I received a most interesting email message a few days ago and thought it would be valuable to open this up to wider discussion:

Dear Dave, I own a videorental shop in italy, part of videorental chain of shops and I’m worried about my business.
I don’t know what to do about it. Here’s why: in Italy people are earning less, bills are up, oil costs more, everyone has less money. Further tv ratings are down, advertisers are screaming mad, tv shows are being downloaded with subtitles within 12 hours from the us premiere, movies are hacked, dvds are copied and up/downloaded… and i thought: “ok this is it. the industry will come up with an internet decoder, tv networks will broadcast via the internet, movies will be on demand, dvrs will be included BUT wont let u skip adverts… so i better close down my shop as the blu ray HD dvds movies will never grow, it’s already a dead technology, already hacked too. Then i read that in order to broadcast 1 episode of desperate housewives to 18 million viewers (in HD format for 42 ” tv screens), the bandwith required would be as huge as 4 times the amount of bandwith the internet has today. All this just for 1 show, imagine having all networks broadcasting 24/7… simply, not possible.
Well, then I wonder: how are networks going to stop the illegal downloading of their tv shows and movies? will a scrambled bluray dvd be able to stop piracy for good ?

Phew! You list quite a litany of problems facing modern video rental companies, and you didn’t mention things like Amazon Unbox (NASDAQ:AMZN), Redbox, a very low cost DVD rental service partially owned by McDonalds (NYSE:MCD) and just starting to spread here in the United States, or the rumored Apple (NASDAQ:AAPL) iTunes Store movie rental service.
Even with all these options, however, I still go to the local Blockbuster (NYSE:BBI) 2-3 times/month because what I miss with my Netflix (NASDAQ:NFLX) membership and exploration of IMDB (where I poke around with alarming regularity) is the kinesthetic, the visual experience of browsing and seeing hundreds, if not thousands of movies. There are a couple of facets to this; I enjoy both being reminded of movies I’ve seen and enjoyed (or hated) just as much as those I haven’t seen yet but are already on, or move onto my to-watch list. (Information scientists refer to this as “accidental discovery” and it’s a big part of what makes online sites inferior for browsing.)
It’s the same reason that I still go to bookstores even though I am almost addicted to Amazon: browsing and the shared social experience of a physical space is still a basic human need and one I cannot fulfill with virtual shopping worlds.
Heck, as I type this, I am sharing a table with a fellow blogger and pal (Amy Gahran) at a café and even though we’re typing away in our own little worlds, there’s still a social sense to the experience that would be missing if we were in our own offices with our cups of tea, IMing sporadically.
Anyway, back to videos. Yes, you’re right that as a “storage facility for videos that are available to rent” video stores are doomed. There are too many alternatives, legal and illegal, and it’s clear that as fast as the MPAA creates copy protection schemes other companies figure out how to circumvent then (including both HD-DVD and Blu-Ray).
Let’s turn this on its head, however. Instead of thinking about “inventory models”, let’s think of a video rental store as a place to learn about movies and share your enthusiasm for particular genres, actors, directors, studios, etc, as a social venue, then it all changes. Being at the rental place becomes just as important as what you take with you when you leave, and the process of learning and discovering new films changes dramatically.
I say that, yet I haven’t yet seen a video rental place that understands this. The closest I encounter here in the States is actually at Best Buy (NYSE:BBY), where they have large TVs with surround sound systems, comfortable couches, and two or three movies featured on displays within that space. Imagine a video rental place that had a meeting space, had sponsored movie showings every night, served coffee and pastries (and since you’re in Italy, it’d be good coffee!) and generally tried to create a community of film lovers, rather than be focused on the crass commercial transaction of a rental.
Imagine working out a partnership with a local movie theater where you sponsor showings of classic movies on the big screen. Viewers who are part of your club get a discount on the admission and everyone gets a discount coupon for a rental. I’d join!
In the same way that specialized private bookstores can reinvent the entire experience of buying books (for example, we have a store here in town that just sells mystery books and has an amazing lineup of author signings in a given month – High Crimes) you could reinvent the entire concept of video rentals and make it far more akin to a store that’s devoted to cinema a la Cinema Paradiso.
Otherwise, you’re right, you are inevitably going to go out of business as alternative methods of acquiring and viewing movies grow ever more pervasive.