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A Deliberate Death

5 Feb, 2004 By: Thomas K. Arnold

I came across an interesting USA Today poll recently. Readers were asked, “Has DVD won the day, or is VHS still putting up a creditable fight for your business?”

The majority of the respondents were split between answering, “I'm all-DVD and wouldn't go back on a bet” (44.6 percent) and “I'm buying and renting DVDs from here on out, but I still have important stuff on VHS” (44.13 percent).

Just 11 percent of poll respondents said they're still stuck on VHS.

The death knell has certainly sounded for the videocassette, and I wouldn't be surprised to see studios stop releasing product on VHS before too long — say, by summer. Already, the big anime suppliers have ditched VHS entirely, and Warner Home Video is now releasing all its sports programming exclusively on DVD.

Now, I know there are a lot of people out there who maintain VHS could have lived a little longer had the studios not been so aggressive in pushing DVD. I continue to hear cries that the studios prematurely killed off VHS, primarily from retailers with large VHS inventories who waited too long to dump their cassettes and now can't give them away.

Did the studios kill off VHS, or has it simply been a matter of changing tastes? Hard to say. But I will tell you, if the studios deliberately hastened the demise of the videocassette, I, for one, can't blame them.

It's a matter of simple economics. I just came across a report from Jessica Reif Cohen, the Merrill Lynch analyst who is held in high esteem by much of Hollywood's power structure. She analyzed the cost factor of DVD vs. VHS and found that the gross profit potential of a single DVD unit is nearly twice that of a videocassette.

The breakdown: Videocassettes have an average wholesale cost of $12 vs. total costs of $6.65 ($2.25 for duplication, $2.75 for marketing, 75 cents for packaging and 90 cents for distribution). DVDs, by comparison, have an average wholesale cost of $16 against total costs of $5.45 (a buck for duplication, $2.75 for marketing, 90 cents for packaging and 80 cents for distribution).

Granted, this differential didn't exist in the early days of DVD, when revenue-sharing was just beginning and the rental-priced cassette still ruled the day.

But once the industry began tilting toward a sellthrough model and consumers could buy any movie they wanted on DVD as soon as it came out, rather than having to wait six months for the price to go down as was customary on VHS, the old economics got tossed and the new reality set in.

I remember those turbulent, confusing days. No one knew whether rental pricing was really, truly headed for extinction, and whether pricing everything for sellthrough would put a serious dent in studio profits.

As it turned out, rental pricing did die, but studio profits rose. So did consumer spending on video. The home entertainment pie's individual slices got smaller, but the number of slices proliferated to the point where the pie got bigger than anyone even imagined — heck, it became an entire pie shop.

And in the hustle and bustle that continues to describe the DVD business, the humble old videocassette simply got in the way.

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