Buried in the basement of an old school building in Bloomsbury is a warren of low-ceilinged offices packed with thousands of DVDs. This unlikely setting is the operational hub of a business that provides online DVD rental services on behalf of leading UK brands including Tesco, MSN and Comet.
The business is Video Island, which has imported a tried-and-tested model from the US, where market leader Netflix has proved that big money can be made from an internet service in a sector where customers crave convenience.
The company offers access to 15,000 DVD titles for a £2.99-a-week subscription, compared with a high-street average of £3.19 for just one DVD for a single night. Subscribers to one of Video Island's partners can get as many DVDs as they like without leaving their home, except to go to the postbox to return them. They can keep the DVDs for as long as they want, never paying any late fees.
This may at first sound like a flawed business plan, open to theft or film junkies renting too many DVDs. But as long as the monthly subscription fees keep rolling in, what the customers do is largely irrelevant.
The inspiration behind the business is 33-year-old Saul Klein, a veteran of the 90s dotcom boom. In keeping with this background, Video Island feels about as new media as it gets, with pool tables, bean bags, table tennis tables and the essential trendy chrome canteen to occupy what Klein describes as 'a truly eclectic bunch of people'. The entrepreneurial nature of the founder clearly rubs off on his 35 staff, each of whom he greets warmly.
Video Island was among a handful of start-ups that spotted an early gap in the market. Last year DVDs overtook VHS tapes as consumers' preferred rental option, and are forecast to grow to 88% of the film rental market by 2007.
The business has attracted £8m of venture capital funding, plus backing from film distributor Redbus and Klein's father, Robin. Klein senior has 25 years of retail experience as founder of Past Times parent Retail Variations, former chairman of the Innovations catalogue and co-founder of the Aroma coffee bar chain.
Rather than trying to launch Video Island as a branded service in its own right, in 2002 Klein decided to team up with already trusted brands to achieve immediate credibility with their millions of customers, such as MSN's 19m users. He likens his business model to the way that Intel partnered with computer manufacturers, inserting its branding into their advertising.
Last week the rental firm merged with another key player, ScreenSelect, which follows a direct-to-consumer approach. The merged companies will operate under the Video Island name, though ScreenSelect will remain the consumer service. 'It's like Direct Wines' business strategy,' explains Klein. 'It offers the platform for the Sunday Times Wine Club, but it also has its own direct-to-consumer brand, Laithwaites.'
Klein, who will preside over the enlarged company as chief executive, has the big players, Netflix and Blockbuster, in his sights. The signs are that their UK investments in online rental fall short of the £8m poured into Video Island. 'This is no longer a business for start-ups,' he says.
'It's a business for people with significant partnerships and capital.'
Tough talk. But Klein is realistic about the task ahead, admitting that it takes 'three to five years to build the semblance of the brand'. The firm has allocated £4m to marketing the merged company between now and the first half of 2005 - a significant budget by any standard - and Klein is confident that Video Island and ScreenSelect will be established names within 18 months.
There are also plans to expand the company's offering. Video Island has created a system for processing orders for 'circular discs', which could carry games, software or music instead of just films. But Klein is not getting ahead of himself. 'We're still at the Model T stage,' he concludes.
'There's no point talking about four-wheel drive when people are only getting used to the idea of cars.'
1992-1994 After graduating from Cambridge, Saul Klein co-founds The Electronic Telegraph and launches the newspaper's online fantasy football league.
1994 Klein establishes Ogilvy & Mather Worldwide's digital media and e-branding business.
1996 Klein joins online technology firm Firefly, which is later bought by Microsoft.
2000 Klein founds The Accelerator Group, a consulting service offering operational expertise and access to strategic capital to digital start-ups.
Dec 2002 Video Island is founded with seed funding from film distributor Redbus and Klein's father Robin.
Sep 2003 First-round funding of £2.1m is secured from Benchmark Capital and Index Ventures. Video Island is launched.
Jun 2004 Second-round funding of £6m is secured from Benchmark Capital, Index Ventures and Cazenove Private Equity.
Aug 2004 Video Island merges with ScreenSelect.
This article was first published on Marketing