7 Comments:

1. Stephen Langsford Says:
   November 7th, 2007 at 12:58 am

   Hi Simon

   I’d like to respond to your blog. Your observation about differences between US mail and Australia Post are correct however our insight is that many US residents do not rely on the mail man picking up the mail from their letterbox and instead use designated US mail drop-offs because they are perceived as more secure. Also online DVD rental is also taking off in the UK– where the postman does not pick up mail from individual letterboxes. Feedback from our customers is that they are happy to return the DVD to their local Australia Post box (en route to work or shopping) or they just take the DVD to work and return it from there.

   The argument of difference in mail order culture between US and Australia was often used in the early days of the web but we’re not seeing it now. Australians are savvy and online services like Quickflix offer choice and convenience that physically constrained bricks and mortar can’t match.

   I’d also like to point out another inaccuracy. Quickflix commenced it first prototype service from January 2004, version 1 of our software, 4000 titles and one centre servicing the whole of Australia. Since then the Quickflix online service become incredibly sophisticated, we’ve expanded our range to a mind boggling 29,000 titles and we have a comprehensive network of distribution centres across Australia providing next day delivery for the majority of households. As a result our subscriber base has grown by over 100% in the last 12 months and given word of mouth is such a strong driver we can expect exponential growth as our happy subscribers tell their friends and family. Ofcourse as a young company and as we continue to invest in our brand and marketing we are not yet profitable but we believe we’re on the right track. Certainly our customers tell us they love the service so we must be doing something right.

   Thanks for allowing me to respond.

   Stephen Langsford
   CEO and Co-Founder Quickflix

2. Simon Says:
   November 7th, 2007 at 7:56 pm

   Hi Stephen and thanks for your input!

   I’m happy your customers love your service. If a mail-order style of watching movies fits someone’s lifestyle, I can see Quickflix is a great option. I know of families with kids that love it. However it does necessitate a change in movie-watching behaviour. There’s no spontaneous rentals, a delayed delivery time, no precise control on what gets shipped to you, and an imposed regular spend. That simply doesn’t work for me. So there’s pros, there’s cons - but now the consumer has choice. And I think choice is fantastic in the face of VideoEzy and Blockbuster who haven’t changed their model in 15 years. APPLEBOX also provides a different model, and now consumers (at least in the Fairfield area) have another service to choose from.

   However, unlike APPLEBOX, Quickflix is openly derived from Netflix, who happen to be hugely profitable and with great market share in the States. But that’s in the States. 4 years in, Netflix hit breakeven. 4 years in here, Quickflix seem a long way from it. This is not a comment on Quickflix - rather the model itself. You are executing well, and if you believe it inaccurate that the States’ mail-order culture is not an issue with adoption here, why then is adoption lagging?

   I do stand corrected and acknowledge that in December, Quickflix will have been trading for only 4 years - I have actually noted this being a 4 year period in previous posts. By reference to the wayBackWhen machine, doors look like they opened in Dec 2003. I have updated my original post to correct this.

   Cheers and regards,
   Simon Gilligan

3. Stephen Langsford Says:
   November 8th, 2007 at 12:07 am

   Hi Simon,

   I’m not familiar with Applebox but there’s no doubting that a range of niche offerings will appeal to consumers.

   What we know from Quickflix members is that when they are prompted with a movie title (from reading a book, a mag, reading a movie review or anything that triggers their mind to wander across 70,000 actor and director names and 30,000 titles) is that they can immediately place that title into their Quickflix Queue and know that it will be delivered to them …along with all the other titles they’ve chosen, no fuss and direct to their letterbox.

   For Australian movie lovers who care about what they watch…trudging down to the video store in the hope they find something they or their partner would like to watch often doesn’t add up to a spontaneous nor gratifying experience.

   Uptake and market dynamics are different in Australia to US, and whether this market is lagging or not the simple fact is that Quickflix is growing rapidly whilst the physical video store is in decline. Sure video stores continue to have a role but we think the video store of the future will be smaller, totally focused on a narrow range of mainstream titles and most likely continuing to support revenues through late fees, and sale of coke and lollies.

   Good luck with Applebox…and anything that shakes up the status quo of the large franchise network stores in which supposedly one size fits all….is a good thing.

   Cheers

   Stephen

4. Simon Says:
   November 8th, 2007 at 1:33 am

   Hi Stephen,

   I agree with your sentiments about the traditional video store - which is why I founded APPLEBOX. My catalogue is online - there’s no trudging down in the hope of finding something. My customers can decide from their home, or work, what they want to watch. They rent it then and there, they know they’ve got the movie. They pick up when it’s convenient to them. That’s both spontaneous and gratifying.

   Furthermore, with a catalogue online, I no longer rely on shelving to display my movies. I operate out of 36sqm and store all my discs in high-density storage. I’ve got 4000 discs so far, with immediate capacity for another 4000. I could easily add more storage for another 4000. That’s 12,000 DVDs which far exceeds the capacity of a shelving based store. With the catalogue online, and all stores interconnected, a renter in fact will have access to all titles across all stores. With 10 stores that could easily be 100,000 DVDs. Granted that’s a future scenario, but it’s the scenario APPLEBOX is founded on.

   So I don’t particularly see APPLEBOX as niche, and I see it well positioned to plumb the benefits of the Long Tail, as does your model. I see APPLEBOX as the video store of the future, where APPLEBOX members have convenient access to a huge range of titles.

   What I’ve come to recognise in my short time in the industry, is just how entrenched VideoEzy and Blockbuster are in the marketplace. With typically 10+ years in key retail positions, they have immense brand visibility, have *millions* of members and service a market that essentially feels it’s satisfied. Renters really don’t recognise how poorly the traditional video store is setup. You know this and I, like you, want to tell them there are better options out there. Having said that, the whole market is rationalising and the balance of power will ultimately shift. This gives opportunity for growth with smarter models - you are positioned for this, and I aim to position APPLEBOX for this.

   And finally, comparing the uptake of Quickflix to that of Netflix is really quite involved. Yes the market dynamics are very different, and I think different enough to favour Netflix in the states, but not so much the same model here. That’s not to say it can’t be done and best of luck doing it!

   Once again, cheers & regards,
   Simon Gilligan

5. alan jones Says:
   November 8th, 2007 at 12:01 pm

   Hey Stephen, Simon, great dialogue here, and much more civilised than most of the web’s exchanges of opinion It may just be the two of you and I reading this far down, but I had a couple of points on the issues you’ve discussed that I think are worth raising.

   [Disclosure: I was one of the founders of HomeScreen Entertainment, which was another Australian online DVD rental startup until the business was acquired by Quickflix. As a result of that acquisition I own shares in Quickflix.]

   The APPLEBOX and Quickflix models are very different from each other, and the proof of which is mainstream and which is niche must wait another five years or so, at least. Managers run businesses, not business models. Many businesses can try and fail on a business model without proving anything about whether that particular business model is viable or not.

   Sometimes its the big tweaks you make that suddenly flip a new business into overdrive, but more often its one or more tiny tweaks to the model that had previously seemed trivial. I see it happening at the online business I now work for.

   Sometimes, it’s the competitive landscape changing - the demise of a competitor or the introduction of a new technology sooner than expected - something that has nothing to do with your own strategic savvy.

   Certainly when planning HomeScreen Entertainment we ran through many potential future scenarios when considering what the competitive landscape would look like a few years out; who the challenging competitors might be, what sort of ’secret sauce’ they might have that we might not be able to replicate, and what our own ’secret sauce’ would need to include in order to beat those competitors.

   Perhaps all we proved in all that strategic planning we did is that you can never forecast all the variables!

   As well as differences in postal service levels and mail-order culture, Netflix doesn’t have to compete with an online DVD rental business owned by a half-public, half-private Telcosaur that also owns much of the local interweb infrastructure. I’m not sure whether the nation’s network infrastructure provider really ought to be in that space at all, but it looks like they’re not going away any time soon. I’d say that’s the biggest market-distortion field in effect here, but who really knows?

   We’ve all seen the inefficiencies in offline DVD rental operations, and the latent potential in using the internet to do a better job of providing entertainment content. There’s no doubt VideoEzy and Blockbuster have their work cut-out for them in adapting to the rapid change in entertainment consumption patterns, but I’d be surprised if DVD rental stores disappeared. They’ll change, they might be fewer in number, but they’ll carry on in some form, and one of those forms might well be something like APPLEBOX. Personally, I’d be delighted if there were an APPLEBOX outlet, either walking distance or with ample parking, near my home. I appreciate not having to go out and get my movie, so being an APPLEBOX customer wouldn’t mean I’d automatically end my Quickflix subscription.

   For me, the greatest potential to change the business of entertainment delivery is not in whether it gets posted to the customer or the customer comes to the store. What matters much more is the management of large content inventories through aggregated rental queue data at the backend and recommendation algorithms at the front-end.

   Please, both of you: in this forum at least, enough with how many titles you have in our library. It plays well in a press release or a banner ad but has no bearing at all here. We all know a large inventory is only good for your business if you’re better able to manage the utilisation of that inventory (which titles you buy, how many copies of each title you buy, and the number of times each copy is rented in its lifetime.)

   Offline rental stores are going out of business all the time, despite their huge customer numbers, awesome brand-recognition, established customer behaviour and geographic spread. Why? Because it’s too hard to manage inventory - keeping your number of titles and the ‘depth’ of copies per title - under control.

   That’s why you see so many stores close still with thousands of SKUs on tables outside the store with ‘5 for $10′ signs above them. They’re out of business before they even have time to react and sell off some of that inventory at a reasonable price. Or they go to sell off some inventory, only to find there’s no market for it because other offline rental stores don’t understand their own inventory position well enough to be able to make an informed bid on the sell-off.

   A lot of Quickflix’s future potential comes from being able to aggregate the rental queue data from its customers and accurately forecast exactly how many copies of each title it needs, in which distribution centres, and when. The longer the average rental queue, the further out Quickflix can forecast inventory requirements. A longer forecast also lets Quickflix buy the stock it needs at a better price - no need to pay thru the nose for another 20 copies of the latest blockbuster if the forecast says you can wait until it’s dropped another $5 per copy.

   Once your system works, the more customers you have, the better it works. More customers = better data = smaller periodic variance = lower cost of new stock, higher utilisation of existing stock. Eventually you hit the kind of scale where you can afford to acquire unprofitable new customers because the cost is offset by the efficiency of your forecasting demand amongst your other customers.

   Recommendation algorithms have really come a long way since the early days of “my TiVo thinks I’m gay” and “Amazon keeps recommending things related to that one off purchase I ordered for my niece.”

   Good recommendation algorithms need to be appropriately applied to customers, need to be quick and easy to use, and need to motivate and reward customers for repeat use. Once they do all that, they are incredibly powerful tools for increasing the utilisation of stock you already own.

   I’m not a big fan of any of the recommendation algorithms I’ve seen applied in Australian ecommerce sites. I see room for improvement everywhere, not just at Quickflix and in DVD rental [disclosure: Quickflix did not acquire HomeScreen's recommendation platform. It is available for licensing.]

   APPLEBOX won’t need recommendation yet, since the customerbase is local and inventory correspondingly smaller. The cost of errors is less. But if you aspire to build a network of stores one day you will need to manage your inventory centrally, and recommendation can help.

   Good recommendation really *is* rocket science; it’s rapidly-evolving, bleeding-edge math still largely the domain of academics. So its something you need to invest in developing and learning from for a while - it’s not a plug-in-and-turn-on thing. Your results *will* vary!

   Managing inventory utilisation in a single retail location isn’t too hard, but likewise becomes challenging when you need to manage multiple stores effectively. Some of the more challenging aspects occur when you try to balance inventory by moving units between stores, an opportunity to learn more about random walk theory than any retail businessman would ever expect.

   You don’t necessarily need to do recommendation and customer demand forecasting to operate a successful entertainment rental business. Maybe they’re the tweaks that turn out to count for nothing, or maybe they’re the apparently minor tweaks that flip the business into overdrive. Like I said, the proof won’t be in for years yet.

   Wow, what a rant. And I can’t believe I posted this on your blog rather than mine! You’re not even running AdWords on it!

   Cheers,

   - alan jones

6. Simon Says:
   November 8th, 2007 at 12:54 pm

   Holy crap! Thanks for your insight there Alan. Plenty for me to chew on. I suspect I will be coming back to this post for quite a while to come. I especially like your opening “Managers run businesses, not business models…”.

   I take heed that with one store APPLEBOX’s inventory issues are greatly simplified. Ramping up multiple stores with centralised inventory management and purchasing forecasts is not to be considered lightly. With DVD prices dropping rapidly after initial release, its clearly an area that a lot of money can be wasted and wasted quickly. And yes, that’s not to forget the tools to promote utilisation of stock already owned…

   Many thanks for your input!
   Cheers,
   Simon.

7. Simon Says:
   November 8th, 2007 at 2:41 pm

   Just a quick revisit to Alan’s thoughts on recommendation engines. Whilst agreed, we are a long way from the “my TiVO thinks I’m gay” beginnings, I have never been impressed with recommendation engines. They never seem to work for me. Mike Walsh expresses it well in his article The Day The Music Started. From that article “recommendation is actually a subtle problem of search rather than one of taste comparison”. Social networks allow us to search in new ways and assign our own weight to recommendations others offer. I’m not convinced an automated attempt will ever achieve as good an outcome - Netflix feel there is some way to go also, with their Netflix Prize. And whilst APPLEBOX have neither at the moment :0, introducing a social network to the product is my first port of call.