I realized that I have been spending a lot of time thinking about why some content rental markets are better developed than others – both in terms of content type and geography. As I thought deeper, I started collecting enough data to put my thinking into a framework-like approach, where I analyze the tendency of a consumer to either OWN or RENT media content. Below, you will find the first version of this analysis, which will probably be subject to substantial improvements in the near future.

The major types of content discussed here are Books, Textbooks, Music Albums, Movies, Video Games and Software. Please note that, for some types, the sub-types might have different rental potential. I will discuss those in the next part of the analysis. For example, under the Video Games heading, we need to analyze the following pairs differently: PC vs. console games. Online-enabled vs. Offline-only games. However, I will just focus on 6 aggregated content types for the sake of simplicity in this post.

The first step is to explain the factors, or determinants, driving an OWN or RENT decision for the consumer:

1. MSRP: The cost of a new release for each content type. As price goes up, rental becomes more attractive for the consumer.
2. Time to consume: The time it takes to consume the content fully. A popular book takes 2-3 weeks to read fully on average. A movie takes 2-3 hours in contrast. Students use a textbook for a full semester, which is 3-4 months. In that regard, a music CD is considered to be used for 3-5 years before it is archived or lost.
3. Re-consume value: To what extent consumers re-read a book, re-watch a movie, re-study a textbook, re-play a music cd or a game. We rarely read a book or watch a movie twice. But we play the same music album every week and use Microsoft Excel every day. If consumers re-use the content less, they would be inclined for rentals rather than ownership.
4. Copy protection: How hard it is for the consumer to make a copy of the content. It is extremely easy to rip a music CD, while it is almost impossible to make a practical copy of a textbook. Copy protection is an important factor for the consumer as they will be inclined to rent more if they can rent, copy and return the content instead of buying it.
5. Long-term relevancy: This is tricky. At first sight, you might think that this is basically the same as #3, "Re-consume value". But it is not. Think of this as how relevant a particular content will be in the future. For popular books, we rarely see big changes in the new editions. In most cases, there is a new foreword or an appendix in the newer editions. For textbooks, the change is substantial. Even though only a few pages and practice problems are added, these additions change all the layout and page numbering of the books. Therefore, students usually find it hard to follow a university course with an edition older than the one suggested by the professor. For movies and video games, situation is different. Both types of content are heavily new-release driven. Almost all titles in these two buckets generate 80% of their lifetime sales in the first-month release window. Especially for video games, online gaming is only relevant when there are other players logged in. Therefore, once a sequel is released, it is very hard to keep the older version of the game relevant. For software, a newer version of a suite takes longer to migrate, but it eventually happens. It is hard to find people using Excel 98 today.

After defining the factors, we will need to rate each content type across them. Here is the chart:

Here, the concluding row is the Rental Price Ceiling. This summarizes how much a customer would effectively pay per day to consume a content fully. For example, if you have paid $15 to buy a popular book and finished it in 18 days (2.5 weeks), basically you paid $0.86 per day. Similarly, you buy a movie DVD for $15 and in only one day, you finish it. Therefore, your effective cost per day is $15.

This metric is quite important, because, among other things like re-consume value, this calculation is the ceiling for rental opportunity. As we see here, movies offer the highest rental price ceiling with $15. At the second place, we see video games at $3.43 per day. The video games are four times the price of movies, but it takes a lot more days to fully consume a game. On the third rank, we see textbooks with about $1 per day rental ceiling.

The first conclusion is, in fact, powerful. We see the highest rental activity in movies, driven by companies like Netflix and Blockbuster. Video games are on the second place, which is perfectly correlated with GameFly's popularity in the market. On the tihrd place, the textbooks, we see a fast-growing market driven by heavily VC-backed start-ups like Chegg and CampusBookRentals. Interestingly, beyond this point, we don't see important companies serving rental needs for popular books, music and software. Music is easy. With $0.01 effective daily price, there is no economical way to rent a music cd. For software, $0.16 is almost completely inhibitive for a rental market.

The second conclusion, which is more subtle, could even prove to be more powerful. It is about what it takes to create a rental market or enhance its potential. Think about the following conclusions derived from the table:

• Popular books are almost at the same rental price ceiling as textbooks. So, why not to start a popular book rental service? First, target consumers for textbooks, the students, are more cash-strapped than the overall target group for books. Therefore, a rental market for textbooks is more attractive than for the popular books. Second important factor is the ratio of rental price to shipping cost. Think about the differences in the rental transactions in two content types. For textbooks, a students rents one and keeps it for 3-4 months. Let's say he pays $20 for that. The book gets shipped only once during this period. For the popular book, the renter would pay around $3 to rent and the book gets shipped once every 3 weeks. In that regard, the shipping costs become inhibitive for the rental company. This brings us to another opportunity. Why not use a kiosk rental model for popular books to shave shipping costs off completely?
• For video games, there are important conclusions. The fact that a video game is online-enabled increases the "Time to consume" substantially. Therefore, a rental company might focus on serving single-player-only games.
• For any content type, fixing the copy protection issues can change the rental potential of a market dramatically.
• For other geographies where prices are quite different (e.g. in Turkey where average textbook prices are around $30), a quite different rental market potential is expected. Similarly, with the average price of console games at $120, there is an attractive rental market to tap into. By changing other determinants of the market, such as the introduction of Blu-Ray with the ultimate copy protection, a robust video game rental market can be created in many countries like Turkey.

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