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THE MORNING BUZZ: As the Rental Business Wanes, Retailers Will Have to Look Elsewhere for Growth

21 Oct, 2002 By: Stephanie Prange

The industry is beginning to see what may be the leading edge of video sales cannibalizing rental. Video Store Magazine market research first predicted in September that rental revenue for the year would fall short compared to last year. While other analysts aren't yet ready to go out on that limb, many do say sellthrough growth could have a negative effect on rentals. Analyst Bob Alexander of Alexander & Associates told Video Store Magazine, “There are some anecdotal rules of thumb that one purchase displaces three rentals.” If that rule proves true, things will have to change significantly in this industry as sellthrough grows.

The big rental chains will have to alter their business model if their mainstay – video rentals – takes a dive. Even if rentals don't die, but merely swoon, public chains such as Blockbuster, Hollywood and Movie Gallery will have to look elsewhere for the growth Wall Street demands. The chains have already put numerous indies out of business to gain market share, so that avenue seems somewhat tapped. These retailers will have to look for some other source of growth outside the rental model to take them into an increasingly sellthrough future.

In a way, they're already in the sellthrough business, garnering a good chunk of money from used video and especially used DVD sales. Notably, the most prevalent Blockbuster advertisement that comes to mind isn't a spot promoting rental, but one offering previously viewed DVDs for under $10.

Ironically, as Wal-Mart enters the online DVD rental business, the big chains are looking to enter sellthrough. Both Blockbuster and Movie Gallery have said as much in calls with Wall Street. “There are about 25 to 30 movies out of the 800 or so released each year that consumers have an intent to own,” said CEO Joe Malugen in August. “We recognize and intend to address that.” Antioco in July said Blockbuster plans to triple its share of sellthrough by 2006. Can the big rental chains compete on Wal-Mart's sellthrough turf?

Another avenue for possible rental chain growth is games. Hollywood Video has jumped into that market with both feet, expanding the number of Game Crazy game sections. Movie Gallery also is shelling out more for game rental inventory. Game spending – which now rivals box office spending – could be a lift as movie rentals taper off.

We'll know more about Hollywood and Blockbuster's plans this week when they announce quarterly financials. But, if there is anything that seems certain in this business, it's that it changes at a remarkable pace. Chains that aren't looking down the road are likely to crash.

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