DVD upstarts carve out niche businesses

Gene Field didn't set out to be a Netflix rival, but his customers told him it made too much sense not to try.

Field and his wife are co-owners of Tampa, Fla.-based AnimeNation.com, a community Web site and online and offline store that specializes in Japanese animation. Like Netflix, their year-old RentAnime.com subsidiary is offering DVD rentals by mail for a monthly fee. But there's a big difference: Every single movie in their catalog is anime or anime-related.

AnimeNation.com might not make the Fields rich through a multimillion-dollar public stock offering, but their service is appealing to a niche market that Netflix and its big rivals aren't addressing. It also shows the potential staying power of small online rental outlets toiling in the shadows of the giants.

"We've had our share of growing pains," Field said. "Inventory demand has been an insatiable monster, which we kind of underestimated. But we're catching up. We're growing."

RentAnime.com is one of a handful of companies quietly building businesses under the noses of Netflix, Blockbuster, Amazon.com and other DVD rental giants. For the most part, they're ignoring the price wars and mergers of their bigger competitors even as they lead their capital-rich rivals in technological innovations such as video on demand.

Executives at Netflix--fresh from last month's market-moving alliance with erstwhile rival Wal-Mart Stores--have little patience for talking about market segments that bring in customer numbers less than seven digits. The company recently passed its 3 million subscriber mark. Blockbuster, the main rival of Netflix today, has somewhere north of 750,000 subscribers and hopes to hit the 2 million mark by early next year.

"It's a business in which scale has become a key contributor to financial success," Netflix Chief Financial Officer Barry McCarthy told financial analysts at the JPMorgan Technology Conference last month. "If you want to be successful in the business, it's important that you be large or figure out how to get large fast."

It's a very different story at San Francisco's Greencine, a DVD rental service focusing on a number of niche content areas--not the "National Treasure" crowd, its employees say--which has built up a loyal group of "tens of thousands" of subscribers in its third year of operation.

"We see ourselves as more of a supplemental service in the DVD rental field," said Craig Phillips, one of the company's editors. "Diversification seems to be a key, as well as being creative. We're really filling in gaps that aren't catered to by Netflix or the other big services."

Aiming for the niche
Indeed, the niche--whatever it may be--is king for these Netflix rivals, who eschew the Hollywood mainstream in favor of subculture film buffs who will line up for "The Rocky Horror Picture Show," swoon over B-grade zombie flicks, or trade trivia about 1970s samurai films as easily as sports fans reel off batting averages.

Field's anime service is a good example. Anime fans, who often call themselves "otaku" in a reference to the Japanese pop subculture they identify with, have long made up one of the most active online communities, trading film information and even subtitling and distributing their own releases.

More than a dozen other companies, such as Wanted List and Video Takeout, focus exclusively on adult titles, which neither Netflix nor

Blockbuster carry. Other rivals offer mainstream titles but distinguish themselves with different business models such as Peerflix's facilitating swaps of subscriber-owned discs, or DVD Overnight's no-subscription rentals.

The most successful DVD upstarts have focused as much on community as on content, however.

Greencine's catalog cuts across a handful of niches, ranging from anime to early Japanese to Italian horror. It maintains a large catalog of adult films, and Phillips said these account for a considerable, but not dominant portion of its business.

But the company drives much of its traffic through blogs and newsletters written by its staff of editors. On virtually every page are links to lists of favorite films created by users, which the company says has helped create a critical sense of participation by subscribers.

"People feel like there is someone behind the curtain," Phillips said. "People can be part of a film community instead of just someone renting from a big faceless corporation."

Not that these businesses have always enjoyed smooth sailing. Both Phillips and Field said their companies' first years were full of bumps that tested the patience of early customers. In RentAnime's case, customers complained bitterly for months about slow mailing times, caused by unforeseen glitches in the local Tampa post office. Those have since been corrected, Field said.

Several are already toying with the video-on-demand services rumored to be coming from Netflix and others. Greencine offers thousands of on-demand movies through its Web site and plans to move more heavily in that direction during the next year, Phillips said. Many of the early titles were adult movies--largely because their copyright owners proved quickly amenable to the on-demand model--but the catalog is now being expanded with independent and foreign films.

Field also says he's planning to move his anime service into the on-demand model as quickly as the Japanese companies that own the rights to the works allow. Just as he transformed his community Web site into a store and his store into a rental service, impetus toward the next step is already coming from the fans, he said.

"The market is changing so fast," Field said. "But the growth of the Internet and the growth of anime has really worked in our favor."