Zip.ca's Rick Anderson. (Darren Brown, OBJ)

Does Zip.ca have what it takes to become the content provider of choice for video junkies?

Has Internet killed the video store or merely changed the rental landscape?

If local DVD rental and video streaming website Zip.ca is any indication of the shape of the future, it's safe to say that the Internet has made things at least a little more interesting for the video fan.

Zip is a bit of a jack-of-all-trades in the video content business: the company's main revenue source is its monthly subscription-based DVD rental service, which allows its users to get up to eight videos per order online, ships it to them at home through one of its four distribution centres, and then lets them watch at their leisure. Subscribers then mail the DVDs back for free and automatically receive the next few videos on their list.

Recently, Zip also added its Zip.tv service, which combines interactive features such as user-submitted reviews and forums with ad-supported streaming video.

"We're known as a 'long-tail' provider, and we provide users with what they want – not just the most popular, but the entire 'long tail' of video content," says Zip chief executive Rick Anderson. "Part of our philosophy takes us not just through different ranges of titles but also different types of formats... and online distribution is another emerging format that will continue to grow."

Zip's strategy has allowed the company to avoid the high-definition format war raging between Toshiba's HD-DVD and Sony's Blu-Ray by stocking titles for both formats, as well as non-high-definition discs, adding to an impressive and growing library of 72,000 individual titles and approximately 400,000 physical DVDs in total.

Mr. Anderson points out that Zip.tv also boasts 20,000 online videos, mostly brief music video, news or sports clips.

All very impressive numbers, especially since Mr. Anderson says the company's 30,000-plus subscribers rent an average of seven to eight movies a month for about $3 per DVD, and that the website attracts about 9,000 unique visits per month. The company also benefits from a partnership with Rogers, whose Video Direct online rental program is powered by Zip.

"We're seeing steady growth in our revenues and operations of about 25 to 30 per cent a year," he says.

However, industry analysts are not quite sure if Zip's diverse business model is one which is going to completely capture the Canadian rental market, although they agree that the idea shows great promise.

"Is there market potential? On a scale of one to 10, it's about a four or a five in the Canadian market," says Kaan Yigit of Solutions Research Group in Toronto.

Mr. Yigit says the closest parallel to Zip's business model is U.S.-based Netflix, which has approximately 12 per cent of the total rental market south of the border. In comparison, Zip had only about one per cent of the Canadian rental market as of four months ago.

"The Canadian market is relatively small, and Zip started much later than Netflix," Mr. Yigit says. "Zip also doesn't have the marketing muscle to make its brand known to the broader population, and at this point, it's simply potential that's not realized in any large way."

What about Zip's enormous title selection, which includes many arthouse and foreign films not carried by the larger video stores?

"Well, selection is great and will make you a good, solid niche player, but the blockbuster titles are what will make you big money ... If you look at movie grosses out there, something like 75 per cent of revenues are coming from the top titles, which means that 71,000 (Zip) titles are relatively niche. It's the 20-80 rule, with 20 per cent of product generating 80 per cent of revenue," says Mr. Yigit.

"What does Blockbuster promise? It guarantees it won't be out of stock of the latest big Hollywood movie, because it won't be that title from Botswana that's out of stock and pissing people off."

Mr. Yigit also argues that the mail rental model employed by Zip and Netflix is merely a transitional business before the market moves toward streaming videos directly over the Internet or allowing for downloads.

While that may yet be a ways off, it is a fact that Mr. Anderson himself acknowledges.

"Most people are not equipped to download full-length high-quality video even though it's technologically feasible, which is why we currently have more ad-supported free content on Zip.tv," he says. "The online video space is an investment opportunity with the expectation of returns down the road."

But even when consumers are more comfortable with the idea of watching videos on the Internet, it may not revolutionize the market the way people are predicting and send scores of customers to Zip.tv, says online video analyst Dan Rayburn of StreamingMedia.com.

"You have to look at the geographic factors, the type of content, how it's delivered to see if (Internet-based video) is going to have an impact," he says. "In some cases it makes sense to get content on your computer, but ... why spend money on a 28-inch high-definition television to watch a nature show downloaded onto a 13-inch laptop? What about if I have friends, or if I want to watch it at someone else's house? (Internet-based video) is not a replacement, it's a complement."

However, the good news is that Zip's early experience in a variety of video technologies makes it a juicy target for takeover, Mr. Yigit says.

"I'd be very surprised if Zip wasn't sold within the next year and a half or two ...they've got market experience doing the online delivery, mail delivery that no one else is doing, and a player in the market might go, 'Well, I don't want to build this myself, so let's go and buy them and we can just scale them,'" he says.

In the meantime, Zip is growing and following the customers wherever they want to go with video technology, says Mr. Anderson.

FACT BOX

Online rental subscription revenues are expected to rise to $285 million US in 2011 from just $12 million in 2006, or 88.4-per-cent growth compounded annually. In comparison, in-store rental growth will average only about 1.1-per-cent at a compounded annual basis, increasing to $1.6 billion US from $1.5 billion. The overall home video rental market is forecasted to expand at a compound annual growth rate of 4.4 per cent to $1.9 billion in 2011.

Source: PwC Global Entertainment and Media Outlook 2007-2011