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THE MORNING BUZZ: Looking for Equilibrium

22 Sep, 2002 By: Kurt Indvik

Video Store Magazine market research this week makes the call that combined home video rental spending for 2002 will fall short of the 2001 level, generating about $9.5 billion at the rental counter, or a drop of about 7 percent from 2001's $10.03 billion.

That's back to 2000 levels, when combined video rentals rang up $9.46 billion, according to VSM market research. Of course, the big difference now is that DVD's share of the rental pie for all of 2002 will certainly end up being somewhere between the 23 percent it started with at the end of January and the 40 percent it garnered for all August transactions. DVD's share of rental spending jumped from 6.5 percent of rental spending in 2000 to 15 percent of rental spending in 2001 and should be someplace north of that in 2002.

Even DVD's triple-digit growth in rental activity so far this year is not enough to halt the slide of VHS rental activity. As you can read in this week's report (see page 22), VHS rentals for August were down more than 40 percent from a year ago. When you consider that in 2001 VHS accounted for 85 percent of the total rental market, you understand the significant loss of dollars this drop reveals.

The year 2001 was a telling one, where the trajectory of VHS and DVD, sellthrough and rental, intersected. First, sellthrough pretty much matched rental in dollar volume for the first time in the industry's history at about $10 billion each, according to VSM market research. Second, DVD sellthrough dollars pretty much matched VHS sellthrough (or exceeded, depending on whose numbers you looked at) for the first time. Third, because while VHS rental activity managed to remain fairly constant, losing only 4 percent from 2000, to $8.83 billion, DVD rental surged more than 140 percent, to $1.5 billion, more than making up for the difference.

DVD has overtaken VHS in sellthrough; the disc garnered 64 percent of July units sold, according to VideoScan, compared to 37 percent of units in the same month in 2001. Take last week's Monsters, Inc. for example. Buena Vista sold 5 million units of the title and by the day after street was claiming record-breaking sales (including pre-sales). Monsters, Inc.'s first-day popularity is just one example of the overwhelming consumer response to the sellthrough nature of this business. The balance has shifted, and the scales now begin tipping ever more toward sellthrough and DVD -- perhaps in part at rental's expense.

Yes, there is an argument that the sellthrough (and rental) economics of DVD have caused the premature decline of VHS.

The questions I have are: A) where will the equilibrium between rental and sales end up being; and B) will the total home video pie grow as a result?

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