Posts filed under media distribution

Online DVD Rental: Behind the curtains with Madhouse

Written by: Vivek Garg

On Jan 9th, 2007

[Update: Madhouse has given a special discount code for our readers. Details at the end of the post]

A lot has been written about online DVD rental business in India and Madhouse being one of the earliest player in the sector, it’s getting buzz everywhere. Seventymm is the poster child of the sector with a funding of $7 million dollars. Madhouse recently closed an angel round of $228000 and looking for more. We sat down with Nandini Hirianniah and Ankur Agrawal, the cofounders of Madhouse to learn the tricks of the trade. Instead of writing directly about Madhouse which already has been discussed several times, we will try to learn the challenges, business process and state of the sector taking Madhouse as our case study.

Start of DVD rental business in India: Most widespread means of watching movies at home is either VCDs or tapes. Consumer appetite for free and cheap content and lack of attention to quality makes it hard to get good quality DVD movies at local rental stores. Also limited shelf space makes it hard to cater to the consumer looking outside of popular bollywood flicks. Success of players like Netflix in USA makes it a known business model. These are precisely the reasons why Madhouse entered this business and I won’t be surprised if others did for the same reason too. Madhouse started this service in May 2005 and they supported this business without funding for almost 1.5 year.

Business Goal: Since movie rental is a subscription business, growth in number of subscribers in one area + growth in numbers of areas served would bring success provided the subscriber acquisition cost (SAC) + cost of keeping the subscriber (churn) + cost of serving the subscriber (COGS) < revenue generated per subscriber (ARPU). This is a greatly simplified picture but I like looking at it with this basic goal. Madhouse wouldn’t give us these numbers but they did mention that they are keeping an eye on their churn. They could keep it constant and even managed to reduce it over time after learning from the customer feedback and by introducing new schemes. I think there is a real lesson here. Understand why your customers are leaving you and act on it.

VCs waiting on the sidelines: We have said this before in earlier post that VCs in India are sitting at the sidelines with their money waiting for the traction in various markets. Madhouse also gave us a similar picture. According to them VCs are going to wait to see how they use their angel money. Some of the VCs think that Seventymm has already got a huge amount of money and this is a winner takes all market. Madhouse also told us that they are looking to increase the depth in the existing markets they serve instead of spreading too thin by expanding immediately. This will mean that they have to go beyond the early adopters of DVD rental business. I think this is a really good way to show to a VC that they are capable of gaining majority share but this also means that they lose the early movers advantage in other areas. What would you do in this case? Madhouse also suggested that VCs typically want to invest into businesses with 10X returns in 5-7 years and some of them don’t see the DVD rental as one. Other concerns raised were logistics and piracy and investors are still skeptical about the licensing and revenue deals with production houses.

Crossing the chasm: Everett Rogers theorized that innovations would spread through society in an S curve, as the early adopters select the technology first, followed by the majority, until a technology or innovation is common. We can think of the current DVD rental business at early adopter stage and it is yet to be seen if we can reach majority. According to Moore, the marketer should focus on one group of customers at a time, using each group as a base for marketing to the next group. The most difficult step is making the transition between visionaries (early adopters) and pragmatists (early majority). This is the chasm that he refers to and it will be interesting to see how it applies in this scenario. Madhouse agreed that most of their customers are early adopters and they are not doing any mass marketing as yet.

Customer, Customer, Customer: Educating customers is tough. Madhouse is not trying to educate customers rather they are trying to gobble up as many customers as possible before they hit the chasm. Their existing markets are Delhi and Chandigarh and they are taking these markets as good learning experience. They have learnt about the consumer habits about watching their movies as soon as they get it. They think 1 on 1 communication works best instead of mass advertising. They cannot stress enough about the quality of movies but they experience tough time explaining to average Joe why DVDs are better than VCDs. Madhouse says it is too soon to say what percentage of customers is with which company. In fact they are working together with some of their competitors to establish this business in the minds of people. When asked about their biggest challenge, Madhouse rightly noted that it is acquiring customers.

Moat and Barrier to entry: What are the differentiating factors for a DVD rental business? What would prevent your competitor from stealing your customers?
-I think exclusive licensing or innovative licensing methods with the publishers and production houses are certainly one of them. Madhouse licensing structure with various publishers includes flat payment per title for unlimited rental for the entire year. They also mention free licensing if they buy the DVD. To reduce this cost they are also thinking about revenue sharing deals. Primary goal here is to reduce capital cost with increased availability of titles.
-Low cost and a large scale distribution network. This can become a true moat once companies go national. Madhouse is trying to build their own.
-Technology for online recommendation and title queuing algorithm. Getting this system right is very important. Madhouse has tied up with NetKode, the company that manages technology for, biggest DVD retailer in Singapore.
Offline presence: madhouse is trying to position itself as movie rental service in their users mind instead of web company. This is why they put emphasis on interacting one to one with their customers. They will also try to achieve this by increasing their offline presence. I would like to remind our readers that one of our predictions for 2007 was that DVD rental companies will come up with offline presence and Madhouse is the first company that is doing this. They have introduced a concept of Movie point. These are existing retail stores that will agree to become DVD return outlets. Slowly they can expand these channels as pickup points. This will create indirect channels at reduced or fixed SAC targeting customers who are not going online. This is important as reverse logistic (returning DVDs) makes a big chunk of operating cost for Madhouse.

Milking the cow: Kishore Biyani of Pantaloon recently said “The money is in the peripheral activities; it’s never in the retail itself. It’s the power of retail that gets you the money; it’s never the transaction that gets you the money.” We think that once a transaction based system is set up, one can do different things to milk their setup. What can DVD rental business do? Some of the ideas we could think of
-Use DVD packaging/labels for ad distribution
-Sell merchandising related to the movies being rented like posters, shirts and coffee mugs.
-Outsource their distribution network for delivering other internet purchases.
Can you give us more ideas how Madhouse can make money?

Competition: We did an earlier post on various ways of distributing media and how online streaming could be a potential disruption to DVD rental. I would like to add an interesting quote on that. “if you carry a 4.7-gigabyte DVD down a ten-meter-long hallway at one meter per second, you’ve effectively “transmitted” the data on that disc at more than 3,700 megabits per second–a speed home networks won’t be reaching for a long time.”

Madhouse team has agreed to answer any direct questions that you have for them about their business. Feel free to leave them as a comment to this post.

[Update] They also have a special promotion for our readers. Subscribe to any of the Madhouse subscription plans and get a 10% discount when you use the promotion code “ileher”. Have fun renting.

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Online movie distribution – a disruptive force?

Written by: Vivek Garg

On Dec 20th, 2006

Recently I got to spend a lot of time at home with little work at hand. Along with gears of war on Xbox live I wanted to watch lot of hindi movies. After finishing new titles from the local Hindi movie rental shop, I decided to give a spin. I took a $3.99 subscription for unlimited movies for 3 days. I watched 4 Hindi movies with DVD/VCD quality online. They support 1 mbps and 512 kbps bitrates. After a few hiccups like clearing the browser cache, windows media player update and lowering the bitrate, I got the no jitter streaming to work in full screen. I hooked the laptop to my TV and audio receiver and voila, I was enjoying new titles that are not in stores with better quality.

At my corner store, I pay $1 for VHS and $2 for DVDs and these are 2 day rentals. It turns out that unlimited $3.99 subscription works out great. With heavy broadband penetration in US and not on time availability of VHS in local store, I wonder if these players are going to disrupt the business model of local stores in US and in India eventually. Let’s look at the players involved in this media distribution game, and the ones that can potentially disrupt existing channels.

1. Brick and mortar rental stores. These stores offer local distribution. People in the same locality go to the store, rent a movie for limited time. Advantage is no hassle local access. Disadvantage for these stores are limited shelf space, bad quality and late fees.

2. Online DVD rental companies (Seventymm, Madhouse) are already gaining popularity in India. For more players, look at this article by Anurag Gupta. They have obvious advantage of unlimited shelf space. DVD players are increasing in India every day. Estimates say that number will reach 50 million in 3-4 years. Here is the transcript of Rishi Navani on talking about their investment in Seventymm.

3. Cable TV, IPTV, video on demand (VOD). You can buy movies at a click of your remote. It will take some time for the infrastructure to develop in India, but this can be potentially disrupting to online DVD rental space. Disadvantage is the initial investment cost to the end user. Ideally, this will be the best option for home users. TV and remote rule the living room and any solution leveraging this can use it to their advantage.

4. Online streaming (, With broadband penetration increasing in India, 1.9 million by end of 2006, this can be the most disruptive in this space. In his interview Rajjat Barjatya says that Rajshri Media is currently focusing on the NRI community. And rightly so, given the current infrastructure in India. PC penetration is still less than DVD players. Computer skill set is required vs. DVD rental which can be operated using mobile phones & courier services. Biggest advantage is that producers and banners can choose this as their distribution channel (e.g. Vivah) and one can watch new movies before their DVD comes out.

We have seen this game played out in US. Netflix (online DVD rental) successfully crushed Blockbuster (local store rental chain) and now Blockbuster is using innovative, in store exchange programs along with online DVD rental to come back. VOD is already becoming an important player and Netflix has plans of online streaming. We will see how this game will turn out in India where we have huge gaps in number of television sets, DVD players and Mobile phones versus PC and broadband connections.

Along with the distribution channel, each player will have to figure out the best subscription model that suits the market best. Like every subscription model, they will face the issues of SAC and Churn. Who do you think has the best subscription model in this space right now? Given the Indian market, who has an advantage in this game? If you have a bunch of money, where would you invest right now?

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