We can understand the characteristics of a DVD renting service business model and a video streaming service business model using Rayna & Struikova’s business model framework to compare to analyse the business models, and then consider how the characteristic differences between information and digital goods caused a change in the business models.
Characteristics of a DVD renting service business model
The value network includes:
- Licensing with movie distributors.
- Purchasing DVDs from production companies
- Renting of shop space.
These complementary assets create a high barrier to entry into the market for competing businesses and ensure market dominance.
Offered the latest movies that are no longer at the cinema.
Implied urgency and limited availability through a fixed number of DVDs.
Reactive pricing with newly released movies are priced higher than older, less popular movies allows the revenue to be maximised.
Shops were the primary distribution channel, although delivery through mail existed for a short period of time.
The target market was people who owned DVD players and watched movies at home.
Understanding customer behaviour through sales data which is used to plan the distribution of upcoming movie releases to optimise the number of DVDs available in the most popular shops.
The revenue model involved customers having membership so that the shop could record which DVDs were rented by which customers and a rental fee with late charges.
The value communicated was in shops as customers browsed shelves full of DVDs, showing them that a large number of choices were available.
Characteristics of a video streaming service business model
Video streaming services attempt to control their supply chain through licensing and then producing content.
The value networks include cloud infrastructure such as AWS for Netflix and Disney Plus, and payment services to collect subscription fees.
Customer’s watching whenever they want using high speed internet connections and mobile devices, shifted the customer’s relationship with watching movies away from something done at a particular time in their own home.
Discovery of new content is made as easy as possible, encouraging more time spent watching, which provides more data, and makes the customer more likely to continue to pay for the service.
The distribution channel for streamed videos is apps and smart TV’s connected to the internet, which creates a low barrier to entry by making them purely technological, requiring only an internet connection and a device for viewing.
The target market for video streaming includes the majority of adults with an internet connection and a desire to watch movies. Netflix, for example, has 182 million active users. Given the popularity of video streaming and the increasing segregation of content into specific services as those companies attempt to own particular segments of the market, it seems likely that customers will subscribe to multiple services which will reduce competition in the market.
Video streaming uses price versioning. Different subscription levels with different features are offered at different prices. This allows the company to segment its customers by offering a basic service that suits the needs of most individuals, along with higher priced options for customers who value watching in high definition or ultra high definition and those who want to watch on multiple devices, often because of multiple users such as a family.
Video streaming enables data capture about customers behavior, including which customers watched which movies, what time of day they watched them, how far through they watched. This data can then be used to recommend other movies
In the competitive video streaming services market, pricing is underplayed to signal to customers that they barely even need to consider the cost because it is so low and because the value they will receive is in being able to watch new movies when it suits them.
Analysis of the differences between business models
Video streaming and DVD rental differs on every element of Rayna & Struikova’s business model framework. The introduction of the internet revolutionised business models. Companies that provided DVD rental services and attempted to adapt their business model by moving part of it online, e.g. ordering DVDs through a website, were quickly replaced by companies that developed business models from an understanding of how the internet changes every aspect of their business.
|DVD rental||Video streaming|
|Value creation||Aggregating assets into a physical location.||Segregating assets into a virtual location.|
|Value proposition||Rent weekly and watch at home.||Access anywhere, any time.|
|Value delivery||Physical shops, and home-bound devices.||Internet-connected home and mobile devices.|
|Value capture||Membership and rental fees revenue model.||Subscription revenue model.|
|Value communication||Delayed communication through trailers on DVDs and customers browsing availability in shops.||New content available every time the customer opens the app.|
The only aspect of consumer behaviour that doesn’t seem to have been affected by the shift in business models is that the majority of movie and TV consumption takes place as entertainment in the home.
Business model innovation came through utilising the ubiquitous adoption of internet technologies and mobile devices that enabled the asset (movies) to be shifted from being an information good to a digital good, along with the resulting change in the economics.
DVDs are information goods. The value is in the information contained within the good, whilst the physical item holds very little value. Information goods cannot be replicated but can be copied, albeit with some loss of information that results in a poorer quality when the movie is played. The ability to copy enabled DVD piracy driven by the high price and limited availability of DVDs. Information goods enable the transfer of information, in this case from the disc to the TV screen.
Video streaming uses digital goods, which are intangible, codified, transferable and replicable. Digital goods are the only type of goods to have this combination of characteristics and so create different economics than information goods rely on. Digital goods may have a high production cost but thereafter the reproduction costs are near zero, whilst also being non-rival. These unique characteristics created challenges for businesses and drove the needs for a change of business model.
Analysis of the differences between information goods and digital goods
In addition to the differences in business models, the two services also have considerable differences in the nature of the goods they provide.
|DVD rental||Video streaming|
|Intangible||No – information contained in a tangible medium.||Yes – information not contained in a tangible medium.|
|Codified||Yes – the physical medium contains codified information.||Yes – contains information and is information.|
|Transferrable||Yes – information can be transferred without direct contact||Yes – information can be transferred in a non-rival way.|
|Replicable||No – some loss of information occurs in copying.||Yes – enabling retrieval without loss of information.|
These differences in characteristics create different economic drives, including reproduction costs, non-rival usage and piracy reduction. Digital goods have reproduction costs at near zero. The usage of digital goods is non-rival because there is no limit on how many customers can watch at the same time. Utilising digital goods enables companies to introduce technical means to prevent piracy through replicating the movies but this drives a different consumer behaviour of sharing account details with friends and family, which causes another technical fix by services controlling the number of devices an account can be logged into.
The widespread adoption of the internet caused a shift from movies being an information good to a digital good which drove a change in business models that resulted in DVD rental services and video streaming service having considerable differences in business models and in the economics that follow from the nature of the goods.