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Acquisition of YouTube worries video retailers



Published: Mon, October 16, 2006 @ 12:00 a.m.



Online video sales and rentals are expected to boom.

SAN FRANCISCO CHRONICLE

From her tiny outpost in the entertainment industry, Joyce Bae is watching Google's steady expansion in the video field and doesn't like what she sees.

"They're taking our business away little by little," said Bae, owner of Diamond Video, a video-rental shop in San Francisco. "I'm worried about the future."

Her worries increased last week after Google said it was buying YouTube, the go-to site for online videos, for 1.65 billion. The deal will make Google the most substantial online video resource and could position the company to dominate the rapidly emerging market for online video sales and rentals.

At this point, DVDs remain the medium of choice for most home video viewing, with sales of 16.3 billion last year and 6.5 billion in rental fees, according to the Digital Entertainment Group, a DVD trade association. But PricewaterhouseCoopers, the consulting giant, projected in a recent report that while the overall home video business will continue to modestly expand, online sales and rentals will experience a boom in coming years.

Looking ahead

By 2010, the firm says, the market for online video sales and rentals will reach 3.6 billion, while in-store video rentals will shrink to about 6.2 billion.

That future came a step closer last month when Apple's iTunes and Amazon.com's Unbox began offering online movie downloads, with Apple pricing online versions of some new Disney movies several dollars below comparable DVD prices.

These are the sorts of trends that undoubtedly caught Google's attention and prompted it to drop a pile of stock -- YouTube is the largest acquisition in Google's eight-year history -- to position itself at the forefront of the online video revolution.

"This acquisition is an exciting next step in terms of our thinking about the evolution of the Internet and video, and one of many investments that we, Google, will be making to make sure that video has its proper place in people's online lifestyle on the Internet worldwide," Eric Schmidt, Google's chief exec, said in a conference call last week with reporters and analysts.

This excitement, however, isn't shared by Diamond Video's Bae and others in the video-store business.

"I hope this business will continue for another 10 or 20 years," Bae said. "But I don't think the future is good for us."

Biggest threat

At this point, the greatest threat to video stores isn't downloadable movies but Netflix-style online rental sites that allow people to order movies via the Internet and receive a DVD in the mail several days later.

Blockbuster and other industry leaders are attempting to accommodate the trend by operating both real-world and virtual stores.

"We've got a strategy that focuses on growing our share of the store-based business and growing online," said Randy Hargrove, a Blockbuster spokesman. "We see opportunities in both."

The wild card, he observed, is if downloadable video sales and rentals catch on with consumers in a big way, bypassing DVDs as a distribution vehicle. Such an operation, with its relatively low overhead and greater efficiency, could make traditional video stores obsolete.

Some in the video-store business say online video sales and rentals are inevitable, particularly now that Google is so heavily invested in making Internet video a core revenue source. But they optimistically believe they'll ride out the digital revolution.

"We'll always have a place," said Andrew Purcell, a clerk at Reel Video in Berkeley, Calif. "We have a lot of obscure movies that you can't find anywhere else."

That said, things will be considerably different once a wide array of videos can be downloaded straight to people's TVs rather than computers, and once the process becomes easier -- and cheaper -- than dealing with a video store.




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