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In Search of a Happy Medium

2 Feb, 2006 By: Thomas K. Arnold

Perhaps the most telling bit of data that came out of Warner Home Video's big announcement of a major catalog initiative for 2006 was this: The year before, the studio's revenue from sales of theatrical catalog DVDs were down 3.5%, while units sold were up 11.4%.

In short, consumers were buying more, but paying less — a lot less. The single biggest dilemma facing the home entertainment business as it matures is not consumer disinterest, not an imminent threat from digital downloads, not the Internet or the iPod. It's drastic price erosion at retail.

We're giving the stuff away and then wonder why profits are down. When the big retailers are all selling the latest blockbuster movies chock full of special features for less than $15, we're in trouble. When these same retailers are blowing out recent theatricals for less than $5 — at the start of last year's holiday season, Wal-Mart was selling Shark Tale and Shrek II for $3.99 — we're in trouble. When retailers devote more floor space to $5 dump bins than new releases, we're in trouble — big, big trouble.

There's no reason consumers should expect to buy a major theatrical release with bells and whistles for $5 or less. But that's what we've trained them to do. The finger points squarely at the big mass merchants who don't care about the integrity of our business if it means being able to satisfy the Holy Grail of discount retailing, the impulse buyer. Does any research support this strategy? Would consumers have been less likely to buy Shark Tale for $9.99 than $3.99?

Contrast this with the music industry, which several years ago began facing some severe problems, chiefly the threat of illegal digital downloading. The labels' immediate response was to hike rather than lower list prices of CDs, and then refuse to even consider offering consumers the chance to legally download music.

It took several years for CD list prices to drop significantly and for the labels to bow their own pay-to-download options. By then, the damage had already been done. The music industry is still reeling from past mistakes.

Will allowing this drastic price erosion in the DVD market come back to bite us as well? Truth be told, it already has. There's a lot to be said about extremes in either direction — and the wisdom of a happy medium.

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