding the depth and breadth of goods and improving space allocation; and efficient new product introductions (Stevenson, 2004).

No information was found to show that EasyCinema’s speed of operations is better than of competitors; hence it will be assumed that EasyCinema is as good as the top 10 industry players.

Flexibility
n terms of online DVD rental services it might concern payment schemes (the types of cards being accepted). No information was found to show that EasyCinema’s flexibility of operations is better than of competitors; hence it will be assumed that EasyCinema is as good as top 10 industry players.

Dependability
Dependability implies doing things as promised. This aspect is very important ingredient of relationship building process between customer and firm. In case of online rental services it might relate to fulfilling the promises of dispatching the DVDs on time or securing the availability of titles. No information was found to show that EasyCinema’s dependability of operations is better/worse than of competitors; hence it will be assumed that EasyCinema is as good as top 10 industry players.

The implications of the entry to Easy group for competitors 
On the basis of the comparison of Easy group offer against competitors it might be concluded that the entry of Easy group into online DVD rental market will not create a significant pressure on the top ten competitors. The analysis showed that EasyCinema’s can not compete on price and quality, which were found to be the crucial components of the competitive offer.

The implications of the entry for Easy group
The major competitive advantage of Easy group approach was the focus on the provision of no frill services with minimisation of costs. The previous concepts such as EasyJet, EasyCar and EasyCinema offered customers the low priced deals respective of the order timing. The comparison of EasyCinema online DVD rental offer shows incongruence of service concept with the group’s mission.

The other area of concern is operational side. For instance, the major focus of operations management in case of EasyJet was made on maximum standardization of procedures with maximisation of capacity management. As Calder (2002) claims EasyJet used different techniques to cut costs. The group made bigger revenue risk with their point-to-point service, but they reduced it by offering very low fares and flying full aircraft. Their operation strategy was seeking to maximise the utilisation of existing facilities. Hence EasyJet managed to get 50% more flying hours per day out of their aircraft than conventional carriers. Other business ventures were made on the similar principle: maximum standardization – low costs – low price – large number of bargain seekers – economy of scale.

The operational side of EasyCinema does not demonstrate the similar business logic. First of all the price is too high to attract large numbers of users willing to use its services. Secondly, the margin control raises a lot of questions. Business success can be defined as achieving high gross margins and customer service levels (i.e. being in-stock) with as little inventory as possible (Stevenson, 2004). This approach necessitates detailed attention to stock control throughout the supply chain to maximize high levels of customer service. Provided that EasyCinema has 21 days return policy it needs to secure large stock of DVDs. Without having effective system of return policy the service creates a potential threat of sporadic stock control. Slack et al. (2001) show that if a company can not plan and coordinate stock levels it creates a threat if poor level of service and increasing costs of operations. The current rental model of EasyCinema creates this threat.

Summing up the implications of the entry of EasyCinema into online DVD rental service it might be predicted that the current service concept does not comply with the operation principles of Easy group (low cost – low price – narrow margin – effective capacity management – growing revenues).

Improvement Areas

Performance objectives
In order to maintain its market share and be able to attract new customers and switch customers of competitors the management team needs to identify the preferences of customers. They need to clearly understand what the order-winning and qualifying services are. The analysis showed that price and quality factors are the crucial determinants of service quality evaluation. At the moment the concept is inferior in price and quality. If group seeks to outperform its competitors in these areas it needs to change its pricing strategy and improve the quality component. The particular attention shall be paid to the architecture of the web site as the symbol of quality which is used by potential customers during pre-purchase and post-purchase evaluation of service quality.  The company may use the website media to enhance customers’ satisfaction using the following tools:

• Pricing incentives – Santos (2003) and Zeithaml (2002) claim that pricing incentives provide financial bonds which in turn improve customer retention and attract new customer. The interesting strategy is proposed by O’Leary et al. (2004) who suggest using dynamic pricing approach. They claim that the firm might use database information to identify individual preferences and consumption patterns of every customer and develop pricing strategies accordingly. This approach will reduce the degree of perceived risk and increase the overall satisfaction.
• Value-added services – The Company might introduce various value-added services and differentiated offerings.
• Personalised services  – Using database and one-to-one marketing tools the company may provide its patrons with highly  personalized service, which is difficult to copy by competitors.

Additionally, the trial ability option shall be considered as its absence might incur significant costs of loss of new customers.

Stock Control
The company might adopt the practice of Blockbusters who have created the system of wants list. In case the movie is not available, the patron can enlist into a want list to get the title. Blockbusters’ website also helps customers to manage their planning of rentals with the use of ranking system, where customer defines the priority of titles he wants to get. This approach allows the company to cope with the trade off between being in stock and margin control. At the same time customers have certain degree of awareness about the process and their degree of tolerance increases (Zeithaml, 2002).

Conclusion
The review of the current state of UK online DVD rental market showed that the market experiences steady growth. Despite the large number of existing players the growing state of the market leaves various market opportunities for new entrants like EasyCinema.

The comparative analysis of the EasyCinema’s concept against the offers of the competitors revealed the inferiority of the former, specifically in such important areas as price and quality. Moreover, the assessment of the fit of the business model with Easy group’s existing business units showed that the present business concept is incongruent with operational principles of the group. The analysis showed that the current online business concept does not offer provide unique cost reduction solutions or smart pricing strategy that could attract potential patrons. On the basis of these findings the paper concluded that the group needs to improve price and quality elements of its service concept. In terms of quality, the particular stress was made on the use of web site as a crucial component of service delivery process which determines the e-service quality. Additionally, the paper suggested the improvement of inventory control which would enable the group to reduce operational costs and increase the operational efficiency.

References
Calder S. (2002) No frills: the truth behind the low-cost revolution in the skies, Virgin Books Ltd.: London

Datamonitor (2005) “Recorded DVD and Video in the United Kingdom”, Datamonitor, June

Johnson, G. & Scholes, K. (2002) Exploring corporate strategy, London: Prentice Hall

Marketing Week (2005) “Five and LoveFilm link for online DVD rental launch”, Marketing Week, 17/02, p. 15

O’Leary C., Rao S., Perry C. (2004) “Improving customer relationship management through database/Internet marketing”, European Journal of Marketing, Vol. 38, No. 3-4, pp. 338-354

Santos J. (2003) “E-service quality: a model of virtual service quality dimensions”, Management Service Quality, Vol. 13, Iss. 3, pp. 233-46.

Slack N., Chambers S. and Johtston R. (2001) Operations Management, 3rd edn., Pearson Education Limited: London

Stevenson W. (2004) Operations management, 8th edn, McGraw Hill

Williamson R. (2004) “Blockbuster Breaks Into Net Rental Arena”, Adweek; 8/23, Vol. 45, Iss. 32, p10

Xing X. & Tang F. F. (2004) “Pricing behaviour in the online DVD market”, Journal of Retailing and Consumer Services, Vol. 11, Iss. 3 , pp. 141-147

Zeithaml V.A. (2002) “Service excellent in electronic channels”, Managing Service Quality, Vol. 12, Iss. 3, pp. 135-8.

www.chooserental.co.uk