In the last year, 25% of South Africa’s video stores closed down. This figure was contained within media and entertainment group Avusa’s financial results for the year ended March 2012, released last week.
Avusa’s (JSE:AVU) entertainment business unit comprises Nu Metro, Gallo Music, Compact Disc Technologies, Entertainment Logistics Services, Associated Musical Distributors and Collage Litho.
Under Nu Metro falls films, cinemas, Home Entertainment and Popcorn Cinema Advertising.
Home Entertainment markets and distributes DVDs through rental and retail and holds the distribution rights for 20th Century Fox, Disney, Warner, the BBC and Universal.
Avusa stated that the rental store base reduced dramatically, saying that around 25% of South Africa’s video stores closed down during the year.
In a statement, acting chief executive officer Mike Robertson pointed out that the arrival of digital terrestrial television provides the group with opportunities to partner with technology companies in the provision of video-on-demand.
So what is killing the video store? Stakeholders and experts on the industry indicate that it is a range of factors, ranging from new channels such as online viewing and video-on-demand, to piracy and monopolies in distribution rights.
Arthur Goldstuck, head of research firm World Wide Worx, said that video-on-demand might have a hand in these closures, but that it is quite limited.
“In its current format video-on-demand as provided by DStv’s BoxOffice is more a convenience factor than a real competition factor,” he told Moneyweb.
DSTV’s BoxOffice, launched in June last year, is currently only available to DStv Premium customers, which according to the latest Television Audience Measurement Survey (TAMS) has 1.75m subscribers.
BoxOffice only offers 15 movies at any one time, with new movies added as they are released for the service by studios. The number of movies is limited due to storage constraints on the current PVRs, which means only approximately 150 blockbuster movies from most of the major studios will be released on BoxOffice in a year and are available at R25 per title.
According to Goldstuck, BoxOffice only has about 20 000 customers, but the rate at which new customers are coming on board is accelerating and would double in three to six months.
The latest figures on BoxOffice will likely be available when parent company Naspers (JSE:NPN) releases its results in the next week.
Mr. VIDEO director Peter Scott told Moneyweb that in the more affluent areas it is feeling a slight pinch from video-on-demand, as customers in those areas have the DStv premium package.
Scott said, however, that the monopoly that exists in distributing rental content also hurts its franchisees.
He said that Nu Metro has monopolised the rental industry by entering into exclusive agreements with the major studios, ensuring that the rental content cannot be legally obtained from anywhere else but it.
“This means that the prices that video rental stores have to pay for movies obtained from Nu Metro are not determined by any competition whatsoever,” he said.
He said that in Mr. VIDEO’s opinion Nu Metro’s own actions are adding to its detriment and diminishing returns.
The difficult economic conditions are also to blame.
Scott said that Mr. VIDEO’s franchisees, like all SMEs, are experiencing strain under the current economic situation.
“We believe the majority of the 25% loss represents mostly the small independent operators,” he said, adding that most of the stores that have closed were unfortunately situated in the previously disadvantaged areas where jobs and healthy entertainment was much needed.
The biggest threat, according to Scott around 80%, still comes from piracy and downloading from institutions like universities where movies are illegally downloaded and shared amongst family and friends.
“The government’s lack of support against these illegal activities does not help matters either. This leads to job loss and crime. Contradicting themselves the government is running a huge drive at the moment to increase the local film industry, but they turn a blind eye on piracy which will inevitably affect those they were trying to assist in the first place,” Scott said.
The Franchise Association of South Africa (Fasa) told Moneyweb that it is aware that DVD franchises have not experienced organic growth and that these franchisees have noted piracy as a big problem that they don’t have control over.
Although there are some independent video stores, the majority are franchises for which the owners have to pay substantial franchise fees, including joining fees, on-going royalty fees and on-going marketing fees.
The failure of such an endeavour causes serious financial hardship for the entrepreneur.
Fasa said that piracy, video-on-demand and online channels will continue to influence businesses negatively into the future as markets develop and are enabled to make use of alternative channels.
Scott told Moneyweb that Mr. VIDEO is trying to tackle the challenges through awareness campaigns.
“In the absence of government intervention our focus is to appeal to the moral side of the consumer to not support piracy as the funds through piracy lead to far more hideous crimes such as child abuse, terrorism and human trafficking,” he said.
Goldstuck believes that the need for video shops is going away in general due to the wide range of video entertainment available on subscriber TV and because the internet is providing alternative entertainment.
“Eventually we will also have the equivalent of Netflix, that will really hurt the stores,” he said, indicating that downloading videos will still be limited in South Africa until bandwidth issues are sorted out. Netflix is an American provider that allows movies and television shows to be watch online or streamed.
“I recommend that video stores change their business models rapidly. They won’t last unless they specialise in niche film offerings,” he said.